Hedge Clause

2000 Investor Limit

DEFINITION of the cover clause

A cover clause is a clause in a research report which attempts to release the author from any responsibility for the accuracy of the information contained in the report or publication. The cover clause attempts to compensate the author (s) for any liability for any error, omission or omission contained in the document. Coverage clauses can be found in analyst reports, corporate press releases and on most investment websites.

A cover clause is also called a “disclaimer”.


Coverage clauses are intended to protect those who communicate but have no role in recording or preparing an organization’s financial information. Although cover clauses are often overlooked, investors are advised to review them to better judge and interpret the content of a publication. Investors will find hedging clauses in almost all of the financial reports released today, and while they are often overlooked, they are very important for investors to read and understand.

Example of a cover clause

One example is the “safe haven” provision found in most corporate press releases. Potential conflicts of interest, for example, from a market analyst writing a recommendation for one of his own holdings should also be included in the cover clause of this report.

Typical hedge clause structure

A standard “cover clause” in an investment advisory contract or a limited partnership / limited liability company contract for hedge funds is structured as an exemption from the adviser’s liability and / or as compensation for the adviser by the client of counsel, unless the counselor has been grossly negligent or has committed reckless or willful misconduct, illegal acts or acts outside the scope of his authority. Often, hedging clauses are followed by “disclosure without waiver” which explains that the client may have certain legal rights, generally arising from federal and state securities laws, notwithstanding hedging clauses that do not been lifted.

Securities and Exchange Commission position on hedging clauses

The U.S. Securities and Exchange Commission has stated that sections 206 (1) and 206 (2) of the Advisers Act prohibit any investment advisor from using a device, scheme or device to defraud or to engage in any transaction, practice or course of business that functions as fraud or deception on customers or potential customers.

These anti-fraud provisions can be violated by the use of a cover clause or other exculpatory provision in an investment advice contract, which is likely to lead an investment advice client to believe that he has renounced non-waivable rights of recourse against the advisor.

The SEC has previously argued that hedging clauses that limit the liability of an investment advisor to acts involving gross negligence or willful misconduct are likely to mislead a client who is not aware of the law by making them believe that he has waived rights that are not subject to waiver. , even if the cover clause explicitly provides that the rights conferred by federal or state law may not be waived.

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