February 12, 2026
What Happened?
The SEC recently announced settled charges against two registered investment advisers (collectively, “Respondents”) for violations of the Advisers Act due to compliance failures in their investment advisory agreements. The order highlights the SEC’s continued focus on advisory contract provisions, particularly hedge clauses and assignment language, that may mislead clients on the adviser’s fiduciary duty or fail to comply with consent requirements for assignments.
Hedge Clause Issues
From at least May 2019 through December 2024, Respondents used advisory contracts containing broad liability disclaimers (also known as “hedge clauses”) that the SEC found were misleading and inconsistent with an advisers’ fiduciary duties.
According to the order, the clauses broadly limited the advisers’ liability in a manner that could lead retail clients to believe they had waived non-waivable causes of action. Although some provisions included savings language purporting not to waive rights under applicable securities laws, the SEC concluded that, when read as a whole, the agreements were likely to mislead clients into believing they could not exercise their legal rights.
Assignment Clause Issues
The SEC also determined that Respondents’ advisory agreements violated Section 205(a)(2) of the Advisers Act, which requires advisory contracts to provide that they may not be assigned without client consent.
Earlier versions of the agreements expressly permitted assignment or transfer without notice to, or consent from, clients, and later versions failed to cure this issue. As a result, the SEC found that Respondents entered into advisory contracts that did not satisfy that statutory non-assignment requirement.
Compliance failures around the hedge clauses, improper assignment clauses, and some provisions that created custody, lead to a cease and desist order and a civil monetary penalty of $85,000
What does this mean for me?
Check your advisory agreements. The SEC has been consistent on the issue of hedge clauses. SEC risk alerts have identified this issue for private fund managers (see the January 27, 2022, Examinations of Private Funds risk alert), have named it in Examination Priorities, and have routinely cited it in enforcement actions alongside other compliance issues over and over again.
The mistake of waiving or appearing to waive the fiduciary duty owed to clients happens when the agreement is drafted or revised. Legal counsel may be trying too hard to protect the adviser. This can lead to indemnification language that limits liability to gross negligence and willful misconduct, improperly carving out liability for breach of fiduciary duty. Savings clauses reminding clients of their rights can help, but in this enforcement action, it was not enough. When you work with legal counsel on drafting an agreement, remind them of this issue and share this enforcement action.
