SEC Enforcement Signals Heightened Scrutiny of Advisory Agreements and Compliance Practices

SEC³ Compliance
February 3, 2026

Investment advisers continue to face regulatory scrutiny over the language used in advisory agreements and the effectiveness of their compliance programs. A recent SEC enforcement action underscores the importance of ensuring that client-facing documents, internal policies, and actual practices are aligned and up to date.

Overview

On January 20, 2026, the US Securities and Exchange Commission issued a settled administrative order against FamilyWealth Advisers LLC and FamilyWealth Asset Management LLC, both SEC-registered investment advisers. See order here FamilyWealth Advisers, LLC and FamilyWealth Asset Management, LLC.

The order identified multiple violations of the Investment Advisers Act of 1940 tied to deficiencies in advisory agreements and related compliance practices.

The SEC cited misleading hedge clauses, improper assignment provisions, failures under the Compliance Rule, and noncompliance with the Custody Rule. The advisers collectively managed approximately $500M in regulatory assets under management, primarily for retail clients, and agreed to pay a combined civil monetary penalty of $150,000.

Although the cited violations reflect long-standing regulatory principles, the action is notable for advisers serving retail clients and for the SEC’s continued focus on advisory contract language, particularly where issues identified during examinations are not fully resolved.

Regulatory Context

The order reflects broader regulatory themes that advisers continue to encounter, including increased attention to client-facing documentation, closer coordination between the SEC’s examination and enforcement functions, and sustained scrutiny of fiduciary representations made to retail clients.

The SEC has repeatedly emphasized that contractual provisions cannot obscure an adviser’s fiduciary obligations or create confusion about clients’ legal rights. This action reinforces that expectation and highlights the Commission’s willingness to assess advisory agreements in their full context rather than reviewing individual provisions in isolation.

1)    Hedge Clause Issues (Section 206(2))

The SEC concluded that the advisers used advisory agreements containing liability-limiting language that was misleading and therefore violated Section 206(2) of the Advisers Act.

The Commission has consistently stated, including in its 2019 fiduciary duty interpretation, that hedge clauses are generally inappropriate in agreements with retail clients when they suggest that clients have waived rights that cannot legally be waived under federal or state law. Subsequent examinations and enforcement actions have reinforced this position.

In this matter, the SEC found that the advisers’ hedge clauses inaccurately described the scope of their nonwaivable fiduciary duties. As written, the provisions could reasonably have caused clients to believe that certain legal claims were no longer available to them, even though those rights remained intact under applicable law. The SEC determined that this created a meaningful risk that clients would not assert their rights.

The order also addressed the advisers’ attempts to revise their agreements during an SEC examination. While acknowledging those efforts, the SEC concluded that the revisions did not fully resolve the identified issues and were not consistently provided to all clients.

2)    Assignment Clause Deficiencies (Section 205(a)(2))

The SEC also charged the advisers with violating Section 205(a)(2) of the Advisers Act based on advisory agreement provisions that permitted assignment of client relationships without obtaining client consent.

The agreements expressly allowed the advisers to assign or transfer advisory contracts without notice to or approval from clients. Even after revisions made following a 2024 examination, the agreements continued to omit language requiring client consent for assignment.

As consolidation activity continues across the wealth management industry, assignment provisions remain an examination focus, and this action underscores the importance of ensuring advisory agreements clearly align with statutory requirements.

3)    Compliance Program Failures (Rule 206(4)-7)

The SEC further found that the advisers violated the Compliance Rule by failing to implement their own written policies and procedures.

Although the advisers maintained written policies stating that hedge and assignment clauses would comply with the Advisers Act, the continued use of deficient agreements demonstrated a gap between written compliance documentation and actual practices. The SEC treated this disconnect as evidence that the compliance program was not operating effectively.

This finding aligns with the SEC’s examination priorities, which emphasize the effectiveness of compliance programs rather than their mere existence.

4)    Custody Rule Violations (Rule 206(4)-2)

The SEC also concluded that the advisers had custody of client assets based on contractual authority to withdraw or disburse client funds without prior client approval.

Because this authority constituted custody under the Advisers Act, the advisers were required to comply with the Custody Rule, including annual verification of client assets by an independent public accountant. The advisers failed to satisfy these requirements for multiple years.

Key Takeaways for Investment Advisers

• Advisory agreement language continues to present regulatory risk, particularly when agreements are used with retail clients
• Examination findings require complete and thoughtful remediation, as partial fixes may not prevent enforcement referrals
• Written compliance policies must be reflected in actual business practices
• Custody determinations require careful analysis, as contractual authority alone may trigger custody obligations

How SEC3 Can Help

SEC3 works with investment advisers to proactively identify and address the types of issues highlighted in this enforcement action. Our team assists clients with reviewing and updating advisory agreements, evaluating hedge and assignment clause language, assessing custody risks, and aligning written policies with day-to-day practices.

We also support advisers in preparing for and responding to SEC examinations, implementing remediation plans, and strengthening compliance programs to reduce regulatory exposure. By addressing documentation and compliance gaps before they become examination findings or enforcement matters, SEC3 helps advisers maintain a strong and defensible compliance framework while staying focused on their business.

Need assistance with your compliance program? SEC’s team of experienced compliance professionals can help. For more information, please email us at info@sec3compliance.com, call (212) 706-4029 x 214, or visit our website at www.sec3compliance.com.

SEC3 provides links to other publicly available legal and compliance websites for your convenience. These links have been selected because we believe they provide valuable information and guidance. The information in this e-newsletter is for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind

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