January 14, 2022
A New Jersey-based investment adviser has settled charges related to (i) having a misleading liability disclaimer in its advisory contracts, (ii) failing to rebate fees charged to certain retirement accounts, and (iii) failing to maintain accurate records and implement required compliance policies.
The SEC’s allegation concerning the liability disclaimer has potentially significant ramifications for advisers to retail clients. These so-called “hedge clauses” are commonly included in advisory contracts and are typically coupled with language, known as a “savings clause,” stating that the hedge clause does not waive or limit the client’s rights under federal or state securities laws. According to the SEC’s order, the hedge clause could lead a client to believe incorrectly that it waived a cause of action against the adviser provided by state or federal law, when those claims are in fact not waivable, and this is the case even when the agreement includes a savings clause.
The SEC’s 2019 Fiduciary Interpretation included the SEC’s view 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 of the Advisers Act because it “generally is likely to mislead those retail clients into not exercising their legal rights, in violation of the antifraud provisions, even where the agreement otherwise specifies that the client may continue to retain its non-waivable rights.” The SEC distinguished the inclusion of a hedge clause in an agreement with an institutional client, the appropriateness of which is based on the facts and circumstances.
Advisers to retail clients may want to review any hedge clauses in their advisory contracts in light of this enforcement action.
See In the Matter of Comprehensive Capital Management, Inc. (Jan. 11, 2022).
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