What is a Hedge Clause?
A hedge clause is a clause found in financial reports and documents. Its purpose is to protect the author of financial reports and financial documents from any risk or liability that can arise from errors or inaccuracies within the reports and documents. Hence, owing to the hedge clause, the author of the reports do not need to take responsibility for any errors, omissions, or inaccuracies found within the reports.
The clause is most commonly found in financial reports and documents like the investment advisory agreements, annual financial reports, financial statements, company press releases, analyst reports, and so on.
- A hedge clause serves to protect the author of financial reports and financial documents from any risk or liability that can arise out of errors or inaccuracies within the reports and documents.
- The clause is most commonly found in financial reports and documents like the investment advisory agreements, annual financial reports, financial statements, company press releases, analyst reports, and so on.
- The Advisers Act is a law that provides a standard code of conduct that is required to be followed by investment advisors and professionals as fiduciaries to their clientele.
Who is an Investment Advisor?
An investment advisor is a financial professional who advises and makes recommendations to their clients relating to important investment and asset management decisions. They are responsible for carrying out thorough investment and security analyses in order to make recommendations that can help their clientele make informed financing and investment decisions.
What is the Advisers Act?
The Advisers Act, formally known as the Investment Advisers Act of 1940, is a law that provides a standard code of conduct that is required to be followed by investment advisers and professionals as fiduciaries to their clientele.
The law contains a standard code of conduct that must be followed by financial professionals in order to prevent malpractices, misreporting, and misuse of financial information that can sometimes be easy considering the dynamicity and complexity of the process.
The Advisers Act and Hedge Clauses
The Advisers Act is vital where hedge clauses are concerned. It is primarily because since hedge clauses absolve the author(s) of a financial report from any responsibility arising out of errors, data omissions, inaccuracies, etc., it can potentially be used for unethical acts and malpractices. To prevent such acts from occurring, the Securities and Exchange Commission (SEC) released an interpretation of the Advisers Act on June 5, 2019.
Within the legislation’s interpretation, clear focus on exculpatory hedge clauses and their consistency with anti-fraud provisions were highlighted and made clear. The SEC specifically warns that based on circumstances and surrounding facts available, there is a possibility that a hedge clause could be deemed consistent with the anti-fraud provisions provided in the act.
Until 2007, through several enforcement actions and no-action letters, the SEC took up a very restrictive position on what an acceptable hedge clause was, one that could pass without any complications. It stood by the fact that anti-fraud provisions were violated whenever a hedge clause was used to eliminate liability on the part of the investment advisor for misrepresentation and misinformation.
In 2007, the SEC issued a no-action letter to global real estate investment management firm Heitman Capital Management, which was a remarkable moment in the world of finance and investment. The SEC changed its stance and advocated that whether a particular hedge clause is permissible or not is fact-dependent and situation-dependent.
Whether or not a hedge clause is used for malfeasance and unethical acts would be circumstantial and would be determined by carrying out a fact-intensive inquiry of the entire case.
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