Definition of coverage clause

What is a coverage clause?

A coverage clause is included in a research report to attempt to relieve the author of any responsibility for the accuracy of the information included in the report or publication. The coverage clause indemnifies the author (s) against liability for any errors, omissions or oversights contained in the document. Hedging clauses can be found in analyst reports, company press releases, and on most investment websites.

Examples of a coverage clause are a disclaimer and a safe harbor notice.

Key takeaways

  • A coverage clause refers to text added to industry research or analyst reports that serves as a disclaimer.
  • The coverage clause exempts the author (s) of the report from any responsibility for errors or omissions.
  • Hedging clauses must be carefully written so that they do not violate regulatory rules around securities fraud and the making of false claims.

Understanding the coverage clauses

Hedging clauses are intended to protect those who communicate but do not have a role in recording or preparing an organization’s financial information. Although hedging clauses are often overlooked, investors are encouraged to review them to better judge and interpret the material in a publication. Investors will find hedging clauses in almost every financial report released today, and although they are often overlooked, they are very important for investors to read and understand.

An example is the “safe harbor” provision found in most company press releases. Potential conflicts of interest of, for example, a stock analyst writing a recommendation for the holdings themselves, should also be included in the coverage clause of that report.

Typical hedging clause structure

A typical “hedge clause” in an investment advisory contract or a hedge fund limited partnership / limited liability partnership agreement is structured as an adviser release of liability and / or as an adviser indemnity on the part of the advisor client, unless the advisor was grossly negligent or engaged in reckless or willful misconduct, illegal acts, or acts beyond the scope of his authority.

Coverage provisions are often followed by a “no-waiver disclosure” explaining that the client may have certain legal rights, which generally arise under federal and state securities laws, despite the coverage provisions that are not stated. they have resigned.

Position of the Securities and Exchange Commission on hedging clauses

The U.S. Securities and Exchange Commission (SEC) has stated that Sections 206 (1) and 206 (2) of the Advisors Act make it illegal for any investment adviser to employ any device, scheme, or device to defraud or participate in any transaction, practice or business course that operates as fraud or deception to customers or potential customers.

Those anti-fraud provisions can be violated through the use of a hedge clause or other exculpatory provision in an investment advisory agreement, which is likely to lead an investment advisory client to believe that they have waived inalienable rights of action against the adviser.

The SEC has previously taken the position that hedging clauses purporting to limit an investment adviser’s liability to acts involving gross negligence or willful intent are likely to mislead a client who is not sophisticated in the law into believing that he has waived rights that cannot be waived, even if the coverage clause explicitly states that rights cannot be waived under federal or state law.

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Mark Holland

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