An investment adviser has an non-waivable fiduciary duty to its clients. If you try to waive the fiduciary or deceive your clients into thinking its waivable, the Securities and Exchange Commission is going to be unhappy with you. These waivers of fiduciary duty are often called “hedge clauses.”
The SEC settled charges against a registered investment adviser and fund manager, ClearPath Capital Partners, for using hedge clauses in advisory agreements and fund documents in violation of Section 206(2) of the Advisers Act (anti-fraud). The SEC claimed that the private fund documents included “misleading” hedge clauses limiting the scope of its non-waivable fiduciary duty. The SEC found that the hedge clauses “could lead a client to believe incorrectly that the client had waived a non-waivable cause of action against the adviser provided by state or federal law.”
If you remember back to the proposed Private Fund Adviser Rules (now defunct), the SEC initially proposed a new regulation that would have explicitly prohibited hedge clauses. That regulation was dropped from the final rule, but in the release commentary the SEC said the regulation was unnecessary because hedge clauses are a clear violation.
In the ClearPath case, the SEC cites back to the Commission Interpretation Regarding Standard of Conduct for Investment Advisers, IA Rel. No. 5248 (June 5, 2019).
“[T]here are few (if any) circumstances in which a hedge clause in an agreement with a retail client would be consistent with [] antifraud provisions, where the hedge clause purports to relieve the adviser from liability for conduct as to which the client has a non-waivable cause of action against the adviser provided by state or federal law. Such a hedge clause 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.” p. 11, fn. 31.
The SEC also pointed out that hedge clauses are generally inconsistent with an adviser’s fiduciary duty regardless of the sophistication of the client.
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