SEC Hedge Clause Crackdown

The SEC just issued a $150,000 wake-up call to every registered investment adviser in America. In January 2026, the Commission announced settled charges against FamilyWealth Advisers and its affiliates for deficiencies you might never expect: the language in their advisory agreements.

This was not a case of fraud, theft, or market manipulation. It was a case of "boilerplate" provisions that the SEC deemed misleading. The message is unmistakable: your investment advisory agreement is a regulatory document with real consequences, and the provisions you have used for years may now expose you to enforcement risk.

Here is what happened, why it matters, and how to protect your firm before the next examination cycle.

What Went Wrong at FamilyWealth

On January 20, 2026, the SEC announced settled charges against FamilyWealth Advisers, LLC and FamilyWealth Asset Management, LLC for violations spanning nearly six years. The enforcement action targeted three categories of agreement language.

1. Misleading Hedge Clauses. The advisers' agreements contained liability disclaimers excluding only "willful misfeasance, bad faith or gross negligence" from waiver. The SEC found this language could mislead retail clients about the scope of the advisers' non-waivable fiduciary duties, because the formulation disclaimed liability for ordinary negligence.
2. Improper Assignment Provisions. The agreements failed to properly prohibit assignment without client consent, as required by Section 205(a)(2) of the Investment Advisers Act.
3. Custody Rule Violations. Trading authorization language in the agreements created custody obligations under Rule 206(4)-2 that the firms failed to meet for multiple years, including the surprise examination requirement.

The penalties were substantial: FamilyWealth Advisers paid $85,000 and FamilyWealth Asset Management paid $65,000, along with censures and cease-and-desist orders.

Why Hedge Clauses Face Heightened Scrutiny

Investment advisers are fiduciaries. Under Sections 206(1) and 206(2) of the Advisers Act, advisers owe their clients a duty of care and a duty of loyalty. These duties are enforceable through the antifraud provisions and cannot be waived by contract.

The SEC's June 2019 Commission Interpretation put advisers on notice. The Commission stated that there are few, if any, circumstances in which a hedge clause in an agreement with a retail client would be consistent with the antifraud provisions where the clause purports to relieve the adviser from liability for conduct as to which the client has a non-waivable cause of action.

Retail clients typically sign form agreements without negotiation and may not understand the legal significance of hedge clause language. When agreements suggest that clients have waived rights they cannot legally waive, the SEC views this as potentially fraudulent.

Three Provisions to Review Now

Based on the FamilyWealth action and recent examination trends, three categories of agreement language warrant immediate attention.

1. Third-Party Liability Disclaimers. Language stating the adviser "shall not be liable for any act or omission of the Custodian, any broker-dealer, or any other third party" without qualification is problematic. Investment advisers have a fiduciary duty to select and monitor service providers. The fix is to add a reasonable care qualifier: "whom Adviser selected with reasonable care."
2. Negligence Standards. Provisions stating the adviser "shall not be liable except in cases of willful misfeasance, bad faith, or gross negligence" disclaim liability for ordinary negligence. Because fiduciary duty encompasses ordinary negligence, this formulation can be deemed misleading. Consider including negligence in the standard or adding explicit language that nothing in the agreement constitutes a waiver of client rights under applicable law.
3. Assignment Provisions. Agreements must clearly state that no assignment may be made by the adviser without the client's consent. Silent or ambiguous provisions, or exceptions that swallow the rule, violate Section 205(a)(2).

The Fiduciary Acknowledgment Solution

Beyond fixing specific problematic provisions, we recommend adding an explicit fiduciary duty acknowledgment to advisory agreements. This language directly addresses the SEC's concerns:

"Nothing in this Agreement shall constitute a waiver or limitation of any rights that Client may have under applicable federal or state law, including the Investment Advisers Act of 1940. Adviser acknowledges its fiduciary duty to act in the best interests of Client, and this Agreement does not seek to limit or waive liability for any breach of fiduciary duty or any violation of applicable securities laws."

This paragraph expressly preserves statutory rights, acknowledges the fiduciary relationship, and demonstrates good faith to examiners.

The Business Case for Proactive Review

FamilyWealth maintained problematic language for about six years, despite numerous examinations and warning from the SEC staff. The result: $150,000 in combined penalties, public censure, and reputational damage.

Proactive agreement review costs a fraction of enforcement penalties and is tax-deductible as a business expense. Firms with clean, well-drafted agreements experience smoother examinations. And demonstrating recent review shows good faith, a factor the SEC considers in determining sanctions.

The SEC's FY 2026 Examination Priorities specifically highlight fiduciary duty compliance. Now is the time to review your agreements with fresh eyes before examiners do it for you.

Key Takeaways

• Advisory agreement language carries real regulatory risk. The FamilyWealth enforcement action resulted in $150,000 in penalties for provisions many firms consider routine boilerplate.
• Hedge clauses with retail clients face heightened scrutiny. Provisions disclaiming liability for ordinary negligence may violate Section 206(2) of the Advisers Act.
• Add a fiduciary duty acknowledgment. Explicit language preserving client statutory rights demonstrates compliance and good faith.
• Conduct a custody analysis. Trading authorization language can trigger custody obligations and surprise examination requirements.
• Proactive review is cheaper than enforcement. Legal fees for agreement review cost far less than six-figure penalties.