UNDERSTANDING DIRECTORS & OFFICERS LIABILITY EXPOSURES FOR MUTUAL FUNDS AND SIX IDEAS TO HELP YOU MANAGE THE RISK

Over the last half of the twentieth century Mutual Funds have become one of the most popular investment mechanisms for the average investor with assets growing in just the past twenty five years from $65 billion to $6.5 trillion. Although very little problems have affected the Mutual Fund industry, questions about fees charged and return on investment in recent years have brought more scrutiny and government interest in the operations and management of this investment vehicle. Further, the unique operations of mutual funds require a specialized liability policy that is a combination of Directors & Officers Liability Insurance and Investment Advisors Professional Liability Insurance.

EXPOSURE TO LOSS
The claims most often made against Directors & Officers of Mutual Funds arise from:
• A failure to detect theft of fund assets that causes a loss to investors;
• A failure to properly report facts about the fund’s operations or investments;
• A failure to understand and act upon pertinent developments or important information that causes a loss to investors;
• Charging excessive fees that are beyond the norm of a similar mutual fund;
• Failure of a representative of the fund to explain options or charges to a fund that causes a loss to an investor;
• Investing in stocks, bonds or other instruments that do not meet the stated objectives of the mutual fund;
• Making false or misleading statements about a fund in promotional literature to induce a person to invest in the fund;
• The failure of a fund to perform according to stated goals and objectives in sales literature or other materials provided to investors;
• Violating laws or regulations in operating the fund.

Investment Adviser professional liability exposures include but are not limited to allegations of negligent management of clients’ accounts, breach of fiduciary duty, misleading sales practices, and other claims made by clients that financial losses were the result of services performed negligently by the investment adviser. This exposure inherently exists whenever a firm provides investment advisory services.

Although these are typical exposures to mutual funds, not every directors & officers liability policy (even those written expressly for mutual funds) will provide coverage for these risks.

UNDERWRITING FACTORS
Underwriters review a number of key areas when vetting the insurability of a mutual fund’s directors and officers liability and establishing appropriate pricing. These factors include:
• A completed application;
• Details from the fund’s CPA firm regarding auditing procedures;
• Experience and professional background of the management firm and its principals;
• Historical performance of the fund;
• Latest annual and quarterly reports for the funds;
• Latest annual and quarterly reports for the management firm;
• Latest annual reports for the research organization;
• Most recent prospectus of the funds;
• Prior claim history.
• Reputation and performance of the research firms used by the fund;
• Types of investments made by the fund;
• Total market value of the fund’s investments;
• Written opinions of Law and CPA firms.

The policies are typically priced on the basis of total funds under management, with various adjustments based on the type and diversification among investment vehicles, as well as the underwriter’s perception of the risk associated with the investments.

SIX IDEAS TO HELP YOU MANAGE RISK AND SECURE THE MOST COST EFFECTIVE PREMIUM
One: Understand the exposures to loss you face and consider them when you make decisions about the operations of the fund.
Two: Consider the unique attributes of your fund and potential exposures that those attributes might give rise to that are not mentioned above.
Three: Analyze claims that may result from these exposure and assign estimated dollar values to these losses, consider these amounts against the limits of insurance you purchase and decide whether you have enough or too much insurance.
Four: Review the exposures against your policy to determine if there are any exposures that are not covered and seek out policies that cover these exposures or negotiate with your current insurer to purchase these coverages.
Five: Seek the help of a specialist broker to walk you through the first four steps.
Six: Sign up for our Mutual Fund Loss Control Newsletter and stay current with the changing trends that may affect your organization

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