The SEC recently announced two enforcement actions against advisory firms that failed to provide clear and consistent disclosures around conflicts of interest tied to fee-based managed account programs. Both cases underscore the Commission’s continuing focus on how financial incentives influence employee recommendations — and the need for firms to adopt policies and procedures that address disclosure risks.

Advisers and broker-dealers face heightened regulatory expectations around transparency. Compensation arrangements that create incentives for employees to recommend firm products must be disclosed accurately and consistently across Form ADV, Form CRS, websites, and client communications. Misaligned or contradictory disclosures not only erode client trust but also invite significant penalties.

In the first case, the adviser was sanctioned for contradictory incentive compensation disclosures.  According to the SEC, from 2020–2023, one advisory firm compensated employees in its managed account program based on client enrollment and retention. Incentives included bonuses, salary increases, and promotions. Yet, while the firm’s Form ADV Part 2 brochure referenced potential discretionary bonuses, its Form CRS and other client-facing materials stated that employees received no additional compensation for product recommendations. The firm’s website also asserted that employees had no financial or outside incentives.  The SEC concluded these disclosures were misleading and inconsistent, finding violations of Advisers Act Sections 206(2) and 206(4) and Rule 206(4)-7. Without admitting or denying the findings, the adviser accepted a cease-and-desist order, a censure, and $19.5 million in civil penalties.

In a separate matter, the SEC sanctioned a registered adviser and its affiliated broker-dealer over disclosures provided to retirement plan participants. Between 2019–2022, dual-hatted employees (serving both as investment adviser representatives and registered reps) were compensated through bonuses and merit-based raises for enrolling participants in the adviser’s discretionary managed account service.

According to the SEC, the firms failed to disclose these compensation-driven conflicts adequately, and their materials created the impression that employees were salaried and acting solely in the clients’ best interests. The firms also failed to clarify the capacity in which employees were acting at the point of recommendation, leaving participants responsible for discerning whether advice was being given in an advisory or brokerage role.

The SEC found the adviser in violation of Section 206(2) of the Advisers Act and determined the broker-dealer failed to meet Regulation Best Interest’s Disclosure and Conflict of Interest obligations. The sanctions included a cease-and-desist order, censure, a $750,000 civil penalty, $4 million in disgorgement, and over $426,000 in prejudgment interest.

Key Takeaways for Compliance Teams:

• Align disclosures across Form ADV, Form CRS, websites, and program brochures — contradictions will draw scrutiny.
• Review incentive structures tied to enrollment, retention, or product recommendations; ensure clients understand how these arrangements may influence advice.
• Develop and enforce written policies and procedures specifically addressing conflicts of interest.
• Dual-hatted employee roles require clear disclosure of capacity at the point of recommendation; leaving ambiguity to clients is insufficient.

At SEC3, we help advisers and broker-dealers get ahead of these risks by:

• Reviewing disclosure documents (ADV, CRS, marketing, website) for consistency and accuracy.
• Assessing compensation structures to identify potential conflicts and ensuring they are fully and fairly disclosed.
• Building and updating compliance policies and procedures tailored to conflict-of-interest management.
• Training staff on how to communicate clearly with clients about roles, incentives, and obligations.
• Monitoring regulatory developments so you know where the SEC is focusing enforcement resources.

Our team understands that disclosure gaps are often unintentional but carry significant consequences. We work with firms to close those gaps proactively — before they become enforcement matters.