Are Your Managers Insured against the SEC?

Insurers are updating coverage for the fund management industry prompted by new investigative approaches from the Securities & Exchange Commission (SEC)—and more firms being caught out.

In setting out the SEC’s aims for the fiscal year 2016, Chair Mary Jo White said in May that the agency would ramp up its attention on the fund management sector—in part to keep up with the growth in assets and managers.

“A 10% rate of adviser examination coverage presents a high risk to the investing public.” —Mary Jo White, SECFollowing this declaration, Zurich North America has announced a new product for its clients “that can help address the increased litigation exposure from investors and limited partners, as well as increased regulatory risk”.

The company said it had updated its offerings after a bumper year of activity by the SEC in 2014. It said the US regulator filed a record 755 enforcement actions, obtained orders totaling $4.16 billion in disgorgement and penalties, and saw its first infraction of the “pay-to-play” rule for investment advisers.

The SEC also increased activity in its whistleblower program, Zurich said, from which about $35 million in awards were handed out. Additionally, it leveraged initiatives like the Aberrational Performance Inquiry, which uses data analytics to look for unusual performance return postings from hedge fund advisers.

Fellow insurer, The Hartford, said managers were operating in an increasingly complex investment and regulatory environment, which created a previously unconsidered array of liabilities and risks.

In May, White said the SEC had increased the number of investment adviser examinations approximately 20% from 2013, but was still only able to examine 10% of registered investment advisers in 2014.

“A rate of adviser examination coverage at that level presents a high risk to the investing public,” she said.

Under the 2016 request for funds, White said top priority would be to hire 225 additional examiners, primarily to conduct additional examinations of investment advisers. Once fully on-board and trained, the investment adviser examiners would assist the agency’s National Examinations Program in increasing its examination coverage of advisers to an anticipated rate of approximately 14% per year.

For 2016, the SEC requested 93 new positions for the Division of Enforcement in three areas: staff proficient in conducting intelligence processing and analysis; investigative staff to permit the agency to more swiftly and effectively identify and respond to the high volume of securities-related misconduct; and litigation staff to address the growing number of contested enforcement matters nationwide.