newyork1.jpg

Understanding How to Mitigate Liability and Navigate Insurance Options

Despite all the proper steps you can take as Chief Compliance Officer (“CCO”) to avoid an enforcement action, insurance becomes a necessary step in self-risk mitigation. It is not only investment advisers and fund boards that can face liability, but CCOs themselves can come under the gun of the Securities and Exchange Commission (“SEC”) as well. CCOs should seek to understand the types of insurance products (eg. www.ccoprotect.com) and riders that can best protect them and the company. Not all policies have the same exact protections, so it is important to consult with your insurance broker, review your policies and ask the right questions.

Andrew Fotopolous, President Starkweather & Shepley Insurance Corp. of MA (www.starshep.com) offers CCOs words of wisdom. ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) “Just because you are given the title of Chief Compliance Officer doesn’t mean you’re a corporate officer. Of course, as the CCO, you believe you are covered under your firm’s D&O, but have you verified this? A majority of CCOs are not subject to indemnification unless designated in the by-laws as a corporate officer or have a stand-alone agreement in writing guaranteeing indemnification.” All CCOs should review the by-laws to make sure they are covered. 

Errors & Omissions (E&O) policies are widely used throughout the industry to help protect against claims by clients arising out of professional services provided by the insured. Directors & Officer Liability (D&O) coverage can be added to an E&O policy or purchased separately to protect the firm as well as the directors, officers, partners and employees of the insured entity for claims arising out of business decisions, not investment decisions. D&O is where you would find coverage for “claims” (including formal regulatory investigations costs) by non-clients such as the S.E.C. and D.O.L. that are not triggered by a client complaint.

Side A, Independent Directors Liability (“IDL”) Insurance typically serves as a supplemental policy to D&O coverage. This can come into play in circumstances where indemnification is not available or is refused. Side A IDL insurance helps fund independent directors mitigate liability and exposure to various risks associated with indemnification (when a fund is legally prohibited from paying for a director/officers defense), erosion risk (when a D&O policy has exhausted its limits of liability), and coverage risk (when a D&O policy does not provide coverage for the situation).

There are many insurance “riders” that can accompany these policies. An insurance rider is an available enhancement option that your broker can negotiate to be included in your policy. Riders can help supplement your existing coverage and provide additional benefits.

Graig Vicidomino, Associate Director at Crystal & Company (www.crystalco.com) is an expert in the insurance business ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ). Graig emphasizes “most D&O policies will trigger only after a formal investigation, or allegation of wrongdoing has been presented by a regulatory body. This means that it is likely that all expenses incurred during the audit or informal investigatory stages will be coming out of your pocket. So, be sure your D&O policy has been enhanced with Pre-Claim Defense coverage, in order to cover those earlier costs in cases where the audit or investigation turns into a covered claim."

“Pre-claim Defense Costs” riders should be considered for entities and officers when reviewing potential liabilities and analyzing their insurance portfolios.  This coverage can extend not only to formal investigations by governmental entities and self-regulatory organizations, but may also provide some earlier coverage in the informal stages should the investigation result in a claim. This coverage can save those covered a tremendous amount of money and aggravation if ever faced with a difficult regulatory situation.

SEC3 will update you with additional insurance tips in the coming months and we will issue a complete whitepaper on this topic in the fall.

Newsletter

Get the latest compliance news and insights - delivered weekly. The SEC3 Communique covers all compliance topics. CCO3 focuses on CCO topics.
tip: check both to keep informed!

Communiques

Pre-Dating & Back-Dating are Equally Risky

The SEC today suspended three accountants formerly of BDO USA LLP for improper professional conduct during its 2013 audit of AmTrust Financial Services Inc., an exchange-listed insurance company. According to the... read more »

Fiduciary Duty

On Friday, September 28, 2018 the SEC charged LendingClub Asset Management (LCA) and its former president Renaud Laplanche with fraud for improperly using fund money to benefit LendingClub Corporation (LendingClub),... read more »

Exciting Summer Project -- Dig Into Some Sand or Dig Into Your Firm's Best Ex Pr…

The Office of Compliance Inspections and Examinations (OCIE) issued a risk alert July 11 targeting investment advisers’ most common deficiencies with regard to their best execution obligations under the Investment... read more »

SEC Adopts Fund Liquidity Reporting and Disclosure Changes

The final week of June was a busy one for SEC releases following the SEC’s June 28th open meeting. Among these was a revisit of Rule 22e-4 under the Investment... read more »

More SEC Settlements - This Time Form PF Filing Deficiencies

On June 1st, the SEC announced settlements with 13 RIAs who repeatedly failed to file Form PF reports. Most of these firms never filed over the review period (2012 through... read more »

Two Recent Enforcement Actions Against Private Fund Advisers

The industry should not misinterpret the SEC’s 2018 National Exam Program Priorities as a shift away from private fund advisers. As discussed during the SEC’s recent National Compliance Outreach Seminar... read more »

Events

Dorsey PF 2018 Symposium

When: September 26, 2018 (8:30 am - 6 pm Where: Dorsey & Whitney LLP | 51 W. 52nd Street | New York, NY 10019 Directions > SEC3’s President, Janaya Moscony will join...

Chief Compliance Officer Roundtable: Breakfast Briefing - June 14, 2018

When: June 14, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Webinar: 2018 SEC Exam Priorities & Recent Exam Highlights

Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. Tobin S. Cochran, Managing Member/President of Focus 1 Associates, LLC and...

Chief Compliance Officer Roundtable: Breakfast Briefing - February 7, 2018

When: February 7, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Upcoming Events - September & October 2017

Upcoming Events Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. SEC3 is teaming up with industry experts in NYC to discuss...

May 23, 2017 - Webcast: WannaCry Ransomware: Were You Really Protected or Just L…

When: Tuesday, May 23rd, 2017 | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. We...

June 14, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Willkie Farr & Gallagher LLP | 600 Travis Street | Suite 2310 | Houston, TX Barry Barbash from Willkie Farr & Gallagher LLP,...

June 13, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Haynes and Boone, LLP | 2323 Victory Avenue | Suite 700 | Dallas, TX 75219 Validated parking is available in the garage attached...

May 31, 2017 - Chicago

9:00-9:30 a.m - Networking and Continental Breakfast 9:30-11:00 a.m - Program Location: Baker & McKenzie LLP | 300 East Randolph Drive | Suite 5000 | Chicago, IL 60601 Kristin Gonzalez and Jerome Tomas...

May 17, 2017 (NYC WIMF)

This event is by invitation only. Please email info@seccc.com to learn more.

May 15, 2017 (NYC Chief Compliance Officer Roundtable)

9:00-9:30am - Networking and Continental Breakfast 9:30-11:00am - Program Location: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone:...

Webcast: The Most Insidious Cybersecurity Threat Is Also The Least Understood

When: Tuesday, April 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. Ransomware, the...

CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO. Attendees will learn: What terms and conditions should Chief Compliance Officers be...

Webinar: CCO Liability (Part III): Managing Liability: Navigating Indemnities an…

When: Tuesday, February 21, 2017 Schedule: 11:00am ET / 10:00am CT / 9:00am MT / 8:00am PT / 7:00am AT Description of Webinar: The National Society of Compliance Professionals is pleased to host...

Webcast: SEC 2017 Examination Focus Area – Cybersecurity Testing

Penetration Testing & Vulnerability Assessments - Examining the SEC & FINRA Requirements When: Wednesday, January 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder,...