Monthly Regulatory Summary As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is […]
Several times over the past decade FINRA has indicated they may be considering making it a requirement for broker-dealers to maintain errors and omission insurance (E&O) to cover the payment of arbitration awards to investors. A 2013 article in the Wall Street Journal indicated that FINRA was “frustrated” over nonpayment of arbitration awards to investors whose retirement savings were eviscerated by financial advisor malpractice. FINRA has reported that $51 million of arbitration awards granted in 2011 were not paid – this was 11% of all awards against broker-dealers, which was up from 4% in 2010.FINRA has not yet enacted that requirement. However, it is a very good idea for all participants in the financial services industry to maintain some sort of insurance coverage to protect from arbitration awards and court litigation related to the professional services.
At CRC, we have seen instances of investor awards against broker-dealers and registered representatives that ruined both. A simple mistake could spell disaster for even the most careful practitioner and his/her employer. There are numerous reasons to purchase E&O insurance. But, to put it bluntly, the primary reason is that everyone makes mistakes. Even the most experienced representatives, and the best supervision and operations departments, mistakes will be made. No one is perfect.
In one recent case, a representative made a mistake in calculating the taxes associated with a 1031 real estate exchange for a 30-unit apartment complex. His former client has initiated litigation against him alleging over $1 million in damages. Just the attorneys’ fees alone will cost him several hundreds of thousands of dollars. The representative had been with his broker-dealer for over 20 years, did not have a single mark on his U4/U5, had never had a grievance lodged against him. Nonetheless, it appears he made a mistake in calculating the tax liability for his client. However, the bigger mistake he made, which he shares with his broker-dealer, is that they did not have E&O insurance coverage.
With all that said, understanding E&O insurance is difficult. How much overage do you need? What exclusions and endorsements are appropriate? What does the “Covering Clause” of the insurance policy actually mean? Does my E&O policy cover all of the products available on the Broker-Dealer’s platform? Will you policy cover losses other than damage awards, such as attorneys’ fees, litigation/arbitration expenses, subpoena costs, regulatory investigation expenses? Just asking these questions is the right start in finding and purchasing E&O insurance.
Give us a call (646)346-2468 to review your current E&O insurance policy status or use the form below to learn more about an E&O Tune-up: