Smaller asset management firms confront many of the same Management Liability risks as large, public corporations. But compared to the bigger players, smaller-sized asset management firms are less likely to have the resources to defend against an investigation by the Securities and Exchange Commission (SEC) or allegations such as breach of fiduciary duty.

Even if your firm has done nothing wrong, costs to defend investigations and allegations can escalate into the tens of millions of dollars, jeopardizing your firm's viability. In fact, a regulatory proceeding or lawsuit can bankrupt your firm. Of the largest Directors & Officers' Liability losses from cases recorded since 2012 involving small asset manager firms, 20 cases involved losses that exceeded the company's average annual revenue, according to Advisen. 

Indeed, regulatory risks have not been alleviated since the 2016 presidential election. Regulation is not going away for asset managers, and firms such as yours will continue to be subject to SEC scrutiny. Recent SEC activity exemplifies this ongoing challenge: In 2016, the SEC opened 1,063 investigations of possible violations of the securities laws, and issued 681 formal orders of investigations. By the end of September 2016, more than 1,700 investigations were ongoing from fiscal year 2016 and prior years, which indicates how long your firm could be affected if it faces an investigation.

Due to ambiguous rules and definitions surrounding insider trading, as well as fees and expense allocations, I expect the SEC to maintain a focus on valuations, conflicts of interest, governance, and how fees and expenses are allocated.

Mitigation strategies to protect against private asset manager risk
While it may not be possible to completely eliminate the possibility of a regulatory inquiry, various risk control strategies can help mitigate losses arising from such events. For example, CNA offers an endorsement for a mock SEC examination audit, which reimburses a portion of the cost your business pays for providers to peruse operations and ensure that your firm's infrastructure complies with industry standards.

Because regulation is not the only risk your asset management firm faces, consider purchasing Management Liability insurance. In the event that litigation arises from issues such as investors alleging errors, partnership disputes or employee disagreements with management, Management Liability policies may provide coverage for your firm's defense costs.

Even if your firm operates in ways you believe to be compliant, it remains vulnerable to SEC involvement or other allegations. For solutions that help manage this risk exposure, contact your agent or broker to ensure that your firm has the right insurance coverage available for these exposures.