SEC Heightened Focus on Adviser Fees and Conflicts: What the New Rules and Enforcement Mean for Compliance

The SEC has intensified scrutiny of investment adviser fee practices, conflict disclosures, and marketing compliance. This article explains the current legal framework, recent enforcement patterns, and concrete steps advisers can take to align with evolving regulatory expectations.

The Regulatory Pressure on Adviser Fee Practices

Investment advisers operate under a fiduciary framework that the SEC has, in recent years, enforced with increasing specificity. What was once a landscape shaped by principles and general guidance has become one defined by granular regulatory expectations, detailed examination priorities, and a willingness to bring enforcement actions over practices that advisers historically treated as matters of internal discretion.

The current posture reflects a deliberate shift. The SEC's Division of Examinations has made fee and expense practices a recurring priority, while the Division of Enforcement has pursued actions targeting inadequate conflict disclosures, misleading performance advertising, and fee arrangements that do not match what advisers have told their clients. For advisory firms, particularly those managing pooled vehicles or maintaining complex fee structures, the compliance burden has become materially heavier. For executives and principals of those firms, the personal exposure has grown as well. Understanding the current framework, and the patterns that tend to draw regulatory scrutiny, is not optional. It is foundational to operating a compliant advisory business.

The Governing Fiduciary and Disclosure Framework

The legal architecture governing investment adviser conduct rests primarily on the Investment Advisers Act, which imposes a fiduciary duty on every investment adviser subject to the Act, whether or not the adviser is registered with the SEC. That duty is not a product of contract; it arises by operation of law. It encompasses both a duty of care and a duty of loyalty, and it requires the adviser to act in the client's best interest and to either eliminate material conflicts of interest or provide full and fair disclosure of those conflicts sufficient for the client to give informed consent.

Form ADV, the principal disclosure document that advisers file with the SEC and deliver to clients, serves as the primary vehicle for satisfying these disclosure obligations. Part 2A of that form, commonly referred to as the brochure, requires detailed narrative disclosure of the adviser's fee practices, compensation arrangements, potential conflicts of interest, and the nature of advisory services. Form CRS, introduced as a companion document for retail investors, imposes additional summary disclosure obligations on advisers who serve individual clients.

The Marketing Rule, which replaced the prior advertising and solicitation framework, now governs how advisers present their services, performance track records, testimonials, and endorsements. The rule prohibits materially misleading statements, imposes substantiation requirements, and sets specific conditions for the presentation of hypothetical performance, extracted performance, and predecessor performance. Advisers who use performance data in marketing materials are now subject to a detailed set of disclosure and recordkeeping obligations that did not exist under the prior regime.

The SEC's examination and enforcement authority extends across this entire framework. The Division of Examinations conducts risk-based and routine examinations of registered advisers, frequently focusing on whether fee disclosures match actual billing practices, whether conflicts have been adequately identified and disclosed, and whether marketing materials comply with the current rule. The Division of Enforcement brings civil actions, including administrative proceedings, against advisers and their principals for violations.

Recurring Deficiencies and the SEC's Enforcement Focus

Several categories of adviser conduct have drawn repeated enforcement attention. Understanding these patterns is essential because they reflect the SEC's current interpretation of where the line falls between permissible practice and violation.

First, fee disclosures that do not match actual billing. The SEC has pursued advisers who disclose one fee methodology in Form ADV but apply a different methodology in practice. This includes advisers who charge fees in advance but do not refund pro rata amounts when clients terminate, advisers who apply fee rates that differ from those disclosed, and advisers who bill for services not described in their brochures. The standard the SEC applies is strict: what the client is told must match what the client is charged.

Second, undisclosed or inadequately disclosed conflicts of interest. The fiduciary duty requires disclosure of material conflicts, and the SEC has interpreted materiality broadly in this context. Compensation from third parties, revenue sharing arrangements, the use of affiliated service providers, allocation practices that favor certain accounts, and the receipt of non-cash benefits from broker-dealers or fund sponsors have all been the subject of enforcement actions. The common thread is that the adviser either failed to disclose the conflict at all or disclosed it in language too general to put a reasonable client on notice.

Third, marketing compliance failures. Since the Marketing Rule took full effect, the SEC has examined advisers' websites, pitch materials, and social media presence for compliance. Advisers who present performance data without the required disclosures, who use hypothetical performance without implementing the rule's adoption and oversight requirements, or who feature testimonials and endorsements without proper disclosure of compensation have faced deficiency findings and, in some instances, enforcement proceedings.

Fourth, the SEC has focused on valuation practices, particularly among advisers to private funds. Advisers who overstate asset values to inflate fee calculations or to present favorable performance results face scrutiny under both the antifraud provisions of the Advisers Act and the Marketing Rule.

The SEC's approach in these areas is notable for its consistency. The agency has made clear, through published examination priorities and enforcement releases, that it views fee and conflict compliance as a core obligation, not a secondary concern. Advisers should expect that any examination will include a detailed review of these areas.

Concrete Steps for Aligning with Regulatory Expectations

Advisers can take several practical steps to reduce the risk of examination deficiencies and enforcement action.

• Audit fee disclosures against actual billing. Conduct a line-by-line comparison of the fee descriptions in Form ADV Part 2A, Form CRS, and advisory agreements against the fees actually charged to clients. Identify any discrepancy, including differences in fee rates, calculation methodologies, billing frequency, or refund practices. Where discrepancies exist, correct both the disclosure and the billing, and consider whether a refund or credit is appropriate.

• Map all conflicts of interest and assess disclosure adequacy. Prepare a comprehensive conflicts inventory that captures every arrangement, affiliation, or practice that could give rise to a material conflict. This includes compensation from product sponsors, the use of affiliated custodians or broker-dealers, allocation practices, co-investment arrangements, and any form of non-cash benefit. For each identified conflict, assess whether the current Form ADV disclosure is specific enough to put a reasonable client on notice. General language, such as "we may have conflicts of interest," is insufficient.

• Review all marketing materials for compliance with the Marketing Rule. This includes websites, social media accounts, pitch decks, performance summaries, and any communication that could constitute an advertisement under the rule. Verify that performance presentations include the required disclosures, that hypothetical performance is accompanied by the prescribed disclosures and is subject to appropriate policies and procedures, and that any testimonial or endorsement is properly documented and disclosed.

• Implement written policies and procedures that address the specific requirements. The compliance rule under the Advisers Act requires advisers to adopt and implement written policies and procedures reasonably designed to prevent violations. Those policies should address fee calculation and billing, conflict identification and disclosure, marketing review and approval, and valuation. They should also designate responsible personnel and establish periodic review processes.

• Prepare for examination. Maintain organized records that demonstrate compliance. The SEC's examiners will request fee schedules, client billing records, advisory agreements, marketing materials, conflict disclosures, and compliance policies. Having these records organized and accessible, and being able to demonstrate that actual practices match disclosed practices, significantly reduces examination risk.

• Evaluate whether existing errors require self-reporting or remedial action. Advisers who discover historical fee overcharges, undisclosed conflicts, or marketing violations should consult counsel promptly. In some circumstances, self-reporting and client remediation can reduce the severity of regulatory consequences.

Key Takeaways and When to Engage Counsel

• The SEC treats fee and conflict compliance as a core fiduciary obligation, not a technical detail. Advisers should approach these areas with corresponding rigor.
• Disclosures must be specific and accurate. General disclaimers do not satisfy the fiduciary duty of full and fair disclosure.
• The Marketing Rule imposes substantive requirements on performance advertising, testimonials, and endorsements that many advisers have not fully implemented.
• Advisers who identify compliance gaps should act promptly to correct them and should engage experienced regulatory counsel before making decisions about self-reporting, client remediation, or responding to examination requests.
• Enforcement exposure in this area extends beyond the firm to individual principals and compliance officers. Personal liability is a realistic concern, and early legal involvement can help manage that risk effectively.