The Financial Insurance Guide for Investment Advisors

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1 ESTABLISHED 1957 The Financial Insurance Guide for Investment Advisors

2 Asset management firms require a special expertise in insurance product design and placement. Investment Advisors need to be concerned when it comes to their exposure and how insurance can protect them. Since 1957, Liftman Insurance has focused on providing insurance for the investment industry. This guide aims to educate you about the risks that you face and help you understand your coverage options. g Insurance Coverage for Investment Advisors g Insurance Marketplace Trends g Why Investment Advisors Purchase D&O/E&O Insurance g Peer Benchmark Analysis of D&O/E&O Limits g Types of Claims g Who is Bringing Claims Against Investment Advisors?

3 Insurance Market Trends The market for investment advisor insurance is transitioning. From 2005 until 2012, there had been a soft market. Coverage was relatively easy to obtain with enough competition to drive pricing down and allow for favorable policy language. Insurance Coverage for Investment Advisors These are the primary coverages that every Investment Advisor should consider: g Directors & Officers Liability (D&O) g Errors & Omissions Liability (E&O) g Fidelity and ERISA Bonds (Crime) g Employment Practices Liability (EPLI) g Fiduciary Liability g Kidnap and Ransom g State Surety Bond g Cyber Risk (Privacy & Network Security) The market has tightened since The regulatory environment has added to the market tightening. In fiscal year 2014 the Securities and Exchange Commission's (SEC) filed a record 755 enforcement actions, up from 686 in This resulted in $4.16 billion in disgorgement and penalites. SEC Enforecement director Andrew Ceresny stated that, going forward, the Enforcement Division will continue to bring its resources to bear across the entire spectrum of the financial industry, from complex accounting fraud and market structure cases, to investment advisor and municpal securities cases, microcap fraud, insider trading and cases against gatekeepers. Insurers have been pushing for price increases. Overall, insurers have confirmed that they cannot continue to provide pricing at the levels they have in the past. Liftman Insurance represents all of the major insurance carriers in order to provide our clients with competitive premiums and terms.

4 Why Investment Advisors Purchase D&O/E&O Insurance g To protect the entity and individuals against claims alleging a wrongful act, error, omission, misstatement, misleading statement, neglect or breach of duty in providing or failing to provide professional services as an advisor. g To provide defense costs. Defense expenses in claims against advisors can escalate rapidly because of the complex nature of the litigation. In most cases, once the policy retention (deductible) is satisfied, the insurer will advance defense costs. g The frequency of claims against investment advisors is increasing. g The focus by the SEC includes conflicts of interest, inaccurate or inadequate disclosure, fraudulent trading schemes, misallocation of investment opportunities, false or misleading performance claims, market manipulation, municipal securities, private equity fees and insider trading. g Increased capital allocations from public employee pension funds and other institutional investors may result in more claim activity as these investors may be quicker to sue when things go wrong. g Federal and state regulatory authorities have increased their scrutiny.

5 g Many firms have moved beyond traditional passive investments and now hold majority stakes in companies and have board representation. Managers face additional liabilities when they serve on outside boards. A D&O policy can be extended to cover these outside directorship exposures. g A D&O/E&O policy can also be extended to cover Employment Practices Liability. This important coverage protects the firm against employee claims for wrongful termination, discrimination, and sexual harassment. g Advisors are purchasing D&O/E&O coverage because their clients are demanding it. Many firms use it as a selling point as it gives investors another layer of protection. Peer Benchmark Analysis of D&O/E&O Insurance Coverage Limits Through peer analysis and insurance market experience, an average limit/deductible range is shown in the table below. ASSETS AVG. LIMIT RANGE AVG. DEDUCTIBLE Under $300M $1M to $5M $25,000 to $75,000* $300M to $900M $3M to $10M $75,000 to $150,000 $900M to $3B $10M to $20M $125,000 to $350,000 $3B to $10B $15M to $25M $250,000 to $500,000 *Deductibles can be tailored to client requirements and can be as low as $5,000 for smaller firms.

6 Types of Claims Investment Advisors are Likely to Encounter g Mismanagement g Short selling g Misstatement g Trading errors g Negligence g Contracting with substandard vendors/advisors g Fraud g Breach of duty g Conflicts of interest/related party transactions g Failure to perform adequate due diligence in evaluating potential investments g Market timing/late trading g Insider trading g Failure to provide adequate disclosure of the investment risks involved g Failure to comply with ERISA regulations g Failure to follow investment guidelines g Claims made by employees alleging discrimination, sexual harassment, or wrongful termination g Failure to invest g Failure to redeem investor funds in a timely and orderly manner g Claims by the SEC, state Attorneys General or other regulatory body alleging violations of rules or statutes g Manipulation or misrepresentation of historical performance

7 Pricing Considerations for D&O/E&O Coverage Who is Bringing Claims Against Investment Advisors? Pricing for D&O/E&O depends on various factors. Premiums are based upon assets under management, investment strategy (including portfolio construction, position concentration, leverage, liquidity, risk controls to mitigate loss), management team experience, compliance, trading errors, investor profile, transparency (communication with investors), and claims history. g Investors g Regulatory Agencies g Competitors g Employees Looking for more information on Financial Insurance? About Liftman Insurance Liftman Insurance has specialized in insurance for the investment industry since Investment advisors, mutual funds, hedge funds and securities broker/dealers all rely on us to obtain broad coverage at competitive premiums. Contact Liftman Insurance today to see how you can benefit from our vast experience and commitment to client satisfaction. Download our recently updated glossary The Investment Industry s Guide to Insurance Coverage and Terms at

8 When was the last time you had a complete analysis of your financial insurance? Contact us for a complimentary review of your current coverage at Theodore Liftman Insurance, Inc. Liftman Insurance Agency Co. (NC, TX, CA) Liftman Insurance Agency (NY) 101 Federal Street Boston, MA (617) [email protected] Financial Insurance Coverage Errors & Omissions Liability n ERISA and Fidelity Bonds Directors & Officers Liability n Employment Practices Liabilty State Surety Bonds n Cyber Fraud n STAMP Bonds 2015 Theodore Liftman Insurance, Inc. All rights reserved.