What’s a hedge clause?
A hedging clause in a research report attempts to free the writer of responsibility for the integrity of the material. The hedge clause shields the author(s) from document mistakes, omissions, and oversights. Analyst reports, firm press releases, and most investment websites have hedge provisions.
Hedge clauses include disclaimers and safe harbor notices.
Understanding Hedge Clauses
Hedge clauses safeguard communicators who don’t record or prepare an organization’s financial information. Investors should analyze hedging clauses better to understand a publication’s content, despite their common neglect. Nearly every financial report now has hedging provisions, which investors should read and understand despite glossing over.
Most firm news releases have “safe harbor” provisions. The hedging clause for that report must also address any conflicts of interest, such as a stock analyst recommending one’s holdings.
Normal Hedge Clause Structure
A typical “hedge clause” in an investment advisory contract or hedge fund limited partnership/limited liability company agreement exempts the adviser from liability. It would indemnify the advisory client unless the adviser were grossly negligent, reckless, willful, illegal, or outside its authority.
Hedge clauses sometimes include a “non-waiver disclosure” stating that the customer may have legal rights under federal and state securities laws despite not waiving all terms.
Securities and Exchange Commission Hedge Clause Position
The SEC prohibits investment advisers from using deception or fraud against clients or prospective clients, as stated in Sections 206(1) and 206(2) of the Advisers Act.
A hedging clause or other exculpatory term in an investment advice agreement may violate antifraud rules, leading clients to assume they have waived non-waivable rights of action against the adviser.
The SEC has said in the past that hedge clauses that limit an investment adviser’s liability to gross negligence or willful misconduct may trick a simpleton client into thinking that they have waived rights that can not be waived, even if the hedge clause makes it clear that federal or state law rights cannot be waived.
Conclusion
- Hedge clauses are disclaimers in industry research and analyst reports.
- The hedging clause releases report authors from liability for mistakes and omissions.
- Carefully designed hedge provisions must not violate securities fraud and false claim regulations.
