On August 29, 2025, the SEC charged Vanguard Advisers with failing to adequately disclose conflicts of interest in its Personal Advisor Services managed account program. The enforcement order found that Vanguard paid its advisers financial incentives, including bonuses, salary increases, and certain promotions, to enroll clients in the fee-based program. The same disclosures that should have described those incentives were internally contradictory: the firm’s Form ADV Part 2 brochure disclosed that some advisers were eligible for discretionary bonuses, while the firm’s Form CRS and a supplement to the same brochure stated that advisers received no additional compensation and no financial incentives to recommend certain products. Vanguard agreed to pay a $19.5 million civil penalty, with the SEC’s order citing violations of Sections 206(2) and 206(4) of the Investment Advisers Act and the firm’s failure to adopt adequate policies and procedures to prevent misleading statements.
Seven months later, on March 23, 2026, the SEC charged Ally Invest Advisors with failing to fully and fairly disclose a conflict of interest that affected clients for nearly six years. Ally Invest had offered clients a no-fee robo-advisor account with a 30% cash allocation. The 30% cash allocation was selected, in part, to generate financial benefit for Ally Invest’s affiliated broker-dealer and bank, making up for the revenue Ally Invest lost from not charging an advisory fee. That conflict was not disclosed to clients. Instead, Ally Invest’s marketing materials described the cash allocation as a valuable buffer against risk. Ally Invest agreed to pay a $500,000 civil penalty for willful violations of Section 206(2).
Neither of those cases involved intentional fraud in the classic sense. Both involved something that the SEC’s enforcement program treats as equally serious: a conflict of interest that the adviser knew about and failed to describe accurately to clients. In the Vanguard case, some disclosure existed but was contradicted by other documents the firm provided simultaneously. In the Ally Invest case, the conflict was simply not disclosed at all for nearly six years. In both cases, the basis for enforcement was not that the adviser acted with corrupt intent but that the disclosure failed to give clients the accurate, complete information they needed to evaluate how their adviser was being paid and whether that payment affected the recommendations they received.
This post addresses the conflict of interest disclosure framework that applies to investment advisers and fund sponsors: what the legal standard requires, why the specific failures in those two recent enforcement actions represent recurring patterns rather than isolated cases, what categories of conflict require the most careful disclosure treatment, and what the practical difference is between disclosure that satisfies the standard and disclosure that does not.
The Legal Standard: Full and Fair Disclosure of Material Conflicts
The conflict of interest disclosure obligation for investment advisers derives from the fiduciary duty framework under the Investment Advisers Act of 1940. The SEC’s 2019 interpretation of investment adviser fiduciary duty confirmed that the duty of loyalty requires advisers to make full and fair disclosure of all material facts relating to the advisory relationship, including all material conflicts of interest. The duty of care requires advisers to provide advice that serves each client’s best interests. Both duties apply throughout the advisory relationship, not only at the time of initial engagement.
The materiality standard for conflict disclosure is the same one that applies to securities disclosure generally: information is material if there is a substantial likelihood that a reasonable investor would consider it important in making a decision, or if disclosure of the omitted fact would significantly alter the total mix of information available. In the conflict context, that standard applies to facts about how the adviser is compensated, what relationships the adviser has with affiliated entities, how decisions about recommendations or allocations are made, and what incentives may affect the adviser’s judgment in ways that are not fully aligned with the client’s interests.
Full and fair disclosure means more than acknowledging that a conflict category exists. As the Vanguard enforcement order illustrates, a disclosure can be inadequate even when it is technically present in one document if a simultaneous disclosure in another document directly contradicts it. As the Ally Invest enforcement order illustrates, a disclosure is equally inadequate when the conflict is described in terms that emphasize a benefit to clients, such as a valuable cash buffer, without explaining the financial interest that drove the structural choice. The test is not whether the adviser said something about the conflict. The test is whether the disclosure gave the client the accurate and complete information needed to understand the conflict and its significance.
| 📌 The “May” Problem: When Conditional Language Misrepresents an Actual Practice One of the most consistently identified disclosure failures in SEC enforcement actions is the use of conditional or permissive language to describe a conflict that already exists as an established part of the adviser’s business model. The Sidley Austin analysis of FY 2025 SEC enforcement actions identified a January 2025 enforcement order in which the SEC found that an adviser made limited conflict disclosure by stating that it ‘may’ provide incentives to its representatives, whereas the adviser was actually paying incentive compensation as a normal part of its compensation structure. That enforcement action represents a pattern the SEC has addressed repeatedly across multiple years: an adviser describes a conflict in conditional terms that suggest it is hypothetical or occasional, when the practice is regular and established. The disclosure that says the adviser may recommend affiliated funds, may receive additional compensation, or may allocate opportunities preferentially does not accurately describe a practice that occurs routinely. The Vanguard enforcement order represents the same pattern in a more specific form. One disclosure stated that advisers were eligible for a discretionary bonus. Another disclosure in the same document package stated that advisers received no additional compensation or financial incentives to recommend certain products. The second statement was not merely conditional. It was directly contradictory to the first. The SEC found that the combination of disclosures was inadequate because it did not give clients a clear and accurate understanding of the incentive structure that influenced the recommendations they were receiving. The practical correction requires advisers to review their disclosures not only for what they say but for whether the combination of statements across the full set of client-facing documents accurately describes what the adviser actually does. A technically accurate statement in one document does not cure a contradictory statement in another. |
Compensation Conflicts: The Highest-Risk Category
Compensation is the conflict category that most directly affects whether an adviser’s recommendations serve the client’s interests or the adviser’s own. When an adviser’s compensation depends on what products it recommends, what programs it enrolls clients in, what service providers it uses, or how it structures accounts, that financial dependency creates the potential for recommendations that are not entirely neutral. The SEC’s fiduciary interpretation is explicit on this point: the duty of loyalty requires advisers to eliminate or fully disclose material conflicts so clients can evaluate whether the advice they receive is impartial.
The Vanguard and Ally Invest enforcement actions both describe compensation conflicts, though in different forms. Vanguard paid advisers financial incentives to enroll and retain clients in a fee-based managed account program, creating a direct financial incentive to recommend that program. Ally Invest structured a no-fee account in a way that generated revenue for its affiliated entities through the cash allocation, creating an indirect financial incentive whose conflict was not explained to clients. Both cases produced enforcement action under the same fiduciary framework, because both involved compensation structures whose conflict with client interests was not fully and fairly disclosed.
For fund sponsors and real estate advisers, the most common compensation conflicts include asset management fees tied to the total amount of assets under management, which create an incentive to retain assets in managed accounts even when a distribution or return of capital might serve the investor better; acquisition fees paid to the sponsor or an affiliated entity for each transaction, which create an incentive to close deals regardless of whether each specific deal optimizes the fund’s return; and incentive compensation paid to investor-facing personnel for enrolling clients in fee-generating programs or vehicles, which is precisely the pattern the Vanguard enforcement order addressed.
Adequate compensation conflict disclosure describes the specific compensation arrangement, identifies who receives the financial benefit, explains the incentive the arrangement creates, and states the circumstances in which the incentive arises in the advisory or fund management relationship. A disclosure that describes the compensation structure in a way that omits the conflict-creating element of that structure, or that describes the conflict-creating element in a way that understates its financial significance, does not satisfy the full and fair disclosure standard.
Affiliate Relationships: The Disclosure Category That Most Commonly Creates Hidden Conflicts
Affiliated relationships are among the most common and most frequently inadequately disclosed sources of conflict in real estate fund sponsorship and investment advisory practice. When an adviser uses affiliated entities for brokerage, custody, lending, property management, construction management, administration, or other services, those relationships create financial incentives that may affect the adviser’s decisions in ways that are not immediately visible to investors or clients.
The prior post in this series on due diligence questionnaires described the September 2023 SEC enforcement action against Prime Group Holdings, in which an affiliated brokerage owned by the CEO received nearly $18 million in fees on fund property acquisitions over four years. The PPM disclosed an acquisition fee and a property management fee but omitted the brokerage fee entirely. The enforcement order under Section 17(a)(2) of the Securities Act did not require proof of intentional fraud. It required only that the omission was negligent and that a material fee paid to an affiliate was not disclosed to investors.
Affiliate conflict disclosure must go beyond acknowledging that affiliated entities exist and that the adviser may use them. It must specifically identify what services the affiliated entity provides, what compensation it receives for those services, the financial significance of that compensation, and how the adviser’s relationship with the affiliated entity may affect its decisions about whether to use that entity rather than an independent third party. A disclosure stating that the adviser may use affiliated service providers is not adequate when the adviser regularly uses specific affiliated entities that receive substantial compensation for services to the fund.
The Ally Invest enforcement order illustrates the affiliate dimension of the conflict in a different form. The 30% cash allocation generated financial benefit not only for Ally Invest itself but for its affiliated broker-dealer, which received rebates from interest generated by the cash deposits, and its affiliated bank, which earned interest by lending out deposited client funds. The conflict disclosure obligation extended to all three of those financial interests, not only to the most visible one. A disclosure that identifies the primary conflict without disclosing the affiliated entities’ financial interests in the same arrangement has not fully and fairly described the conflict.
Allocation Conflicts: Disclosure That Must Match the Actual Governance Framework
Allocation conflicts in multi-fund and multi-vehicle platforms are addressed in detail in the prior two posts in this series on allocation of investment opportunities among affiliates and on competing funds and side vehicles. The disclosure obligation that applies to those conflicts shares the same inadequacy pattern that appears in the compensation and affiliate conflict categories: disclosure that describes the framework in general terms that do not reflect how allocation decisions are actually made.
The 2020 Private Fund Risk Alert identified advisers that disclosed an allocation framework and then did not follow it. The Sidley Austin FY 2025 review identified continued SEC focus on conflicts of interest in allocation decisions, compensation arrangements, and cherry-picking as recurring enforcement themes. The FY 2025 and FY 2026 examination priorities both named investment allocations and cross-fund transactions as named examination focus areas.
Allocation conflict disclosure must describe the actual methodology used to allocate opportunities among eligible vehicles, specify the factors that govern priority when multiple vehicles are eligible, describe how co-investment opportunities are distributed and what factors affect which investors receive access, and explain how conflicts among investors in different parts of the capital structure will be managed. A disclosure that describes all of those elements using hypothetical or conditional language rather than the specific framework the adviser actually uses does not give investors the information they need to evaluate whether the allocation process is fair.
Preferential Treatment and Side Letter Disclosures
Preferential treatment conflicts arise when selected investors receive rights or benefits that other investors in the same fund do not receive, and when the existence of those preferential arrangements is not disclosed to the investors who do not receive them. Side letters are the most common mechanism through which preferential treatment is established in private fund structures, and the disclosure obligations they create extend both to the existence of the preferential arrangements and to their practical significance for investors who are not party to them.
The Fifth Circuit’s June 2024 vacatur of the Private Fund Adviser Rules removed the specific regulatory requirements the 2023 rules would have imposed regarding disclosure of preferential treatment in side letters. It did not remove the underlying disclosure obligation that arises from the fiduciary duty framework, the antifraud provisions of the federal securities laws, and the contractual obligations in the governing documents. A side letter that grants one investor preferential liquidity rights, fee terms, co-investment access, or information rights is a material arrangement that may need to be disclosed to other investors in the fund, depending on how it affects their economic position and whether the fund’s governing documents contemplate disclosure of such arrangements.
The relevant disclosure question is not whether the preferential arrangement is technically permitted under the fund’s governing documents. The relevant question is whether other investors, who committed capital on the basis of the fund’s disclosed terms, would consider the preferential arrangement material to their understanding of how the fund operates and how their interests compare to the interests of other investors. When the answer is yes, the disclosure obligation is triggered.
Principal Transactions and Related-Party Dealings
Principal transactions are one of the most specifically regulated conflict categories under the Advisers Act. Section 206(3) prohibits an investment adviser from acting as principal for its own account in a transaction with a client unless the adviser provides written disclosure of the transaction before completion and the client consents. That requirement is transaction-specific: a general disclosure in the Form ADV brochure that the adviser may engage in principal transactions does not satisfy the pre-transaction consent requirement that Section 206(3) imposes on each specific transaction.
For real estate fund sponsors, the principal transaction risk arises in contexts including cross-fund asset transfers, continuation fund transactions where the sponsor controls both sides, and any arrangement in which a sponsor-affiliated entity buys from or sells to a fund the same sponsor manages. As discussed in the prior posts on competing funds and allocation practices, those transactions require not only the specific consent mechanics of Section 206(3) where it applies but also the LPAC governance and independent valuation processes that the fiduciary duty framework requires for transactions in which the adviser has economic interests on both sides.
Disclosure, Mitigation, and Elimination: Choosing the Right Response
Conflict disclosure is one possible response to a conflict. It is not always the only appropriate response, and for some conflicts it is not a sufficient one. The SEC has explained that if a conflict cannot be fully and fairly disclosed in a way that allows informed consent, the adviser should eliminate the conflict or mitigate it enough to make disclosure meaningful. That principle requires advisers to evaluate their conflicts along a spectrum of possible responses rather than treating disclosure as universally adequate.
Disclosure is appropriate when the conflict can be explained specifically enough that clients or investors can understand its nature, its potential effect on the advice or transaction, and the framework the adviser uses to manage it. Mitigation is appropriate when the conflict is structural and elimination would be commercially impractical, but where changes to compensation design, supervision, approval processes, or governance can reduce the risk that the conflict actually affects outcomes. Elimination is appropriate when the conflict is so severe, pervasive, or impossible to explain in a way that allows meaningful consent that permitting it to continue is inconsistent with the adviser’s fiduciary obligations.
The Vanguard enforcement order illustrates the limits of disclosure alone as a response to a compensation conflict. The firm’s advisers were paid incentive compensation to enroll clients in a fee-based program. The firm attempted to manage that conflict through disclosure, but the disclosure was contradictory across different documents, which meant the disclosure approach failed both in its accuracy and in its function. A mitigation response would have required changing the compensation structure to reduce the financial incentive to recommend the fee-based program or imposing supervisory controls that prevented advisers from recommending the program based on their personal compensation interests rather than the client’s interests. The enforcement order specifically cited the firm’s failure to adopt adequate policies and procedures to prevent misleading statements, which is the compliance program dimension of the mitigation obligation.
| ⚠️ The Conflict Disclosure Failures That Most Frequently Produce Enforcement Action 1. Conditional or permissive language for an actual established practice. The January 2025 enforcement action identified by the Sidley Austin FY 2025 review involved a firm describing its compensation incentives using ‘may’ language when the incentives were being paid as a matter of established practice. The materiality standard applies to what the adviser actually does, not to what it theoretically might do. 2. Contradictory statements across different documents provided to the same client. The Vanguard enforcement order found that one document disclosed adviser eligibility for bonuses while another stated that advisers received no financial incentives. The combination of disclosures did not give clients an accurate understanding of the adviser’s compensation structure. Conflict disclosure must be consistent across the full set of documents the client receives, not only accurate in one document while contradicted in another. 3. Describing the benefit to clients without disclosing the financial interest that drove the decision. The Ally Invest enforcement order found that marketing materials described the 30% cash allocation as a valuable buffer against risk without disclosing that the allocation was selected in part to generate financial benefit for the adviser’s affiliated entities. A disclosure that presents the client-facing rationale for a decision without the conflict-creating rationale is a materially incomplete disclosure. 4. Omitting an affiliated entity’s financial interest in an arrangement that the disclosure partially describes. The Prime Group enforcement action found that the PPM disclosed an acquisition fee and a property management fee while omitting the brokerage fee paid to the CEO’s affiliated entity. A partial fee disclosure that omits a material affiliated compensation stream does not satisfy the full and fair disclosure standard. 5. Disclosing the allocation framework without following it. The 2020 Private Fund Risk Alert found advisers that described a co-investment allocation process and then did not follow the described process. A disclosed framework that does not govern actual conduct is not adequate disclosure. It is an inaccurate description of how the conflict is managed. Failing to adopt written policies and procedures reasonably designed to prevent misleading statements about conflicts. The Vanguard enforcement order specifically found a Rule 206(4)-7 violation: the firm failed to adopt adequate written policies and procedures to prevent misleading statements about incentive compensation. The compliance program requirement is not separate from the disclosure obligation. It is the institutional mechanism through which the disclosure obligation is reliably implemented. |
Documentation: The Infrastructure That Makes Disclosure Defensible
A well-designed conflict disclosure is more defensible when it is backed by the documentation infrastructure that demonstrates both the conflict was identified and the disclosure accurately describes how it is managed. That infrastructure includes a conflicts inventory that systematically identifies the recurring conflicts in the adviser’s business model and transaction-specific conflicts that arise in particular situations; written policies and procedures that specify how each category of conflict is identified, disclosed, managed, and reviewed; documentation of when disclosures were delivered to clients and when any required consents were obtained; and periodic testing to confirm that actual practices remain consistent with written disclosures.
The FY 2026 examination priorities released by the SEC’s Division of Examinations in November 2025 specifically identified consistency between advisers’ disclosures and their actual practices as an examination focus area, and named conflicts of interest, including the allocation of fees and expenses and allocation of investment opportunities among affiliated entities, as continuing priority categories. The FY 2026 priorities also noted that the Division would review investment advice and related disclosures for consistency with an adviser’s fiduciary obligations. That examination focus describes exactly the gap that the Vanguard and Ally Invest enforcement actions document: disclosures that were technically present but that did not accurately describe the conflict’s nature or significance.
Documentation matters not only for examinations but for investor diligence. Institutional investors who conduct serious diligence on investment advisers and fund sponsors ask specifically about conflict management processes, written policies, testing and review practices, and the consistency between disclosed practices and actual conduct. An adviser who can demonstrate a systematic, documented conflict management process is in a materially different position from one who relies on ad hoc disclosure decisions made in response to specific situations. The documentation demonstrates that the conflict management is institutional rather than incidental, which is precisely what the fiduciary obligation requires.
The Disclosure Standard Is Not What Was Said. It Is Whether Clients Understood What They Needed to Know
The Vanguard and Ally Invest enforcement actions, separated by seven months and involving different types of conflicts and different sizes of civil penalties, share a single underlying failure: clients were not given the accurate, complete information they needed to understand how their adviser’s financial interests related to the recommendations and decisions they were receiving. In Vanguard’s case, one document disclosed a conflict while another denied it. In Ally Invest’s case, the conflict was described as a client benefit while its nature as an adviser benefit was not disclosed at all.
Neither of those failures required the SEC to prove that anyone acted with fraudulent intent. Both produced enforcement orders under standards that require only that the disclosure failed to give clients what the fiduciary framework requires: accurate, complete information about how the adviser is paid and whether that payment creates an incentive that may affect the advice the client receives.
The conflict disclosure standard in the words of the SEC’s fiduciary interpretation is full and fair disclosure of all material conflicts so clients can provide informed consent. Full means complete, not selectively complete. Fair means accurate, not partially accurate and partially contradicted. Informed consent means the client understood the conflict before making the decision affected by it, not that they received a document somewhere in the package that mentioned the conflict in some form. Building disclosure that satisfies that standard requires treating conflict identification and disclosure as a systematic institutional function, not as a drafting task performed once and left unchanged until an examination or enforcement action reveals its inadequacy.