Insurance for Fund Managers

Praised when performing well, but criticised when returns decline – today’s fund managers should not count themselves immune to the risk of litigation, regulatory investigations, or operational errors, regardless of how well managed a fund structure may be.

That said, the revised Swiss Collective Investment Schemes Act, aiming at equivalence with the new EU Directive on Alternative Investment Fund Managers (AIFM directive), have specified the standards for the fund managers' professional liability.

Historically, fund managers may have questioned the value of insurance, in part because earlier fund regulation was less and in part because they felt sufficiently protected by broad indemnity agreements and the deep pockets of the funds that they managed.

But in recent years, new regulatory policies and activity, the substantial costs of legal defence, the financial value of the settlements and the scrutiny of investors have combined to create an environment in which more and more investment funds and respectively their managers are purchasing management liability insurance policies. Insurance companies have responded by beginning to tailor products, which meet the specific risks faced by investment funds.

In the current regulatory climate, investigations by the regulator or other government agencies may be of primary concern.

Many policies provide coverage for legal fees incurred in connection with such investigations, particularly if the investigations are commenced by a subpoena that identifies individual insureds. This can be critical, because the defence fees incurred by an adviser or fund under investigation can often run well into the millions. Whether a particular investigation or regulatory action is covered will depend on the terms of the policy.

Insurance serves, both to protect against insurable risks and to reassure their investors. In the context of the many new regulation, it pays-off to engage a specialist broker who understands the specific legal requirements and can provide compliant solutions based on either a professional indemnity insurance or an investment management insurance for fund managers.

Advisors and managers of collective investment schemes expose themselves to a number operational, legal and regulatory risks with very serious implications for directors and officers of their respective firms as well as for their clients, i.e. the fund investors.

The fund structure, i.e. the fund and its independent directors as well as the fund manager, have certain liability risks in common, like the 'prospectus liability' and investigations and enforcement proceedings initiated by regulators. In addition, fund managers face legal exposures for their operations-based errors in providing advisory and related services to funds and private accounts (e.g. legal exposures arising from pricing errors, mishandling of corporate action requests, and failures to adhere to investment restrictions).

As a practical matter, fund managers are likely to find themselves at heightened liability risk.

Most of the time, foreign domicile funds are part of the investment solution for structures initiated in Switzerland. Therefore it needs to be considered whether a foreign insurance policy (e.g. out of Switzerland) is admitted in the offshore jurisdiction concerned, to compensate the fund or its directors.

Liability risk exposure varies considering the asset class: Managers of private equity or venture capital funds face different exposures than those of hedge funds or real estate funds.