The S.E.C. recently censured and fined two registered investment adviser firms, finding that they breached their non-waivable fiduciary duties to their clients by attempting to prospectively limit their potential liability to their clients through the use of so-called ‘hedge clauses’ in their advisory agreements.
The advisory agreements at issue sought to preclude the S.E.C-registered investment adviser firms’ clients from bringing legal claims against the firms unless the firms had been grossly negligent or engaged in willful misconduct. Additional language in the advisory agreement indicated that the firms could only be liable to its clients “in the case of willful misfeasance, bad faith or gross negligence on the part of [the firms], or the reckless disregard by the [firms] of its obligations and duties.” The advisory agreements even contained a provision that purported to require the firms’ clients to defend and indemnify—that is, pay the firms’ attorney fees and potential adverse judgments—if the clients sued them for negligence, breach of fiduciary duty, or other securities law violations.
Provisions such as those that purport to disclaim or otherwise limit a registered investment adviser firm’s liability to its clients are known as ‘hedge clauses.’ The S.E.C. has made clear since at least 2019 that ‘hedge clauses’ are inconsistent with an S.E.C.-registered investment adviser firm’s non-waivable fiduciary duties (which require the firm to act in its clients’ best interests) under the Investment Advisers Act of 1940. The Investment Advisers Act of 1940 also contains a provision—15 U.S.C. § 80b-15—that can void contracts that violate any provision of the Investment Advisers Act of 1940. The S.E.C. has therefore concluded that the use of ‘hedge clauses’ generally misleads retail clients and can constitute a violation of the antifraud provision—15 U.S.C. § 80b-6—of the Investment Advisers Act of 1940.
In this instance, the S.E.C. determined that the language of the ‘hedge clauses’ described above could “mislead [the firm’s] retail clients into not exercising their non‑waivable legal rights”—and thus violated the antifraud provision. The S.E.C. also determined that the firms’ failure to adhere to policies and procedures in its compliance manuals that barred the use of ‘hedge clauses’ was itself a violation of an S.E.C. regulation—17 C.F.R. § 275.206(4)‑7—known as the Compliance Rule. On account of those and other violations, the S.E.C. censured and fined the two firms.
Stoll Berne frequently represents defrauded investors and other victims of investment scams and securities law violations. The S.E.C.’s recent action is a valuable reminder that clients of S.E.C.‑registered investment adviser firms are owed non-waivable fiduciary duties, and any ‘hedge clauses’ that purport to limit or disclaim a firm’s liability should not be a bar to a client’s ability to pursue legal claims when there is reason to believe that the firm has breached its non‑waivable fiduciary duties or committed other securities law violations, including violations of state securities laws. Investors who live in Oregon or who are clients of an S.E.C.‑registered investment adviser that is based in Oregon may even be able to bring claims under the Oregon Securities Law, which provides important remedies for investors in cases in which it applies.
The S.E.C.’s order described above is Investment Advisers Act of 1940 Release No. 6941 and was entered on January 20, 2026, in Administrative Proceeding File No. 3-22580.
