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Maine?s Take on Investment Adviser Hedge Clauses and Assets Under Management

By Jay Fishman

Recently, an investment adviser queried the Maine Office of Securities whether a hedge clause such as the following placed in a client?s contract was appropriate:

"Except for negligence or malfeasance, or violation of applicable law, neither you nor any of your officers, directors or employees shall be liable hereunder for any action performed or omitted to be performed or for any errors of judgment in managing the account. The federal and state securities laws impose liabilities under certain circumstances on persons who act in good faith, and therefore nothing herein shall in any way constitute a waiver or limitation of any rights which the client may have under any federal or state securities laws. "

Maine replied that there was no appropriate or inappropriate hedge clause language but cautioned the investment adviser that the State, by rule, holds investment advisers (and investment adviser representatives) to a fiduciary duty that may not be disclaimed away in a contract. It was suggested that the investment adviser append the following language to the above hedge clause:

"In this regard, nothing shall abridge the fiduciary duty imposed on the adviser to Act for the benefit of the client nor any rights the client may have as a result of that duty. "

Next, the investment adviser posed the following hypothetical: Whether the Office of Securities would consider the adviser to be a state investment adviser for purposes of becoming licensed in Maine as opposed to a federal covered investment adviser, if the adviser only provided investment advice on a temporary basis and had no assets under management. The investment adviser cited an SEC definition stating that an investment adviser is one who provides continuous and regular supervision or management, thereby excluding one who provides advice on an intermittent or periodic basis. The adviser also disclosed that it listed all of its portfolios as ?assets under management.?

The Office of Securities stated that its sole test for determining whether an investment adviser was state or federal covered is whether the adviser is registered under the Investment Advisers Act of 1940; that if ?yes? the adviser was federal covered. The Office of Securities further cautioned the adviser that as it did not use an assets under management test to determine state or federal covered registration, its opinion could conflict with the SEC and that, therefore, the adviser should either pose the question to the SEC or read Section 5(b) of the Instructions to Form ADV pertaining to calculating assets under management.

Full post as published by Jim Hamilton's World of Securities Regulation on January 03, 2008 (boomark / email).