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Fiduciary Liability? Do we have it? Can I answer "YES" on the DDQ?

Dec 17, 2013 4:15:41 PM ,

loudagostino

Fiduciary Liability

Countless numbers of our financial institution clients are asked to carry Fiduciary Liability protection by third-party investors. This request causes a lot of confusion for asset management firms due to the fact that they rarely ever purchase it (at least in the most literal sense).

What do I mean? Fiduciary Liability Insurance provides protection for employers serving as a sponsor (fiduciary) to its own in-house 401(k) plans and not for providing investment advice to a third-party ERISA Plan.

More simply and as defined by IRMI.COM, Fiduciary Liability is "The responsibility on trustees, employers, fiduciaries, professional administrators, and the plan itself with respect to errors and omissions (E&O) in the administration of employee benefit programs as imposed by the Employee Retirement Income Security Act (ERISA)."

So in essence, Fiduciary Liability is a form of 1st party protection as it covers the employer for claims brought by employees of the organization for negligence in the administration of the defined benefit plan. It does NOT provide protection for the liability arising out of the rendering or failing to render investment advisory services to a third-party ERISA Plan.

What is the investor asking for??

What the investor is requesting is for the Advisor/Manager to carry Investment Adviser Errors and Omissions Coverage. The Employee Retirement Income Security Act of 1974 (ERISA) protects the retirement assets of Americans by implementing rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets. ERISA generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides investment advice to the plan.  As such, Advisors/Managers who have discretion over third-party ERISA Assets are deemed Fiduciaries.

So the real question should be whether you purchase Investment Advisor Errors and Omissions Insurance Protection. If you do, then "YES" is the appropriate response when completing the due diligence questionaire!

Tags: hedge fund insurance, Hedge Funds, Insurance, agency, Asset Management, Iron Cove Posts, brokerage, Due Diligence Questionaire, ERISA, Errors and Omissions, Fiduciary, Fiduciary Liability, hedge fund, investment advisors, Liability, Lou D'Agostino, Pension Plans

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