SEC fines adviser $500k for cash-sweep disclosure failures

JD Supra Finance & Banking

Filed March 31st, 2026

Detected April 1st, 2026

Summary

The SEC settled an enforcement action against an investment adviser for failing to disclose conflicts of interest in its Cash-Enhanced Accounts, which allocated 30% of client funds to cash deposited with an affiliated bank. The adviser received affiliate revenue from these deposits while charging no advisory fee, creating incentives to maintain high cash allocations. The SEC found additional violations for misleading Modern Portfolio Theory disclosures. The firm was ordered to pay a $500,000 civil penalty and must notify all affected current and former clients.

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What changed

The SEC found that the investment adviser violated Section 206(2) of the Investment Advisers Act by failing to disclose a material conflict of interest. The firm operated 'Cash-Enhanced Accounts' that allocated 30% of assets to cash held at an affiliated bank, with a portion of bank interest revenue flowing to an affiliated broker-dealer. The SEC determined the cash allocation percentage was selected in part to compensate for the lack of advisory fees, and that the firm's disclosure claiming Modern Portfolio Theory-based management was misleading since only the non-cash 70% was actually managed under that theory. The adviser consented without admitting or denying liability.

Investment advisers should immediately audit their cash sweep programs, affiliate revenue-sharing arrangements, and fee structures for adequate conflict of interest disclosure. Any 'no-fee' or 'low-fee' products must prominently disclose indirect compensation arrangements. Firms claiming specific investment methodologies must ensure those claims accurately reflect how ALL portions of the portfolio—including cash holdings—are actually managed. All current and former affected clients must receive the SEC Order, and firms should review marketing materials for consistency with actual practices.

What to do next

Audit all cash sweep programs and affiliate revenue-sharing arrangements to ensure conflicts of interest are prominently disclosed
Review fee-free and low-fee product structures for indirect compensation arrangements and disclose with same prominence as the no-fee marketing
Verify that investment methodology disclosures (e.g., Modern Portfolio Theory claims) accurately reflect how ALL portfolio components are actually managed, including cash allocations

Penalties

$500,000 civil penalty, plus censure and cease and desist order; firm must send SEC Order to all affected current and former clients

Source document (simplified)

March 31, 2026

A Tale of Two Issues (of Disclosure): Cash-Sweep and Investment Practices

LinkedIn Facebook X Send Embed Last week, the SEC settled an enforcement action against an investment adviser (the "Investment Adviser") for breaches of fiduciary duty related to its robo-advisor accounts that were titled “Cash-Enhanced Accounts.” [i] Key features of the Cash-Enhanced Accounts included that there was “no advisory fee” and that the Investment Adviser would allocate 30% of the account to cash. The 30% cash allocation was deposited with a bank affiliate of the Investment Adviser and a portion of the interest earned by the bank was ultimately paid to a broker-dealer affiliated with the Investment Adviser. Wait…is the SEC still doing cash sweep enforcement cases?

Apparently so. Although certain cash sweep investigations have been closed according to public filings, the SEC continues to review revenue sharing and disclosure practices associated with cash sweep programs. Here the SEC found that the 30% cash allocation structure resulted in a conflict of interest because the Investment Adviser was incentivized to set a higher cash allocation percentage and that the conflict was heightened because it was not charging advisory fees on the accounts. The firm consented, without admitting or denying, that it failed to disclose this conflict of interest.

Moreover, while the SEC acknowledged that the Investment Adviser had considered several factors in setting the allocation percentage, it also found that the cash allocation percentage was select “in part to make up for” the lack of an advisory fee. As a result, in finding the firm failed to adequately disclose the conflict of interest, the SEC specifically noted the “reasons for selecting the thirty percent cash allocation” as a material fact about the conflict of interest.

As notable as the cash sweep enforcement action is, that was only half the story because the 30% cash allocation formed the foundation for an additional disclosure finding. The Investment Adviser claimed its portfolios were managed according to Modern Portfolio Theory. However, SEC found that the 30% cash allocation in the Cash-Enhanced Accounts was “not selected or based on Modern Portfolio Theory.” In other words, Modern Portfolio Theory only guided the non-cash portion (i.e., 70%) of the portfolio. The SEC found that the firm’s disclosure of its use of Modern Portfolio Theory was inaccurate and misleading because it did not distinguish between the cash and securities portions of the portfolios.

The findings above resulted in the SEC concluding that the firm had violated Section 206(2), of the Investment Advisers Act, which is a negligence-based anti-fraud provision. In addition to a censure and cease and desist order, the firm was ordered to pay a $500,000 civil penalty. Moreover, the firm agreed to send a copy of the SEC Order to all affected current and former clients (presumably clients with a Cash-Enhanced Account).

Practical Considerations for Investment Advisers

From our docket of SEC enforcement matters and the SEC’s pronouncements, we know that advisers’ marketing practices are going to receive significant attention in examination and enforcement matters in the near term.

1. Re-Evaluate "Free" or "Low-Fee" Product Structures

The "Nothing is Free" Rule: If your firm offers products without a management fee, the SEC will look for "indirect" compensation. Audit all sweep programs, affiliate revenue-sharing arrangements, and 12b-1 fees to ensure they are disclosed with the same prominence as the "no-fee" marketing.
Cash Drag Disclosure: Explicitly disclose the impact of high cash allocations on long-term performance, particularly in inflationary environments where the interest earned by the client may be significantly lower than the revenue earned by the firm (or its affiliates).
2. Align Marketing "Slogans" with Operational Reality
Model Accuracy: If your firm claims to employ things such as "Modern Portfolio Theory," "AI-driven algorithms," or "Quantitative Models," check whether these frameworks apply to the entire portfolio and maintain disclosure practices to clearly identify distinctions.
Override Documentation: If business requirements (like a minimum cash buffer for revenue) override the outputs of an investment model, this must be disclosed as a conflict of interest, not masked as an investment "strategy."
3. Remediation and Notice Preparedness
Client Communication: As in this Order, it is common for the SEC and other regulators to require that the subject firm notify past clients. Firms should maintain robust historical contact data. If a material disclosure failure is found internally, consider proactive "remediation" or "clarification" notices to both current and past clients to mitigate enforcement risks.
[i] https://www.sec.gov/files/litigation/admin/2026/ia-6954.pdf

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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