Investment Manager / Asset Management Insurance

Introduction and Underwriting Issues

Ram Garg CFA, MBA

May 27, 2014

Page 2 _16-Oct-15

The views, information and content expressed herein are based on market information and discussion with insurers/reinsures. The information provided should not be relied on as legal advice or a definitive statement of the law in any jurisdiction. For such advice, an applicant, insured, listener or reader should consult their own legal counsel.

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—Asset Management Industry Overview Exposures Key litigation trends

—State of the Industry —Coverage available—Underwriting considerations

Agenda

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Structure – Private Equity / Venture Capital

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Structure – Hedge Fund

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Structure – Mutual Fund

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Risk Exposure

— Improper Investment Decisions — Breach of Investment Guidelines— Failure to disclose risk factors— Issues about valuation of Portfolio — Failure to meet Fund’s Objectives— Fund Prospectus Liability— Regulatory Investigations and Claims

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Loss Triggers

— Everyday activities, such as:• Back-office support functions• Communications with third parties • Not doing anything

— Portfolio Company Exits— Market Fluctuations— Divestments— Non- or under-performance

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Trends: Who is Getting Sued?

Almost All Entities Involved…

—Fund

—Firm’s individuals

—Management company

—Fund management entity

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Trends: Who are Claimant?

Plaintiffs Include…— Fund of Funds— Investors— Governmental Agencies and Self-Regulatory Organizations— Portfolio Companies constituencies

— Shareholders— Employees/management— Creditors— Business partners

— Co-investors

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Claim Examples - Breach of Duty

SEC Sues Fund Adviser from Malaysia for Fees Charged in Breach of Duty Under the Investment Company Act

Kuala Lumpur-based AMC served as a sub-adviser to the Malaysia Fund, Inc., a closed-end fund that invests in Malaysian companies, whose principal investment adviser is Morgan Stanley Investment Management, Inc. (MSIM). The SEC alleges that AMC misrepresented its services during the fund’s annual advisory agreement review process for year for more than 10 years, and AMC collected fees for advisory services that it each did not provide.

Source: http://www.sec.gov/news/press/2012/2012-120.htm

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Claim Examples – illicit profits

Hedge Fund Manager to Pay $44 Million for Illegal Trading in Chinese Bank Stocks

The Securities and Exchange Commission today charged the manager of two New York-based hedge funds with conducting a pair of trading schemes involving Chinese bank stocks and making $16.7 million in illicit profits. He and his firms have agreed to pay $44 million to settle the SEC’s charges.

Source: http://www.sec.gov/litigation

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Claim Examples – Failed Investment

The Malaysian sues Singapore banker over failed investment

A Malaysian investor is filing a lawsuit in Singapore against a French banker over an unsuccessful US$665,000 (RM2 million) share investment

Source: http://www.themalaysianinsider.com/malaysia/article/malaysian-sues-singapore-banker-overfailed-investment

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What is common?

— Defense cost is incurred in all cases— Anyone can claim suitability of investment issues — A small error can cause big impact

Page 15 _16-Oct-15

—Asset Management Industry Overview Exposures Key litigation trends

—State of the Industry —Coverage available—Underwriting considerations

Agenda

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State of the Industry

— Increased scrutiny from regulators— Tighter internal controls— Commissions and fees are being scrutinised— Sales practices being reviewed— Conflicts of interest is being addressed— Disclosures to buyers— Issue for insurers is systemic risk! — Euro crisis may trigger another financial tsunami

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What Policyholders should know?

— Policy “triggers” early – so think of defense cost

— Multiple “claims” can occur at the same time

— Wrongful Act definition is very broad … includes allegations

— Understand the “Fraud” Exclusion

Page 18 _16-Oct-15

—Asset Management Industry Overview Exposures Key litigation trends

—State of the Industry —Coverage available—Underwriting considerations

Agenda

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IMI – Coverage

Investment Management Insurance

PI D&O Crime

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IMI – Coverage

Part A – PI (Fund & Company Professional Liability)

Part B – D&O (Management Liability)

Part C – Crime— Employee Dishonesty Coverage— Client Coverage— Premises Coverage — Forgery Coverage— Funds Transfer Fraud Coverage— Computer Fraud Coverage— Expense Coverage

— Defence Costs Coverage

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Crime – Employee Dishonesty Coverage

Direct loss of Money, Securities or Property sustained by an Insured resulting directly from the dishonest or fraudulent acts of any Employee, committed alone or in collusion with others, which result in improper personal financial gain either to such Employee or to others, or which were committed with the intent to cause the Insured to sustain such loss, which loss was Discovered during the Policy.

Improper personal financial gain shall not include wages, wage increases, salary, salary increases, commissions, fees, bonuses, promotions, awards, profit sharing, incentive plans, business entertainment expense accounts or superannuation.

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Crime – Client Coverage

Direct loss of Money, Securities or Property sustained by a Client resulting directly from dishonest or fraudulent acts of any Employee not in collusion with such Client’s directors or employees which were committed with the intent to cause the Client such loss and which result in improper personal financial gain to the Employee

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Crime – Premises Coverage

Direct loss sustained by an Insured resulting from unlawful taking of Money, Securities or Property by a Third Party or the actual destruction or disappearance of Money, Securities or Property, form the possession, custody or control of the Insured, while such property is lodged or deposited at premises located anywhere.

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Crime – Forgery Coverage

Direct loss resulting from: a. Forgery on, or fraudulent material alteration of, any negotiable instrument committed by a Third Party, or b. transferring, paying or delivering any Money, Securities or Property, or establishing any credit or giving any value in reliance on any written instructions to the Insured authorising or acknowledging the transfer, payment, delivery or receipt of Money, Securities or Property, which instructions fraudulently purport to bear the handwritten signature of any Client, financial institution, or Employee, but which instructions either bear a Forgery or have been fraudulently materially altered without the knowledge and consent of such Client, financial institution or Employee,

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Crime – Funds Transfer Fraud

Direct loss sustained by an Insured resulting directly from Funds Transfer Fraud committed by a Third Party

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Crime – Computer Fraud

Direct loss sustained by an Insured resulting from Computer Fraud committed by a Third Party

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Crime – Expense Coverage

a. Audit Expenses

b. Investigative Costs resulting from any direct loss covered under Employee dishonesty or Client coverage; or

c. Computer Violation Expenses resulting from Computer Fraud

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Crime – Defence Costs

(1) Incurred if the Company elects to defend; or(2) incurred and paid if the Company elects not to defend,

any claim, suit, arbitration or legal proceeding with respect to covered claim, whether or not successful, whether or not fully litigated on the merits and whether or not settled.

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—Asset Management Industry Overview Exposures Key litigation trends

—State of the Industry —Coverage available—Underwriting considerations

Agenda

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IMI - Key Underwriting Considerations?

— Fund size (AUM)— Firm profile— Investors’ profile— Investment Policies and procedures— Historical fund performance — Expertise and experience within industry segment— Risk management and loss prevention

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Fac R/I Submission Requirement

1. Organizational / Structure Chart

2. Offering Memorandum (PPM)

3. Fund Performance Reports

4. Latest audited financials

5. Proposal Form

Thank you for all support