As an investment adviser, what fiduciary duties do you owe your clients?
Under the Investment Advisers Act of 1940 (“Advisers Act”), all SEC-registered investment advisers owe clients a fiduciary duty comprised of two core elements: the Duty of Care and the Duty of Loyalty. These duties require advisers to act in the best interests of their clients, avoid putting their own interests first, and disclose material conflicts when they cannot be eliminated.
What Are the Core Fiduciary Duties?
- Duty of Care
The Duty of Care includes several important components:
- Best-Interest Advice: Advisers must understand a client’s financial situation and provide recommendations reasonably believed to be in the client’s best interest.
- Reasonable Investigation: Advice must be supported by due diligence; advisers cannot rely on materially inaccurate, incomplete, or outdated information.
- Best Execution: When advisers have discretion over client accounts, they must seek the best overall value for transactions.
- Ongoing Monitoring: If the client-adviser relationship includes periodic review, advisers must provide ongoing monitoring as agreed upon and adjust accordingly.
- Duty of Loyalty
The Duty of Loyalty requires:
- Prioritizing Client Interests: Advisers must not subordinate clients’ interests to their own.
- Full and Fair Disclosure: Material facts, conflicts, and how they are addressed must be clearly explained to clients in a transparent manner, so clients can make informed decisions.
- Conflict Management: If a conflict cannot be eliminated, advisers must disclose it fully and obtain informed consent where appropriate.
Hedge Funds and Conflicts of Interest
Hedge funds are particularly prone to conflicts of interest due to their complex structures, discretionary investment authority, and performance-based fee arrangements. Managers may face conflicts in allocating investment opportunities among multiple funds or accounts, engaging in related-party transactions, or pursuing strategies that benefit the fund at the potential expense of certain investors.
These inherent conflicts make clear, full, and transparent disclosures critical.
In this 2022 SEC Risk Alert, the SEC emphasized that advisers’ fiduciary duties cannot be waived, and that disclosure language that could mislead clients about these duties may violate Section 206 of the Advisers Act.
Historically these clauses have drawn regulatory scrutiny because they can create the impression that clients have waived unwaivable fiduciary rights, even though federal and state law prohibit such waivers.
Although the 2022 SEC Risk Alert can be applied to most, if not all, financial services providers, it primarily addressed private funds. It confirmed that federal fiduciary duties cannot be waived, even by institutional clients, and that hedge clauses purporting to limit liability may violate the Advisers Act.
Enforcement Actions Highlight Risks of Improper Hedge Clauses
In January 2026, the SEC charged two registered investment advisers for including misleading liability disclaimers in client agreements that implied clients waived non-waivable causes of action under federal or state law. The enforcement order found that such hedge clause language could mislead retail clients about their legal rights.
Prior to this, the SEC settled against advisers like Comprehensive Capital Management (“CCM”) for improper hedge clauses that purported to limit liability beyond what is permissible under the Advisers Act.
Additional enforcement actions in 2024 also reflected similar findings, where hedge clauses led to fraud and fiduciary duty violations and resulted in settlements requiring removal or revision of such clauses.
In September 2024, the SEC charged ClearPath Capital Partners LLC with violations of the Advisers Act, including its use of misleading liability disclaimers. ClearPath agreed to a settlement including a cease‑and‑desist order, removal of the hedge clauses, and a $65,000 civil penalty.
In March 2024, the SEC charged two investment advisers, Global Predictions, Inc. and Delphia (USA) Inc., with the use of a misleading liability hedge clause in an advisory. The SEC found the hedge clause did not align with fiduciary duties. The firms were also charged with misleading claims of AI use. Both firms agreed to settle the charges with civil penalties ($175,000 for Global Predictions; $225,000 for Delphia).
Key Compliance Takeaways for Advisers
- Hedge Clauses Must Never Imply Waiver of Fiduciary Duties: Ensure clauses are clear and do not suggest that fiduciary duties are optional or limited.
- Write in Plain English: Disclosures should clearly explain clients’ rights.
- Disclosure Is Not Enough Without Substance: Advisers should align written disclosures with internal policies and actual practices.
The SEC’s 2026 examination priorities continue to emphasize fiduciary duty compliance, identification and mitigation of conflicts of interest, transparency, and robust disclosures. Firms should reassess policies, procedures, and supervisory practices to mitigate enforcement risk.
It is prudent to consult with experienced legal counsel when drafting or updating agreements, especially as regulatory expectations continue to evolve.
For more information and to have JLG review your contracts, please contact us at 619.298.2880 or email us at [email protected].
