Brief introduction and discussion on Investment Management Insurance for Mutual Fund, Private Equity, Venture Capital and Hedge Funds

1. Investment Manager /
Asset Management Insurance
Introduction and Underwriting Issues
Ram Garg CFA, MBA
May 27, 2014

2. 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.

3. Page 3 _16-Oct-15
—Asset Management Industry Overview
 Exposures
 Key litigation trends
—State of the Industry
—Coverage available
—Underwriting considerations
Agenda

4. Page 4 _16-Oct-15
Structure – Private Equity / Venture Capital

5. Page 5 _16-Oct-15
Structure – Hedge Fund

6. Page 6 _16-Oct-15
Structure – Mutual Fund

7. Page 7 _16-Oct-15
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

8. Page 8 _16-Oct-15
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

9. Page 9 _16-Oct-15
Trends: Who is Getting Sued?
Almost All Entities Involved…
—Fund
—Firm’s individuals
—Management company
—Fund management entity

10. Page 10 _16-Oct-15
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

11. Page 11 _16-Oct-15
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

12. Page 12 _16-Oct-15
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

13. Page 13 _16-Oct-15
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

14. Page 14 _16-Oct-15
What is common?
— Defense cost is incurred in all cases
— Anyone can claim suitability of investment issues
— A small error can cause big impact

15. Page 15 _16-Oct-15
—Asset Management Industry Overview
 Exposures
 Key litigation trends
—State of the Industry
—Coverage available
—Underwriting considerations
Agenda

16. Page 16 _16-Oct-15
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

17. Page 17 _16-Oct-15
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

18. Page 18 _16-Oct-15
—Asset Management Industry Overview
 Exposures
 Key litigation trends
—State of the Industry
—Coverage available
—Underwriting considerations
Agenda

19. Page 19 _16-Oct-15
IMI – Coverage
Investment Management Insurance
PI D&O Crime

20. Page 20 _16-Oct-15
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

21. Page 21 _16-Oct-15
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.

22. Page 22 _16-Oct-15
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

23. Page 23 _16-Oct-15
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.

24. Page 24 _16-Oct-15
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,

25. Page 25 _16-Oct-15
Crime – Funds Transfer Fraud
Direct loss sustained by an Insured resulting directly
from Funds Transfer Fraud committed by a Third Party

26. Page 26 _16-Oct-15
Crime – Computer Fraud
Direct loss sustained by an Insured resulting from
Computer Fraud committed by a Third Party

27. Page 27 _16-Oct-15
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

28. Page 28 _16-Oct-15
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.

29. Page 29 _16-Oct-15
—Asset Management Industry Overview
 Exposures
 Key litigation trends
—State of the Industry
—Coverage available
—Underwriting considerations
Agenda

30. Page 30 _16-Oct-15
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

31. Page 31 _16-Oct-15
Fac R/I Submission Requirement
1. Organizational / Structure Chart
2. Offering Memorandum (PPM)
3. Fund Performance Reports
4. Latest audited financials
5. Proposal Form

32. Thank you for all support