April 2, 2026

SEC charges investment adviser for alleged conflicts disclosure failures

Allison Scher Bernbach, Caitlyn Campbell, Marc E. Elovitz, Eugene Goldman, Paul Helms McDermott Will & Schulte + Follow Contact LinkedIn Facebook X Send Embed

On March 23, 2026, the US Securities and Exchange Commission (SEC) announced settled charges against an SEC-registered investment adviser (the Firm) for failing to fully and fairly disclose:

• Material conflicts of interest arising from revenue received by its affiliates as a result of its selection of a 30% cash allocation for its “no advisory fee” cash-enhanced “robo-advisor” accounts (the Cash-Enhanced Accounts).
• Material facts regarding the scope of its stated investment methodology, including that such methodology applied only to the non-cash portion of the Cash-Enhanced Accounts. As a result, the SEC found that such conduct violated Section 206(2) of the Investment Advisers Act of 1940 (Advisors Act). Notably, the SEC did not charge any violations relating to the Firm’s compliance policies and procedures or bring any claims against individuals.

Without admitting or denying the SEC’s findings, the Firm settled and agreed to pay a civil monetary penalty in the amount of $500,000.

In Depth

Background

The SEC found that the Firm violated Section 206(2) in two ways:

• It allocated 30% of client assets in its Cash-Enhanced Accounts to cash, but failed to disclose that it had a conflict of interest in setting this allocation because the allocation was selected, in part, to generate a financial benefit for the Firm’s affiliated broker-dealer and affiliated bank (the Affiliates) intended to offset the revenue the Firm lost by not charging advisory fees on the accounts.
• It inaccurately disclosed that its portfolio management services for the Cash-Enhanced Accounts were to be based on a specific investment methodology when only the non-cash portion of the assets in the Cash-Enhanced Accounts (i.e., 70% of the assets) were managed according to investment methodology.

Undisclosed revenue earned by affiliates

The Firm offered the Cash-Enhanced Accounts to clients on a “no advisory fee” basis. However, the Firm set a 30% cash allocation for the Cash-Enhanced Accounts, which meant that 30% of each account was allocated to cash held at a nonaffiliated clearing broker. The nonaffiliated clearing broker in turn deposited the cash at various banks, including the Firm’s affiliated bank, to be loaned out with interest earned on the cash deposits paid to the nonaffiliated clearing broker, which in turn paid the Firm’s affiliated broker-dealer a rebate reflecting a portion of the interest that was generated by the cash held in the accounts.

The SEC has long scrutinized advisers’ receipt of undisclosed compensation – whether such compensation is received by an adviser or by an adviser’s affiliates and regardless of whether compensation is direct or indirect compensation. Because the Firm’s Affiliates received compensation, the SEC alleged that the Firm had an incentive to set a higher cash allocation percentage for those accounts. The SEC also alleged that while the Firm considered several factors when setting the allocation for the accounts, it failed to disclose that the 30% cash allocation was selected in part to make up for not charging an advisory fee or the associated conflicts of interest.

Failure to adhere to the stated investment methodology

The Firm disclosed in its Forms ADV Part 2A that its “portfolio management services were based on its “Modern Portfolio Theory.” The SEC alleged that this statement was misleading because the Firm did not use the Modern Portfolio Theory to select the cash allocation portion of the Cash-Enhanced Accounts. Rather, the cash allocation was based, in part, on the Firm’s desire to make up for revenue lost from not charging an advisory fee on the Cash-Enhanced Accounts. Because the Firm used the Modern Portfolio Theory to guide only the portion of client assets invested in securities (70%), not the cash allocation, it failed to accurately disclose both the limited scope of that methodology and that the 30% cash allocation was not selected based on the methodology.

Key takeaways for registered investment advisers

This settlement highlights the SEC’s continued focus on undisclosed compensation and related conflicts of interest, which continue to be a perennial topic of examination and enforcement interest. The action particularly underscores the SEC’s continued scrutiny of revenue-generating features embedded in “no-fee” or low-fee advisory products, especially where advisers may have incentives to structure portfolios in ways that benefit them or their affiliates.

This action also reflects the SEC’s continued emphasis on ensuring that an adviser’s disclosures, particularly in Form ADV, accurately and fully describe its actual practices. The SEC continues to closely examine whether an adviser’s stated investment methodologies and portfolio construction processes align with how client assets are in fact managed.

Notably, the charges were brought under Section 206(2) of the Advisers Act, which, unlike Section 206(1), which requires scienter, is negligence based. This means that even without an intent to deceive, an adviser can be found to have violated Section 206 based on careless or inadequate disclosures without proof of fraudulent intent. Further, the settlement suggests that, even under this administration, the SEC remains willing to impose meaningful penalties in negligence-based cases when advisers derive a financial benefit from the violative conduct.

In light of this action, advisers are reminded of the importance of examining how an adviser’s actual practices, including but not limited to compensation, fees, expenses and portfolio management, and related conflicts of interest, align with stated disclosures.

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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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