How Financial Advisors Can Identify and Revise Hedge Clauses

A hedge clause is a liability disclaimer often found in advisory agreements that’s designed to shield advisors from legal claims related to client losses. Hedge clauses have come under increasing scrutiny from the Securities and Exchange Commission (SEC) due to concerns that they might mislead clients or conflict with fiduciary standards. If your firm uses templated contracts, you may consider reviewing them for hedge clause language and revising as needed.

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Understanding Hedge Clauses

Hedge clauses are provisions included in contracts that are intended to limit one party’s liability should they be sued by the other. In an advisory agreement, hedge clauses are typically used to limit liability for losses related to market fluctuations, errors in judgment and adherence to a client’s wishes.

A hedge clause serves an important purpose for advisors. This type of clause defines the range of circumstances under which a client could sue you, which may be very narrow. For instance, a typical hedge clause might state that a client could only sue you for losses that result from your gross negligence or willful misconduct.

Assuming you do not breach your fiduciary duty in any way, such a clause could make it difficult for a client to bring a lawsuit against you. By agreeing to the contract and the hedge clause contained in it, your client effectively waives their right to sue you for any losses that occur if you appear to act in good faith at all times.

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Hedge Clauses and the SEC

The SEC views hedge clauses as problematic for two reasons. First, they’re potentially misleading to clients who may not fully understand what rights they’re waiving or that they’re waiving any rights at all. Clients who have a valid claim against an advisor may not pursue it if they do not understand their right to do so.

Additionally, the wording used in hedge clauses may compromise an advisor’s ability to adhere to fiduciary duty. Advisors are prohibited from misleading clients under the Investment Advisers Act, and the SEC has suggested that hedge clauses are, by nature, misleading because of the phrasing that’s often used in them.

In the SEC’s view, hedge clauses contradict Section 215(a) and Section 206(2) of the Investment Advisers Act. Section 215(a) states that “Any condition, stipulation, or provision binding any person to waive compliance with any provision of this title or with any rule, regulation or order thereunder shall be void.” Section 206(2), meanwhile, prohibits advisors from engaging “in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.'” ¹

An advisor may have no intention to strip a client of their rights but may do so inadvertently by including a hedge clause in their advisory agreement. That can hurt clients and it could also make registered investment advisors (RIAs) who use these clauses a target for SEC enforcement actions.

In January 2026, for example, the SEC undertook an administrative proceeding against two registered investment advisors over their use of hedge clauses in advisory contracts. The SEC fined the two firms $85,000 and $65,000, respectively, after alleging the companies “willfully violated Sections 206(2), 205(a)(2), and Section 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder.” Neither company admitted nor denied the allegations, but both agreed to the fines and to a cease-and-desist order. ²

How Advisors Can Identify and Revise Hedge Clause Language

A thorough review of advisory agreements and other client contracts can help you identify hedge clauses for revision. Look for language that limits the advisor’s responsibility for certain actions, decisions or outcomes, or suggests the client is giving up certain rights or remedies.

You might start your review by searching client documents for specific keywords, including:

• Negligence/gross negligence/simple negligence
• Liability/liable/not liable/limits liability
• Misconduct/willful misconduct
• Good faith
• Hold harmless
• Waive/waives/waiver
• Act, omission or error of judgment/ordinary errors of judgment
• Market fluctuations
• Action or inaction
• Losses
• Claims
• Indemnify
• Release/releases
• Sole remedy/exclusive remedy
• Damages/consequential damages

These are the types of words and phrases commonly included in hedge clauses. You may use an artificial intelligence tool to scan documents in bulk. AI data extraction and parsing tools can “read” documents in different formats to find keywords near instantly, saving you valuable hours.

The list of documents you may want to review includes all client contracts, onboarding documents, wrap-fee agreements and any other forms you’ve asked clients to sign during your working relationship with them. If you find a hedge clause in any of these documents, you’ll need to replace it with compliant language.

This language should clearly define the scope of the advisor-client relationship, including the services you will and will not provide. It should also tell the client what their responsibilities are in working with you, and what responsibilities you have to the client. You would need to disclose the risks of working with an advisor and define the extent to which you will rely on the accuracy of client information when offering advice.

You may consider working with an attorney or RIA compliance consultant to ensure that any language you use to replace a hedge clause is aligned with the SEC’s latest guidance. Once you’ve updated your documents, you’ll need to share them with clients and obtain updated signatures for all contracts. If you’d like to skip this step yourself, a repapering specialist can shoulder the administrative burden of obtaining new signatures and replacing old documents.

Frequently Asked Questions

Bottom Line

Hedge clauses can cause harm to clients who may have a valid claim to sue their advisor. Reviewing client documents for hedge clause language may be time-consuming, but it’s necessary to protect the investors you serve while staying compliant with SEC regulations.

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