SEC fines advisors $150K for contracts contradicting their compliance manuals

Two investment advisors just learned an expensive lesson: misleading contract language can cost you, even when your own compliance manual says you're doing everything right.

The Securities and Exchange Commission hit FamilyWealth Advisers and FamilyWealth Asset Management with $150,000 in penalties on January 20, wrapping up a case that shows how easy it is for compliance programs to exist only on paper.

Here's what happened. Both firms, which together manage more than half a billion dollars for mostly retail clients, spent years having clients sign advisory agreements that included problematic hedge clauses. These are provisions that try to limit how much liability an adviser can face.

The trouble is, the language in their contracts went too far. It could have led clients to think they were giving up legal rights that actually can't be waived under federal or state law. One section said the firms wouldn't be liable except for willful misconduct or gross negligence. Another made clients agree to defend and indemnify the advisers even for securities violations or breaches of their duties.

The really striking part? The SEC had already made its position clear back in June 2019, publishing guidance that warned such hedge clauses in retail client agreements would likely violate antifraud rules. The firms kept using similar language anyway.

When FamilyWealth updated its advisory agreement in May 2020, it didn't fix the problem. Even after an SEC examination prompted another revision in 2024, some of the troublesome provisions remained.

There were other issues too. The agreements said the firms could assign or transfer the contract to someone else without telling clients or getting their permission. That's a direct violation of the Investment Advisers Act, which requires client consent for assignments.

Then there's the custody situation. The agreements gave the firms authority to instruct custodians about client assets, including the ability to direct withdrawals. That triggered a rule requiring annual surprise audits by independent accountants. The firms never got those audits done for any year from 2019 through 2024.

Perhaps most revealing was the gap between policy and practice. Both firms maintained compliance manuals that explicitly stated their advisory agreements met regulatory requirements and didn't contain hedge clauses. Meanwhile, clients were signing contracts that did exactly what the manuals said they didn't do.

FamilyWealth Advisers, based in Lake Mary, Florida, managed $346 million as of last December. Its sister firm, FamilyWealth Asset Management in Dallas, managed $181 million. The same parent company owns both.

The settlement orders them to stop the violations, and they've been censured. FamilyWealth Advisers will pay $85,000, while FamilyWealth Asset Management will pay $65,000. To their credit, the firms did revise their agreements last December and sent the new version to all existing clients.

Still, the violations went on for more than five years, continuing well after the SEC made its expectations clear and despite compliance policies that claimed to prevent exactly these problems.

This case serves as a reminder for investment advisors to regularly review client agreements against evolving regulatory guidance.