SEC Flags Undisclosed Adviser Conflicts of Interest

In a Risk Alert, the SEC Division of Examinations highlighted investment adviser obligations to disclose "economic conflicts of interest." 

Division staff said examinations revealed repeated failures to disclose conflicts and warned advisers that as fiduciaries, they must eliminate or fully disclose conflicts that could skew their advice. Staff said they found (i) advisers that received revenue (from custodians, clearing firms, or cash-sweep and bank-deposit programs) without fully disclosing it, (ii) advisers that failed to disclose that client cash was subject to asset-based fees, which sometimes produced negative returns, and (iii) advisers that recommended higher-cost money market or mutual fund share classes that paid the adviser, including Rule 12b-1 fees, despite cheaper share classes that were available.

Staff also pointed to other undisclosed conflicts involving custodial credits, margin-loan and transaction markups, and revenue to broker-dealer affiliates. They cited incomplete Form ADV disclosures of affiliations and brokerage arrangements.

On billing, staff found advisers charged fees inconsistent with their agreements and disclosures - prorating or applying wrong rates, billing on excluded assets, charging for services not provided or for closed or inactive accounts, billing twice for the same service, and failing to refund prepaid fees on termination. The Division noted adviser compliance programs that lacked controls to bill accurately.