MFA Comments On Hedge Clauses In Client Agreements

The Managed Funds Association (the "MFA") commented on (i) the SEC's proposed interpretation of the standard of conduct for investment advisers and (ii) related letters by the Institutional Limited Partners Association ("ILPA Letter") and the American Investment Council ("AIC Letter"). The MFA's comments are a supplement to its letter from August 7, 2018.

The ILPA Letter and the AIC Letter take opposing positions, with the ILPA Letter advocating for the SEC to withdraw its Heitman Capital Management No-Action Letter (the "Heitman Letter"). In the Heitman Letter, SEC staff did not object to the use of "hedge clauses," limiting an investment adviser's obligation to indemnify an institutional client where the adviser had been "negligent" but not grossly negligent. The AIC Letter is a rebuttal to the ILPA Letter, arguing that the ILPA Letter reflects a misunderstanding of the fiduciary standard imposed by the Advisers Act. The MFA takes the side of the AIC in this debate.