SEC’s Latest Case Focuses on Investment Advisory Agreement Provisions

Background

On January 20, 2026, the SEC announced an enforcement action against a retail investment adviser⁽¹⁾ for improperly drafting its investment advisory agreements. Specifically, the adviser included a hedge clause without a corresponding savings clause, an assignment clause and a clause which gave it inadvertent custody of client assets.
The SEC noted that the conduct appeared to be recidivist, as prior examinations had identified these same issues.
Notably, the SEC cited no apparent investor harm in the order, underscoring the heightened level of scrutiny applied to retail advisers.

Conduct

Hedge Clauses: A hedge clause is contractual language that appears to limit or waive an adviser’s fiduciary duty.

The adviser’s investment advisory agreements stated that the adviser would be liable only for gross negligence or willful misconduct. The agreements did not include a savings clause or other clarifying language explaining that fiduciary duties extend beyond those standards. As a result, the SEC viewed the language as misleading.
This issue had been identified in a prior examination and was not fully remediated.

Assignment Clause: An assignment clause permits an adviser to transfer its advisory rights to another entity. Section 205(a)(2) of the Advisers Act prohibits such assignments without client consent.

During the relevant period, the adviser’s agreements stated that the adviser retained “the right to assign or otherwise transfer this Agreement or its rights or obligations set forth hereunder without notice and without Client’s consent.” Because such transfers without client consent are prohibited, the SEC viewed this language as misleading.
This issue was also flagged in a prior examination and not fully remediated.

Failure to Recognize Custody

The adviser’s agreements authorized the adviser to withdraw funds directly from client accounts, which constituted custody under the Advisers Act.
The adviser failed to recognize that this authority triggered compliance obligations under the Custody Rule and did not implement the required custody procedures, in violation of Rule 206(4)-2.
This issue had been identified during a prior examination and was not fully remediated.

Compliance Violations

The adviser’s compliance manual stated that advisory contracts would not include hedge clauses. Despite this policy, the adviser’s agreements contained prohibited hedge clause language.

Key Takeaways

Retail contract scrutiny: The SEC continues to bring enforcement actions involving hedge clauses in retail advisory agreements, even where there is no identifiable investor harm.
Inadvertent custody: Inadvertent custody remains a significant compliance risk. Merely granting an adviser authority to withdraw funds from a client’s custodial account can create custody and trigger Custody Rule obligations.
Recidivist behavior is taken seriously: Post-examination remediation must be complete and thorough. While advisers may disagree with certain exam findings, any remediation they commit to must be fully and effectively implemented. Advisers should carefully review all exam findings and clearly determine which issues require remediation; failure to do so may result in being viewed as recidivist.

_{(1) In the Matter of FAMILYWEALTH ADVISERS, LLC and FAMILYWEALTH ASSET MANAGEMENT, LLC}