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Trade Errors – Is Your Wealth Management Practice Covered?

by Rickard Jorgensen, FCII, ACIArb., ARM

stock market

We received an enquiry recently from a firm that was reviewing their compliance standards. The compliance process required the firm ensure that there was a particular form of errors and omissions in place, either through the firm’s professional liability program or as a separate investment professionals’ policy. This coverage is known as Cost of Corrections, or Trade Error, coverage.

Cost of Corrections coverage provides protection for the costs incurred by an adviser or registered representative of a securities broker-dealer to correct an issue that arose from an error in the execution of a securities transaction, where in the absence of such correction the wrongful act would have constituted a covered loss.

Professional liability coverage is usually triggered by a customer complaint, demand or lawsuit alleging negligence. In the event of an actual trade error, the Investment Adviser/Investment Manager who has full discretion of the assets would most likely want to close out the position and reconcile the account without notifying the client or customer. If the policy contains a cost of corrections coverage extension then the Investment. Manager would simply report the error to the carrier as a claim. This is a form of first party coverage.

Although most accountants’ professional liability programs provide coverage for activities as a Personal Financial Planner, the vast majority of insurers DO NOT provide cost of corrections coverage.

For example, the General Star policy provides coverage for activities as a registered investment adviser as follows:

Professional Services also means:

Services performed in the business of affecting Securities Transactions for others by an Insured who is employed by you as a Registered Representative, but solely when such services are performed on your behalf or on behalf of a subsidiary of yours, unless the subsidiary is a registered Broker-Dealer.

Hanover Insurance provides coverage for activities as a registered representative as follows:

Professional services also means services performed by you as a registered representative, but solely when such services are performed on behalf of the named insured, and provided that you are appropriately licensed by the state in which you are providing such services.

Neither policy provides affirmative coverage for cost of corrections arising from trade errors.

Conversely, CPAGold™ provides specific costs of corrections coverage in the registered investment adviser or registered representative endorsements as follows:

We will pay on your behalf all sums in excess of the applicable Deductible amount stated in the Declarations that you become legally obligated to pay as Damages and associated Defense Expenses, including Cost of Corrections, resulting from a Claim first made against you during the Policy Period, or Extended Reporting Period, if applicable, as a result of a Covered Act committed by you, provided that….

And

Cost of Corrections means a monetary cost incurred by you to correct a situation arising out of an actual or alleged error in connection with Securities transactions where in the absence of such correction the wrongful act would have constituted a covered loss.

CPAGold™ is the only accountants’ professional liability insurance program to provide this coverage.

If your personal financial planning practice manages client assets and instructs or executes trades on clients’ behalf, cost of correction or trade errors coverage is crucial to your firm. Consult with your insurance adviser about the availability of this coverage.

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