On January 20, 2026, the Securities and Exchange Commission (SEC) issued an enforcement order against Familywealth Asset Management and Familywealth Advisers for violations of the Investment Advisers Act, specifically Sections 206(2), 205(a)(2), and 206(4), related to advisers’ use of hedging and assignment clauses in their investment advisory agreements, as well as Rules 206(4)-2 (Custody Rule) and 206(4)-7 (Compliance Rule).
The order signifies key compliance obligations for investment advisers and demonstrates the SEC’s willingness to pursue regulatory action on the basis of investment advisory agreements.
Advisory Agreement Deficiencies
The SEC alleged that the advisers’ advisory agreements were deficient for several reasons:
- Hedge Clauses. The SEC reiterated its position that hedge clauses in advisory agreements, particularly retail agreements, that are designed to limit an adviser’s liability are generally inconsistent with antifraud provisions and likely to mislead clients about their legal rights.
- Assignment Clause. The SEC affirmed that investment advisory contracts shall not be assigned by an adviser without the client’s consent.
- Custody Rule. The SEC affirmed that advisers with custody of client assets must maintain those assets with a qualified custodian, notify clients in writing of account openings, ensure custodians send quarterly statements, and obtain annual, independent verification of client funds and securities.
- Compliance Rule. The SEC affirmed that registered investment advisers are required to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules.
Though Familywealth updated their advisory agreements in response to the SEC’s investigation, the SEC remarked that the remediation of the agreements was not swift and did not adequately address all the SEC staff’s concerns.
Hedge Clause
The hedge clause in the advisory agreements (1) did not waive or limit any of the client’s rights under federal and state securities laws; and (2) excluded from the waiver willful misfeasance, bad faith, or gross negligence. The SEC highlighted that a client does not actually need to be misled for a finding of fraud. The SEC reiterated that a misleading statement alone can amount to fraud if the statement could lead a client to believe that they have waived a non-waivable cause of action against an investment adviser.
Key Takeaways for Investment Advisers
- Review and Update Agreements. Investment advisers should review advisory agreements, including any boilerplate agreements, for hedge clauses and ensure compliance with SEC guidance and fiduciary obligations.
- Strengthen Custody and Compliance Procedures. Investment advisers must adhere to custody and compliance requirements, including independent verification and robust written policies.
- Prompt Remediation. Swift remedial action and transparent communication with advisory clients can mitigate regulatory consequences.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.
You can subscribe to future advisories and other Alston & Bird publications by completing our publications subscription form.