Heightened SEC Expectations for Investment Advisers on Fee and Conflict Disclosures

The SEC has intensified its focus on fee transparency and conflicts of interest for investment advisers. This article explains the current legal landscape, enforcement patterns, and concrete steps advisory firms can take to align disclosures, marketing, and operations with regulatory expectations while reducing enforcement risk and strengthening client trust.

Opening

The Securities and Exchange Commission has sharpened its scrutiny of investment advisers' fee practices and conflicts of interest. Through rulemaking, guidance, examinations, and enforcement, the agency is demanding "full and fair" disclosure that is specific, comprehensible, and operationally accurate. This focus extends to fees, expenses, revenue sharing, wrap programs, and preferential treatment in private funds. For advisory firms, the shift presents both a compliance mandate and an opportunity to build durable client trust while reducing litigation and enforcement risk.

This article explains the legal framework driving these expectations, identifies the compliance pitfalls most frequently observed, and offers a practical roadmap for chief compliance officers, general counsel, and operating leaders seeking to align policies, contracts, and day-to-day practices with the SEC's standards.

Legal Landscape

The Investment Advisers Act and its implementing rules underpin the SEC's authority over registered investment advisers. Key provisions include:

• Anti-fraud provisions: The Advisers Act prohibits fraudulent, deceptive, or manipulative conduct by advisers, and its anti-fraud protections extend to investors in pooled investment vehicles.
• Fiduciary duty: The SEC's interpretation of an adviser's fiduciary duty, encompassing both a duty of care and a duty of loyalty, emphasizes full and fair disclosure of conflicts and informed client consent.
• Compliance program rule: SEC rules require advisers to adopt written compliance policies and procedures and to conduct an annual review of their effectiveness.
• Brochure delivery: Advisers must deliver and update the disclosure brochure and brochure supplement with detailed fee and conflict disclosures.
• Books and records: SEC rules prescribe retention of advertisements, performance data, client communications, and other records.
• Marketing Rule: The SEC's modernized marketing framework sets content standards for advertising and solicitation, including testimonials, endorsements, third-party ratings, and performance presentations.
• Custody: SEC rules governing custody of client assets impose safekeeping and reporting obligations. The agency has also pursued broader safeguarding requirements through rulemaking proposals.
• Customer relationship summary: For advisers serving retail investors, the relationship summary supplements disclosures about fees, services, and conflicts in plain language.

Regulatory actors include the SEC's Division of Investment Management (rulemaking and disclosure forms), the Division of Examinations (risk-based exams and priorities), and the Division of Enforcement (investigations and actions). Recent years show a pattern of:

• Expanded focus on fee and expense transparency, including revenue sharing, share class selection, wrap fee programs, and expense allocation in private funds.
• Enforcement of the marketing framework's substantiation and performance requirements.
• Recordkeeping actions involving off-channel communications that escape required retention obligations.
• Increased attention to private fund governance, reporting, and preferential treatment through rulemaking and examinations, even as certain rules have faced legal challenges.

The throughline is consistent: the SEC expects precise, comprehensible disclosures that match operational reality, backed by robust testing and records.

Key Compliance Issues

1. Specific, Plain-English Fee Disclosures

The disclosure brochure requires a clear description of fees and compensation, including how fees are calculated, billed (in advance or arrears), refunds on termination, and additional costs such as trading away charges, custodial fees, and platform fees. The SEC has faulted advisers for:

• Boilerplate disclosures that fail to quantify or plainly describe material costs.
• Misalignment between invoices, advisory agreements, and brochure disclosures.
• Inaccurate fee billing, including situations where non-billable assets are included in assets under management calculations, pro-rations are missed, or refunds are not issued consistent with disclosures.

2. Conflicts of Interest and Duty of Loyalty

Under the SEC's fiduciary duty framework, "full and fair" conflict disclosure must enable a client to provide informed consent. Common conflict areas include:

• Revenue sharing and platform payments, including non-cash benefits, which must be disclosed in the relevant section of the firm's brochure.
• Share class selection for mutual funds, including the impact of distribution and service fees, and related best execution obligations.
• Soft dollar arrangements made under the safe harbor available for research and brokerage services under federal securities law.
• Affiliated broker-dealers, principal trades, and agency cross transactions, where the Advisers Act requires transaction-specific written disclosure and client consent for principal trades.
• Wrap fee programs where clients may incur additional execution costs despite an "all-in" fee.

The SEC disfavors generic conflict language and expects disclosures tailored to the firm's actual practices, including who pays what, when, and why.

3. Marketing Rule and Performance Substantiation

The modernized marketing framework requires advisers to present fair and balanced advertising. Pitfalls include:

• Presenting gross performance more prominently than net performance.
• Providing hypothetical performance to retail investors without meeting policy, vetting, and disclosure prerequisites.
• Using testimonials, endorsements, and third-party ratings without required disclosures and oversight of promoters.
• Failing to retain substantiation for material statements as required under books and records obligations.

4. Private Fund Fees, Expenses, and Preferential Terms

The SEC has scrutinized expense allocations (such as broken-deal costs), monitoring fees, valuation practices, and side-letter preferences. Even as aspects of recent private fund rulemakings have been challenged, examinations and enforcement continue to focus on:

• Whether limited partners receive clear, timely breakdowns of fees and expenses.
• Proper application of management fee offsets and clawbacks.
• Adequacy of disclosures around preferential liquidity, information rights, or fee breaks.

5. Recordkeeping and Operational Alignment

Under the SEC's books and records requirements, firms must maintain accurate, complete records, including advertisements, performance backups, client communications, and advisory agreements. The SEC has brought recordkeeping actions against advisers for off-channel communications and inadequate retention of marketing substantiation. Operational misalignments, where the firm's practices in billing, routing, and share class selection deviate from written policies, remain a core examination and enforcement driver.

Consequences of compliance failures include disgorgement, civil penalties, undertakings (such as hiring independent consultants), restrictions on activities, and reputational harm, often accompanied by client remediation and revised disclosures.

Practical Guidance

A. Rebuild Disclosures Around How the Business Actually Operates

• Map end-to-end fee flows: advisory fee calculations, billing cycles, refunds, affiliated and third-party fees, platform and custodial charges, and trade-away costs.
• Align every fee and cost with a specific disclosure location (the brochure, the customer relationship summary, the advisory agreement, the wrap fee brochure), and ensure descriptions are consistent, quantified where possible, and written for a lay reader.
• Use concrete examples showing how a representative client would be billed, including ranges, tiering, and add-ons.

B. Create a Conflicts Inventory and Heat Map

• Catalog all conflicts: revenue sharing, soft dollars (identifying which arrangements fall within the research and brokerage safe harbor), affiliated brokers, principal and agency cross potential, referral arrangements, outside business activities, and gifts and entertainment.
• Rate each conflict by materiality and mitigation (disclose, eliminate, or neutralize). Validate that mitigation steps, such as client credits for share class conflicts, actually occur.
• Tie each conflict to the firm's written compliance policies, the corresponding brochure disclosures, and supervised person training.

C. Tighten Fee Billing and Expense Testing

• Perform independent recalculations of advisory fees each quarter for a risk-based sample. Test pro-rations, inclusion and exclusion of assets, and breakpoint application.
• Run exception reports: negative-fee tests, unusual jumps in assets-based fees, billing consistency across similarly situated clients.
• For private funds, test expense allocations to management company versus fund, application of offsets, and disclosure of monitoring fees and clawbacks.

D. Elevate Best Execution and Share Class Governance

• Adopt share class selection procedures that prioritize the lowest-cost share class available, or document why a higher-cost class is in the client's best interest with corresponding credits or fee reductions.
• Conduct periodic broker and custodian reviews, obtain and evaluate execution quality data, and document trade-away cost analyses for wrap programs.

E. Execute the Marketing Framework with Evidence

• Maintain a substantiation file for every material claim and performance figure, including methodologies, composites, calculation worksheets, and model assumptions.
• Present net and gross performance with equal prominence. Avoid cherry-picking.
• Restrict hypothetical performance to appropriate investors and contexts, with policies governing audience, assumptions, and disclosures.
• Oversee testimonials and endorsements: written agreements with promoters, required disclosures, and compensation tracking.

F. Strengthen Books and Records and Off-Channel Controls

• Implement approved communication channels with automated archiving. Prohibit and monitor personal devices and unapproved applications for client business.
• Conduct periodic attestations and test samples across teams. Enforce violations consistently.

G. Make Remediation a Reflex

• When issues surface, execute a playbook: scoping (lookback period), impact quantification, client remediation (credits and refunds), disclosure updates (brochure amendments), and root-cause fixes.
• Consider whether and how to engage the SEC during examinations or investigations. Voluntary, well-documented remediation and clear narratives can materially affect outcomes.

H. Contract and Policy Checkpoints

• Advisory agreements: Specify fee bases, billing timing, termination refunds, calculation examples, and any performance-based fees consistent with Advisers Act requirements.
• Brokerage practices: Disclose trade-away and routing practices, soft dollar use under the applicable research and brokerage safe harbor, and wrap program conflicts.
• Private fund documents: Ensure the private placement memorandum, partnership agreement, side letters, and investor reports are consistent about fees, expenses, and preferential terms. Maintain a centralized side-letter matrix and most-favored-nation tracking where applicable.
• Code of ethics: Reinforce personal trading, gifts, and outside business activities controls required of advisers to prevent conflicts.

I. Governance That Works in Practice

• Empower the chief compliance officer with real-time access to billing, trading, and marketing data. Use dashboards to tie operational metrics to compliance testing.
• Document the required annual compliance program review with clear findings, remediation owners, and timelines. Share takeaways with senior leadership and, where appropriate, clients.

Warning Signs That Indicate Exposure

• Generic fee disclosures with no dollar ranges or examples.
• Inconsistent descriptions across the brochure, client agreements, and invoices.
• Use of higher-cost share classes when a lower-cost class is available without documented justification or client credits.
• Hypothetical performance distributed broadly to retail audiences.
• Missing or incomplete substantiation files for marketing claims.
• Off-channel communications that are not archived.

Conclusion

The SEC expects precise, plain-language disclosures that match operations, especially for fees, expenses, and conflicts. The marketing framework requires rigorous substantiation, fair and balanced performance presentation, and oversight of testimonials and hypothetical results. Examinations and enforcement focus on billing accuracy, revenue sharing, share class selection, wrap fee conflicts, private fund expenses, and recordkeeping.

Firms should seek counsel when they detect billing anomalies, inconsistent disclosures, off-channel communications, or private fund expense issues, or before rolling out new fee models or marketing materials. The SEC's trajectory is clear: transparency backed by evidence. Advisory firms that operationalize disclosure, invest in testing, and remediate quickly will be best positioned to manage regulatory risk and maintain client confidence.