Hedge Clauses in Focus: The SEC Charges an Investment Adviser with Four Advisers Act Violations

• On January 20, 2026, the U.S. Securities and Exchange Commission (SEC) released a settled Order Instituting Proceedings involving registered investment advisers FamilyWealth Advisers, LLC and FamilyWealth Asset Management, LLC (the Advisers) for violations associated with their use of hedge and assignment clauses in their investment advisory agreements, an associated violation of the Compliance Rule and a violation of the Custody Rule.
• The Order is of particular interest to investment advisers, including wealth managers, that service retail investors. The focus on hedge and assignment clauses in investment advisory agreements reflects the SEC’s willingness to scrutinize documentation presented to advisory clients.
• Further, the repeated references in the Order to the Advisers’ examination by the SEC suggest that the Division of Enforcement continues to take referrals from the Division of Examinations, particularly in instances where deficiencies are not resolved during the exam process.
• Finally, the settlement is notable given the relatively low number of enforcement actions by the SEC since Chairman Paul Atkins’s confirmation last year. In particular, the Order’s focus on hedge clauses shares similarities with enforcement actions brought by the SEC under former Chairman Gary Gensler, which pursued an aggressive regulatory enforcement agenda against investment advisers.

Charges and Implications

The SEC charged the Advisers with four separate violations of the Investment Advisers Act of 1940 (the Advisers Act). Combined, the Advisers were described as having approximately $500 million in regulatory assets under management, most of which was associated with retail investors. Pursuant to the settlement, the Advisers were ordered to pay an aggregate civil monetary penalty of $150,000. Each charge, the description of the salient facts and the formatting of the Order are notable, with the settlement coming out in the midst of lower-than-usual enforcement activity by the SEC.

Hedge Clause - Section 206(2)

First, as provided in the Order, the SEC found the Advisers utilized investment advisory agreements that included “hedge clause” language, which is designed to limit an adviser’s liability. The Advisers’ hedge clauses, however, were found to be misleading and in violation of Section 206(2) of the Advisers Act. 

By way of background, and as noted in the Order, the SEC’s 2019 Fiduciary Interpretation stated that “there are few (if any) circumstances in which a hedge clause in an agreement with a retail client would be consistent with … antifraud provisions, where the hedge clause purports to relieve the adviser from liability for conduct as to which the client has a non-waivable cause of action against the adviser provided by state or federal law.” In the nearly seven years since the publication of the Fiduciary Interpretation, the SEC has brought a series of enforcement actions and examination risk alerts noting its ongoing focus on this issue.¹

Here, the SEC concluded that the hedge clauses in the Advisers’ agreements contained misleading statements regarding the scope of each adviser’s non-waivable fiduciary duty, such that the client could have been led to believe—incorrectly—that they had waived a non-waivable cause of action against the Advisers. The Order thus noted that clients might not have exercised their legal rights. By charging the Advisers with a Section 206(2) violation, the SEC found that these misleading statements amounted to a fraud on the clients.

As an example, one version of the agreement utilized by the Advisers stated that the Advisers would not be liable to their clients (and the clients would similarly indemnify and hold harmless the Advisers) for any act, omission or determination made in connection with the advisory agreement except for in cases of willful misconduct or gross negligence. While the agreement did also state that this waiver would not apply to “any federal or state securities law … if applicable,” the SEC found that the language “when read in its entirety,” was misleading. The SEC also highlighted the fact that the Advisers utilized the agreements with retail investors, who are often less sophisticated, and were therefore more likely to have been misled.

Notably, the Order referenced attempted remedial acts by the Advisers in the form of edits to the agreements during the course of an SEC examination. However, the Order concluded that the remedial efforts fell short because they did not address all of the deficiencies, and further because the new agreements were not provided to all advisory clients.² The Order was silent as to what level of specificity is needed for a hedge clause to be compliant with Section 206(2) of the Advisers Act. For example, the Order did not describe what substantive adjustments would have sufficed or whether the carveout that was in the agreement should have been more prominent. We note, however, that not all instances of the language purportedly limiting liability in the agreements were accompanied by clarifying language that duties had not been waived.

Assignment Clause - Section 205(a)(2)

Second, the SEC found that the Advisers’ agreements improperly permitted the assignment of the client relationships without client consent as required by Section 205(a)(2) of the Advisers Act. Specifically, while potentially attributable to inartful drafting, the agreements expressly stated that the Advisers retained the right to assign or otherwise transfer the agreement “without notice and without Client’s consent.”

The Order further noted that even after certain revisions to the agreement were made following the 2024 examination, the agreements continued to fail to provide, in substance, that client consent was needed to complete an assignment. 

Given the growing trend of larger investment advisers purchasing smaller investment advisers as part of an effort to grow assets under management, we expect the SEC to continue to focus on assignment clauses, especially in examinations.³

Compliance Rule - Rule 206(4)-7

Third, and related to the above two violations, the SEC found that while the Advisers had adopted written policies and procedures associated with hedge and assignment clauses, they were not implemented. Specifically, the Advisers’ compliance manuals stated that any hedge or assignment clause would comply with the Advisers Act. The substantive violations of Sections 206(2) and 205(a)(2) of the Advisers Act were thus deemed to have violated Rule 206(4)-7, which is known as the “Compliance Rule.”

This charge is notable given a lower volume of enforcement actions since the beginning of Chairman Atkins’s tenure charging investment advisers with violations of the Compliance Rule for not implementing their own policies and procedures.

Regardless, the findings align with the SEC’s Examination Priorities for Fiscal Year 2026, in which it described the effectiveness of investment adviser compliance programs as a “fundamental part of the examination process.” We therefore expect the SEC to continue to examine disconnects between an adviser’s written policies and procedures and its actual practices.

Custody Rule - Rule 206(4)-2

Fourth, the Order found that the Advisers’ advisory arrangements provided the Advisers with custody of client assets due to the contractual ability for the Advisers to make payments and withdraw or disburse funds without the consent of the client. The Advisers thereby were required to implement the Advisers Act-enumerated set of requirements for custody, including obtaining annual verification of client funds and securities by an independent public accountant, which the Advisers failed to satisfy for at least the calendar years 2019 through 2024.

Takeaways

While each charge in the Order has been the subject of enforcement action in the past, aspects of this settlement are notable and worth considering, especially given the current, less aggressive enforcement environment.

The structure and tone of the document are also notable. This includes repeated references throughout the Order to the 2024 examination of the Advisers. Through the Order, the SEC appears to be reminding investment advisers to diligently implement necessary remedial steps associated with examination findings and that the failure to do so thoughtfully and thoroughly may lead to referral to the Division of Enforcement.

^{1 See, e.g., “The SEC Is Kicking Off 2022 with a Renewed Focus on the Private Funds Industry: A Review of Recent Enforcement Actions and Their Lessons for Private Fund Managers,” Akin Client Alert (Feb. 2, 2022), available at https://www.akingump.com/en/insights/alerts/the-sec-is-kicking-off-2022-with-a-renewed-focus-on-the-private-funds-industry-a-review-of-recent-enforcement-actions-and-their-lessons-for-private-fund-managers; In the Matter of Global Predictions, Inc., Advisers Act Release No. 6574 (Mar. 18, 2024), available at https://www.sec.gov/files/litigation/admin/2024/ia-6574.pdf; In the Matter of ClearPath Capital Partners, LLC, Advisers Act Release No. 6672 (Sept. 3, 2024), available at https://www.sec.gov/files/litigation/admin/2024/ia-6672.pdf.}

^{2 The Order still cited the Advisers’ overall remedial acts, “including its revisions in December 2024 to the advisory agreement, distribution of the revised agreement to all existing clients, and request that all existing clients sign the revised advisory agreement and return the agreements to the firms.” Order at 8.}

^{3 See “A Dealmaking Frenzy Is Reshaping the Booming Wealth-Management Business,” Wall St. J. (Dec. 29, 2025), available at https://www.wsj.com/finance/investing/a-dealmaking-frenzy-is-reshaping-the-booming-wealth-management-business-6ae921d6.}