Advisory Contract

A hedge clause in an advisory contract that tries to waive the adviser's liability for negligence is:

1. A.Allowed for institutions onlyClient sophistication does affect some disclosure judgments, which makes this plausible. A clause purporting to waive the adviser's liability for its own negligence still misleads the client about rights that cannot be waived, whoever the client is.
2. B.RequiredNo rule requires such language. The obligation runs the opposite direction, toward full and fair disclosure of what the adviser owes the client.
3. C.Standard and enforceableClauses like this do appear in contracts, which is exactly why they feel routine. Appearing in a contract does not make one valid, and this one misleads clients into believing they have given up protections they cannot give up.
4. D.ProhibitedCorrect - misleading and barred.

Why: Such hedge clauses are misleading as to client rights and are prohibited.

An investment advisory contract must generally:

1. A.Permit unlimited borrowing from the clientBorrowing from clients is a classic prohibited practice for advisers, subject to narrow exceptions such as regulated lenders. A contract requiring it would create the very conflict the rules forbid, not satisfy a contract requirement.
2. B.Describe services and fees and bar assignment without consentCorrect - required contract terms.
3. C.Waive the client's legal rightsHedge clauses that purport to waive a client's rights under the securities laws are prohibited, not required. The contract must instead spell out services, fees, and the consent requirement for assignment.
4. D.Guarantee a minimum returnGuaranteeing a return against loss is a prohibited practice, since no adviser can promise market results. Required contract terms concern services, compensation, and assignment consent.

Why: An advisory contract must set out services and compensation and provide that assignment requires client consent.