Will Your Insurance Protect You in a Tougher Regulatory Environment?

Recent high profile cases point to the probability that tougher regulatory constraints will be imposed on hedge funds in the not too distant future.  These cases include the fine imposed on GLG and Philip Jabre, by the Financial Services Authority, the Japanese regulator's action against Yoshiaki Murakami’s alleged insider trading and the requirement for hedge funds to register with the Securities and Exchange Commission (SEC), albeit on hold at present.

In this article we highlight where insurance such as professional indemnity (PI) and directors’ and officers’ liability (D&O), can provide protection against regulatory breaches, and what you should be looking for within your PI and D&O policy wording.

First, what cover does D&O and PI insurance provide?

  • D&O is designed to defend the individual, whether indemnified by the entity which has purchased the cover or not, and reimburse the entity where it has provided an indemnity. 
  • PI protects the entity against allegations of a ‘wrongful act’ arising out of the provision of investment advisory services.

Both policies cover both indemnity and defence costs.

So what are the key areas relating to potential regulatory protection that you should look at within your D&O and PI policy wording?

  1. Definitions

    Claim – this should include regulatory investigations where a wrongful act has been alleged against both the entity and the individual.

    Loss fines and penalties will be excluded.  However, you should ensure that this exclusion is restricted to where the fines are uninsurable by law.

  2. Exclusions

    Market abuse and money laundering – you should ensure that within your policy defence costs are advanced until it is determined by a court of law, tribunal or admission that the entity or individual is guilty.

    Insider trading, wrongdoing, personal conduct exclusions – all these exclusions are related to a dishonest or wrongful act. Once again your policy should allow defence costs to be advanced until it is determined by a court of law, tribunal or admission that the entity or individual is guilty

    Fines and penalties – fines and penalties imposed by regulators are, in the main, uninsurable by law and therefore your insurances will not cover you for these. However, make sure your policy will exclude only those fines and penalties uninsurable by law.

  3. Extensions

    Representation at investigations and examinations extension – this can and will be provided on most D&O and PI policies. The intent is to provide cover for any reasonable and necessary fees, costs and expenses of legal representation at any official investigation, examination, inquiry or other similar proceeding. The importance of this extension is that it will provide the coverage where no wrongful act has been alleged, ie no claim has been made. The investigation must be specific to an individual or the entity.

The wording of these definitions, exclusions and extensions are important. You need to ensure that your D&O and PI policy will cover you for defence costs for both allegations of a wrongful act (such as market abuse, money laundering and insider trading) until such time as guilt is proven or admitted; and for legal representation at regulatory investigations, even where no specific allegations have been made.

You, as the client, pay for these insurances so you should make sure they achieve the best they can and make the most of the benefits they provide!