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RIA RISK & INSURANCE GUIDE
GOLSAN SCRUGGS
Investment Management E&O Specialists
In Association With

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TABLE OF CONTENTS
I. THE BASIS FOR RISK
Legal Duties of Investment Advisers
Risk Categories & Case Law
II. CLAIM ILLUSTRATIONS
III. RISK SUMMATION
IV. INSURANCE (RISK-TRANSFER) MECHANISMS
V. DISCLAIMER & CORPORATE INFORMATION
VI. REFERENCE INDEX

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The Investment
Advisers Act of 1940
(“IAA”) is itself a
Congressional
recognition of an
adviser’s status as a
fiduciary.
The SEC has
implicitly
acknowledged that
an adviser’s
fiduciary
obligations contain
a suitability rule…
component.
THE BASIS FOR RISK
Investment Advisers face risks associated with rendering investment advice to their clients, managing
their clients’ assets, publishing written materials related to investment advice, and, from regulators, for
violations of Federal and State law governing their practices. The discussion below highlights the sources of the
risks that Investment Advisers encounter in their practices.
A. LEGAL DUTIES OF INVESTMENT ADVISERS
1. Sources of the Fiduciary Duty
An investment adviser’s duties as a fiduciary derive from various sources,
including state and federal statutes, as well as longstanding common law (legal
principles developed by courts independent of statute). The Investment Advisers
Act of 1940 (“IAA”) is itself a Congressional recognition of an adviser’s status as a
fiduciary.
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Section 206 of that Act, commonly referred to as the “anti-fraud”
provision of the IAA, establishes “federal fiduciary standards” that govern advisers’
conduct.
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The SEC has also looked to common law principles of fiduciaries and
agents to clarify the standards of conduct of investment advisers. Just some of the
duties that flow from that fiduciary status include:
(1) Acting in good faith solely for the benefit of the principal;
(2) Disclosing all actual and potential conflicts of interest;
(3) Avoiding deals in which the adviser is adverse to the client, except where the client has given informed consent;
(4) Disclosing all material facts concerning the cost at which securities were sold and the current market price;
(5) Executing trades at the best price discoverable in the exercise of reasonable diligence.
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The nature of the particular duty of any adviser will depend upon the services rendered. An adviser who
has total discretion has a different duty than one who makes investment recommendations. An adviser who takes
custody of assets has yet another duty. Nevertheless, the duty of any adviser is a duty of the highest loyalty and
care and it is owed to every client.
The investment adviser fiduciary role shares some similarity with the FINRA
suitability rule and usually imposes a higher standard than the FINRA “suitability”
obligation. However, the suitability rule (FINRA Rule 2111) is often incorporated in
claims against advisers, and can be relevant to determining compliance with
fiduciary obligations,
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and the SEC has implicitly acknowledged that an adviser’s
fiduciary obligations contain a suitability component.
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The suitability rule requires
that securities professionals have a reasonable basis to believe that a security
product is suitable to be offered to at least some investors and that it is suitable for
the customer, based upon reasonable diligence of the customer’s financial situation,
needs and objectives. This applies to an investment product and an investment strategy, which may or may not
involve specific products. A professional must also perform reasonable diligence to understand the benefits and
risks of a transaction or investment or strategy, which must be explained to the customer. The suitability rule also

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Section 202 of the
IAA defines an
“investment
adviser” as any
natural person or
entity.
includes a “quantitative suitability” requirement which requires that all transactions, taken together, not be
excessive or unsuitable for the customer’s investment profile. In recent years the broker-dealer suitability
obligation has been enhanced to make it more consistent with the adviser’s obligations as a fiduciary.
2. Definition of an “Investment Adviser” Under Federal Law
Section 202 of the IAA defines an “investment adviser” as any natural person
or entity who: (1) for compensation, (2) is engaged in the business, (3) of providing
advice to others or issuing reports or analyses regarding securities. Note the law’s
inclusion of the word “person”. Such clarification within the law clarifies the intent and
magnitude of our society’s congregational unity on the role of a fiduciary, of the
inability for the corporate entity to act as the commonly used traditional barrier and
legal protector to the individual, and for the confirmation of an adviser’s personal
liability to the public for the adviser’s actions or inactions.
3. The Advisers Act Does Not Create Privately-Enforceable Causes of Action
The U.S. Supreme Court has held that the Investment Advisers Act does not create private causes of
action to enforce its various provisions, with the exception of a section rendering void contracts that run afoul of
the act, which gives rise for a suit for rescission of the contract and restitution of fees paid.
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Consequently, only
the SEC may bring actions for violations of the Advisers Act. Most private litigation against advisers therefore takes
the form of other causes of action, mostly under state law. It is generally accepted that federal securities laws,
including the Investment Advisers Act, does not preempt state securities laws or causes of action.
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However, the Investment Advisers Act does empower the SEC to enforce the terms of the Act, including
imposing financial penalties, such as fines and restitution against advisers. Its provisions can also be relevant in
determining an adviser’s duties and are pled as industry standard rules in claims involving purported negligence or
breaches of fiduciary duty. Especially in arbitrations were the arbitrators are not bound to follow the law,
standards under the Act may be significant factors in the outcome of the case.
B. RISK CATEGORIES & CASE LAW
1. Common Law Liabilities
Negligence/Professional Malpractice
Definition: Failure to act with the same degree of care as a typical investment adviser under the same or
similar standards.
Legal Applicability: Longstanding duty imposed by courts at common law (i.e., independent of any
statute). Plaintiffs may establish the standard of care through practices in the community, according to
testimony of experienced practitioners (usually paid experts), articles and texts on investment adviser
practices, securities training materials, regulations, and, especially where the adviser uses specific
credentials, standards set forth by accrediting organizations (e.g. CFP designations).
Potential Defenses: Advisers may defend themselves by establishing (also usually with expert testimony)
that their conduct was consistent with industry standards including disclosing potential risks and

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problems to the investor. This is a very case-specific analysis, and the nature of the standard applied will
depend upon the relationship between the client and the adviser and the services that were rendered.
Written investment policy statements and clear records or communications with clients regarding the
risks and potential benefits of strategies are key components of defending against these claims. Statutes
of limitations vary state-by-state, but California’s statute of limitations for professional negligence actions
is two years.
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Negligent Misrepresentation
Definition: Investor suffers loss by reasonably relying on material, false misrepresentation or omission by
adviser who was compensated for providing such advice, when the adviser honestly believes the truth of
the statement but without reasonable grounds for that belief.
Legal Applicability: Although negligent misrepresentation is a form of fraud, plaintiff does not need to
prove that there was an intent to deceive, just that the statement was made without a reasonable basis.
Potential Defenses: Like a negligence action, a negligent misrepresentation claim is typically subject to a
two-year statute of limitations (or in some cases, depending on the circumstances of the
misrepresentation, possibly the longer statute of limitations for fraud). Adviser-defendants may attempt
to prove the statement was true; that it was no misleading in light of the various risk disclosures, including
written disclosures and the investment policy statement; that the adviser did have reasonable grounds for
making the statement on the basis of research, investigation, or due diligence; or that disclosures
rendered any alleged reliance on a misrepresentation unreasonable.
Fraud
Definition: Causing damaging reliance by a customer on a material misstatement or omission, with both
knowledge of falsity and specific intent to cause customer to rely.
Legal Applicability: The elements of fraud are (1) misrepresentation or omission, (2) knowledge of falsity,
(3) intent to defraud by inducing reliance, (4) justifiable reliance on the misrepresentation by the investor,
and (5) resulting damage.
Potential Defenses: California imposes a three-year statute of limitation on fraud claims.
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The most
difficult aspect for potential plaintiffs will be proving intent to defraud, and many of the adviser’s due
diligence and suitability efforts can serve to corroborate an adviser’s non-fraudulent, good faith intent.
Breach of Fiduciary Duty
Definition: Failure to act loyally, in good faith, and in the absolute best interest of the client with full
disclosure of all possible material information including potential conflicts of interest. Most common
breaches include failure to disclose compensation from third parties and conflicts of interest such as the
impact of recommended transaction on adviser’s own holdings or those of other clients.
Legal Applicability: The Supreme Court, the SEC, most state regulators, and financial planner associations
have affirmed that generally a financial adviser is a fiduciary. A fiduciary’s standard imposes a higher duty
than just to avoid negligence or misrepresentations. Many charges often alleged against advisers,
including the failure to properly execute the wishes of their clients, conflict of interest, suitability, or
mistake, are often pleaded as breaches of the broad fiduciary duty. Such alleged violations are also often

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pleaded as independent causes of action, when in fact it is the breach of fiduciary duty that creates the
causes of action.
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Potential Defenses: California grants one of the longest statute of limitations of four years for breaches
of fiduciary duty.
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Although it is typically not possible to deny that an adviser had a fiduciary relationship
to the customer, an adviser may attempt to show that alleged damages were not linked to that
relationship (i.e., the alleged losses stemmed from an investment choice that the adviser did not assume
fiduciary duties over), or that the adviser complied with his or her fiduciary duties by acting diligently,
loyally, and in good faith.
Breach of Contract
Definition of Risk: Failure or alleged failure to honor and/or fulfill the trust, faith or promise made as
described within your client agreements, investment policy statements or trust documents.
Legal Applicability: Breach of contract is a legal cause of action at common law. In addition, Section 205
of the Investment Advisers Act of 1940, affirms that an adviser’s responsibilities to adhere to “prudent
practices” includes adherence to client plans.
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Potential Defenses: Alleged breach of a written contract must be brought within four years, and on an
oral contract within two.
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. It can often be difficult for plaintiffs to identify what provision of a contract
that was allegedly violated, or that the value of the services provided (the investment advice) was not
worth the fees paid.
Agency Liability—Acts of Another
Definition of Risk: Liability for the acts of another, independent securities professional.
Legal Applicability: Under common law agency principles, an adviser is the agent of the investor, who is
the principal; the adviser may, under certain circumstances, create a situation where he is the principal,
and another person is his sub-agent. For example, when an adviser has discretionary authority over a
client account and selects the broker-dealer who will execute the transactions, the broker-dealer may be
deemed the adviser’s agent.
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In such cases the adviser may be liable for the sub-agent’s violations, and
also for his own conduct such as negligent hiring or supervision or failure to disclose known information
to the principal-investor, including information about the sub-agent’s possible legal violations.
Alternatively, even in the absence of an agency relationship, a plaintiff could argue that an adviser’s
fiduciary duty extends to performing adequate due diligence on persons he recommends or refers the
client to.
Potential Defenses: The statute of limitations for the underlying violation provides the time limit for
agency liability based on that original violation. An adviser could argue that the other investment
professional is not his or her agent, but rather that they are both co-agents of the investor, independent
of each other. The adviser could also argue that he had no knowledge of, or reason to know of or suspect,
the wrongful acts of another.
Employee Dishonesty/Fidelity
Definition of Risk: Theft by RIA employees of RIA in house assets or from client accounts.

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Legal Applicability: Principles of agency law dictate that advisory firms have a duty of care to make
prudent hires within the firm and to properly safeguard funds. Registered investment advisers are
required to adopt a code of ethics
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(setting forth the standards of business conduct expected of
“supervised persons” (i.e., employees, officers, directors and other people who are required to be
supervised), and it must address personal securities trading by these people.
Potential Defenses: The statute of limitations for the underlying violation provides the time limit for
agency liability based on that original violation. Adoption and adherence to sufficient supervisory and
compliance procedures provides the main line of defense against such liability.
2. Statutory Liabilities
Involvement in Sale of Security (Federal Securities Statutes)
Definition: Making a false statement or omission in connection with purchase or sale of security.
Legal Applicability: Section 12(2) of the 1933 Securities Act imposes liability to persons who successfully
solicited a sale, motivated by a desire for pecuniary gain on the sale. Proof of actual reliance is not
required, but only a causal connection between the purchase and the misrepresentation or omission. The
exact applicability differs somewhat depending on what federal circuit suit is brought in, but liability
generally does not attach unless the adviser receives compensation from the actual seller of the security.
Rule 10b-5 of the SEC imposes liability on all persons who knowingly make a false or misleading statement
or omission in connection with the purchase or sale of security. Plaintiff must, however, prove that the
adviser knew that the representations were false or misleading, or acted with reckless disregard for their
truth or falsity.
Potential Defenses: Federal statute imposes a two-year limitations period from the date that the investor
should have suspected or discovered the allegedly fraudulent conduct.
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The securities statutes also
codify the “good faith” defense absolving persons from fraud liability if they can prove that did not know,
and could not have discovered in the exercise of reasonable diligence, the untruth or omission.
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Uniform State Securities Act (2002)
Definition: Engaging in a deceptive or fraudulent act or scheme when rendering investment advice.
Uniform Act (2002), Section 509(b). The client may sue to recover the consideration paid for such advice,
any actual damages “caused by” such advice, plus interest, costs and attorney’s fees, less the income
received from such advice. This remedy is cumulative with those provided by other remedies at law or
equity.
Legal Applicability: A 10b-5-like private cause of action is available against any person who directly or
indirectly receives consideration for providing investment advice and violates the Act’s anti-fraud
provision. Also jointly and severally liable are control persons, managing partners, executive officers,
directors, and employees and other advisers who materially aid in the conduct, unless they can prove an
affirmative defense of reasonable lack of knowledge. Section 509(f). The 2002 Act has so far been
adopted by 17 states and has been endorsed by the American Bar Association and FINRA; the prior 1956
also contains a similar provision. 1956 Uniform Securities Act, Section 410(b).

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Potential Defenses: The Uniform State Securities Act, versions of which have been adopted by most
state, is similar to the federal securities laws in both its limitations period as well as the existence of a
good faith defense. Uniform Act (2002) Section 509.
Liability as a Broker-Dealer
Definition of Risk: Engaging in activities of a broker-dealer, subjecting adviser to possible enforcement
action or civil litigation for failure to register as a broker-dealer or for violation of laws applicable to
broker-dealers.
Legal Applicability: Under Section 401 and 509 the 2002 Uniform Securities Act, failure to register as a
broker-dealer gives rise to a private cause of action for recovery of actual damages, including costs and
attorney’s fees, less income received. The SEC has advised that it would not recommend registration as a
broker-dealer or enforcement even when an adviser exercises discretion over client accounts, when the
adviser did not directly purchase or sell securities (but submitted orders through another entity for
execution) and did not receive additional compensation for participating in such transactions.
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However, activities such as soliciting investments in connection with a brokerage firm in exchange for a
fee will require registration as a broker-dealer.
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Solicitation of private placements, even without
transaction-based fees, may also be deemed an activity requiring registration as a broker-dealer.
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Potential Defenses: Advisers may argue that they do not fall under the definition of broker-dealers and
are not properly subject to registration requirements. The federal securities laws also contain numerous
exemptions to the registration requirements for certain finders, banking-related functions, private
placement servicing platforms, certain persons associated with the issuer, etc.
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The USAA also imposes a
shorter statute of limitations for this action of one year after the violation. Section 509(j)(1). Unlike other
securities statutes or other parts of the USAA, the limitations period runs from the date of the violation
and is not tolled (or paused) for late discovery.
Elder Abuse
Definition of Risk: State statutes provide for punitive or multiple damages involving persons over a
certain age, plus attorney’s fees, where there is proof of recklessness, oppression, fraud, or malice.
Certain states require a “taking” of property in order to assert such claims.
Legal Applicability: Elder abuse claims are often used by investor attorney’s to “beef up” damages and
attempt to secure attorney’s fees. The evidentiary burden varies according to the state’s elder abuse
statute, but California has recently reduced the proof burden from “clear and convincing” down to a
“preponderance of the evidence” standard.
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Potential Defenses: Elder abuse claims can come into play when an aggrieved investor is of a certain age
and an adviser has received some assets of the elder or dependent adult through the form of fees.
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But,
like allegations of fraud, they are often difficult to prove absent genuine wrongdoing rising to the level of
recklessness, oppression, fraud, or malice.
ERISA
Definition of Risk: Employee Retirement Income Security Act of 1974 imposes heightened fiduciary
responsibilities over advisers with certain levels or kinds of discretion or control over retirement plans.

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Legal Standards: ERISA’S fiduciary standard is the “highest known to law”, Donovan v. Beirwith, 680 F.2d
263, 272, n.8 (2d Cir. 1985), and makes ERISA fiduciaries personally liable for any plan losses incurred
because of breaches of that duty. ERISA Section 409(a). Section 404 of ERISA imposes four types of
duties on fiduciaries: (1) act for the “exclusive benefit” of the plan; (2) comply with the statute’s “prudent
man rule” requiring a fiduciary to oversee the investment under an objectively prudent standard, (3)
diversify assets to avoid large losses, and (4) comply with the plan documents.
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Section 406 of the
statute also contains various prohibitions, including keeping a fiduciary from entering into transactions
which he “knows or should know” is with a party in interest, dealing with plan assets in his own account,
acting on behalf of a party with interests adverse to the plan, or receiving compensation from any party
dealing with the plan (with an exception for “reasonable compensation” that is adequately disclosed).
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A fiduciary must both avoid prohibited transactions as well as comply with the fiduciary duties set forth by
Section 404.
Possible Defenses: An adviser may not necessarily be an ERISA fiduciary, for example, if advice were just
provided on a one-time basis. ERISA’s prohibitions are also subject to certain exemptions according to the
statute and guidance issued by the Department of Labor for many common transactions. Finally, courts
have determined that, like other fiduciary relationships, a plan fiduciary is only a fiduciary “to the extent”
he performs one of the defined fiduciary functions; taking on a fiduciary rule in a limited capacity does not
create full responsibility of all aspects of the plan.
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Similarly, one is not responsible for acts before
becoming a fiduciary or after ceasing to be one.
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3. Investment Adviser Act Violations Relevant To Other Causes Of Action
As explained above, standards applicable to investment advisers can be relevant to determining the
existence of negligence or other breach of duty, even if they do not give rise to a private cause of action.
They may also form the basis of an award by arbitrators acting in equity, or enforcement actions by the
SEC. In most situations such violations are specific instances of broader general legal principles, and are
subject to the same defenses.
Arbitrator-Created Causes of Action
Definition of Risk: An arbitration panel holding an adviser civilly liable for a regulatory or statutory
violation that does not, at law, create a private cause of action.
Legal Applicability: Arbitrators have equitable authority to impose the relief they deem just. They are
not technically bound by rules of law, including those holding that many regulations and the Investment
Advisers Act do not create private causes of action. Therefore arbitrators could properly award relief to a
complaining investor on the basis of such violations, even if such an award could not occur in a court of
law.
Trade Execution/Error
Definition: Failure and/or alleged failure to execute a securities trade-transaction as intended or
preferred.
Legal Applicability: Pursuant to Sections 203(f), 203(k), 206(1), 206(2), and 211 of the Investment
Advisers Act of 1940, advisers must execute trades as intended. Execution errors may also be treated as
negligence, failure to supervise, and breach of common law and/or ERISA fiduciary duties.
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Regulatory Compliance/Audit
Definition: Failure and/or alleged failure to meet regulatory requirements of the SEC, DOL & various
State Regulators.
Legal Applicability: A registered investment adviser’s books and records are subject to compliance
examinations by the SEC staff (under Section 204 of the Advisers Act) and state regulatory agencies. The
purpose of SEC examinations is to protect investors by determining whether registered firms are
complying with the law, adhering to the disclosures that they have provided to their clients, and
maintaining appropriate compliance programs to ensure compliance with the law. The Department of
Labor enforces ERISA and the Pension Protection Act and holds the power to conduct examinations of books
and records.
Conflicts of Interest
Definition of Risk: Placing or alleged to have placed one’s own interest above a client’s.
Legal Applicability: The Investment Advisers Act of 1940 (as well as ERISA) imposes a duty on advisers to
act as fiduciaries in dealings with their clients, meaning the adviser must hold the client’s interest above
its own in all matters.
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“Best Execution” (Trading) Practices
Definition of Risk: Inability or alleged breach of obligation to execute transactions in such a manner that
the clients’ total cost or proceeds in each transaction is the most favorable under the circumstances;
failure or alleged failure to exercise reasonable care to obtain the most advantageous terms for a
customer/client.
Legal Applicability: As a fiduciary, an adviser has an obligation to obtain "best execution" of clients'
transactions. This stems from the fiduciary duty and crates an obligation to execute transactions where
the clients’ costs in such transactions are the most favorable under the circumstances. An adviser must
consider the full range of a broker’s services and quality of services in making brokerage decisions.
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These practices are the subject of increasing regulatory scrutiny and the SEC has made these a point of
emphasis in examinations.
Suitability of Investments
Definition of Risk: Breach or alleged breach of the fiduciary duty owed to client to determine, provide
and transact investment management concurrent and suitable to the client’s financial situation,
investment objectives and risk tolerance.
Legal Applicability: The fiduciary standard of the Investment Advisers Act and ERISA imposes a higher
standard of care which incorporates the “suitability” requirements discussed above.
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Client Information Privacy Breach
Definition of Risk: Clients’ private information improperly disclosed to, or used by, third parties or
employees.
Legal Applicability: Effective November 13, 2000, the SEC adopted Regulation S-P, the privacy rules
promulgated under Section 504 of the Gramm-Leach-Bliley Act (GLBA). Section 504 of the GLBA
required the SEC and other federal agencies to adopt rules implementing notice requirements and
restrictions on a financial institution’s ability to disclose nonpublic personal information about
consumers. Under the GLBA, a financial institution must provide its customers with a notice of its
privacy policies and practices. Furthermore, it must not disclose nonpublic personal information about
a consumer to nonaffiliated third parties, unless the institution provides certain information to the
consumer and the consumer has not elected to opt out of the disclosure. California’s Financial
Information Privacy Act also provides mandatory notice and choice provisions for sharing nonpublic
personal information by financial institutions, and provides for a $2,500 maximum penalty per
individual violation.
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II. CLAIM ILLUSTRATIONS
The following describes various claim examples experienced by various Golsan Scruggs’ insured
investment adviser clientele:
Claim Example #1
Allegation(s): Unsuitable Trading, Breach of Fiduciary Duty
Claimant: Private Individual
An advisory client with an IRA invested in traditional equities and bonds decided to invest a portion of the funds in
a private hedge fund. The adviser prepared the documents with the custodian to invest about $1MM into the
private hedge fund. As tax documents were being prepared the following year, it was discovered that the
previously completed transaction was in fact a withdrawal and reinvestment of the funds resulting in an
immediate tax bill of $250,000 to $300,000 for the client. In short, the adviser had prepared the wrong document.
The client alleged damages of $300,000 and demanded indemnification.
Third-Party Settlement: $50,000
Defense Expenses: $50,000
Claim Example #2
Allegation(s): Failure to Disclose & Conflict of Interest
Claimant: Securities Exchange Commission
An SEC investigation into separate, commonly owned RIA firms and a mutual fund managed by one of the firms
resulted in allegations that the RIA failed to disclose multiple conflicts of interest in three areas: (1) receipt of

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undisclosed compensation, (2) misleading information regarding fee structure and (3) voting proxies in their own
favor. The SEC called for disgorgement of previously charged fees as well as civil money penalties; disgorgement of
$900,000 and SEC levied fines of $150,000.
Third-Party Settlement: $1,150,000
Defense Expenses: $20,000
Claim Example #3
Allegation(s): Breach of Contract; Failure to Supervise
Claimant: Three Separate Individual Clients
Advisory staff failed to properly modify trade instruction software. The firm incorrectly included all firm accounts
within a block trade in leveraged funds. However, three specific clients had given special communication and
instructions for their cash balances in all accounts to remain as cash. The market moved rapidly down
(exponentially so due to a leveraged investment product) resulting in losses to the three clients. The Clients
brought suits against the adviser for breach of contract and failure to supervise.
Third-Party Settlement: $150,000
Defense Expenses: $30,000
Claim Example #4
Allegation(s): Erroneous Trade
Claimants: Multiple Third Party RIAs
An RIA firm functioning as a back-office service provider and model portfolio manager to outside, unaffiliated RIA
firms routinely completed significant block trades. It was agreed that in order to rebalance mutual fund portfolios,
a roughly $7,000,000 rebalance from one fund to another was needed. The RIA reported to their clients (other
RIAs) that the rebalance occurred on a specific date. It was found days later that the trade did not, in fact, occur.
The market moved by the time this was discovered resulting in an approximate $200,000+ loss to the underlying
accounts.
Third-Party Indemnification: $200,000
Defense Expenses: None
Claim Example #5
Allegation(s): Unsuitable & Risky Investment Recommendations
Claimants: Private Individuals
An RIA was engaged by clients as their discretionary asset manager to manage the clients’ assets in accordance
with their specific investment needs, goals and objectives. The clients noted that their primary goals were “Capital
Preservation” and a “Low Level” of volatility. Clients alleged that the actual portfolio constructed by the RIA was

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High Risk and Unsuitable. The claim noted that the average standard deviation of the initial asset allocation was
near 20 and that this was not consistent with the “Capital Preservation” goal. The claim alleged that the gain of a
“suitable portfolio” would have produced substantial gains over the time period. Claimants not only requested the
amount they had lost during the adviser’s management, but also the amount they would have gained should they
have been invested differently. Adviser ultimately found to have properly executed their fiduciary role.
Third-Party Indemnification: None
Defense Expenses: $150,000
Claim Example #6
Allegation(s): Unauthorized Transaction & Unsuitable Investment
Claimant: Private Individual
An Investment Adviser Representative (IAR) presented the opportunity to a client to purchase pre-IPO shares of a
social media company which were held within a private partnership. The claimant alleged that the IAR invested
funds in the private partnership without final approval of the claimant. The claimant did sign forms to move
forward with the investment, but alleged that they were rushed through the process and did not receive complete
explanation. The claimant alleged the IAR promised to call to further explain, yet did not call and purchased the
investment regardless. The claimant also alleged that the investment was unsuitable due to his limited
understanding of investments and his modest net worth. The written demand requested the client be made whole
by the advisory firm. Due to specific security market correction, claimant’s financial position improved and,
therefore, claim was withdrawn.
Third-Party Indemnification: None
Defense Expenses: $85,000
Claim Example #7
Allegation(s): Unsuitable Trading, Breach of Fiduciary Duty
Claimant: Private Individual
The claimant was unhappy with the minimal returns which her funds were generating within a fixed annuity
product. On the adviser’s advice, the claimant liquidated the annuities and deposited cash into the adviser’s
custodial account. The adviser managed the claimants account on a discretionary basis from mid-2007 through
the first quarter of 2009 (a period over which the S&P fell by about 40%). The claimant’s approximately $750,000
account fell from market losses as well as significant client withdrawals. The claimant alleged damages of
$750,000 (the entire account) on the basis of unsuitable trading and breach of fiduciary duty. Ultimate breach
unclear. All parties agreed to minor settlement.
Third-Party Settlement: $25,000
Defense Expenses: $60,000

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III. RISK SUMMATION
Pursuant to the above sections expanding upon the legal duties, risk categories, case
law and claim examples – What have we learned?
There is no higher professional standard than that of a
fiduciary (“duty of care”).
Cases brought against advisers can be groundless or
unwarranted but trigger and demand attention
(defense) regardless (i.e. alleged vs. actual) of
circumstances.
The legal framework (IAA – the Act) imposes liability to
an Adviser (IAR) personally as an Individual – as well as
to the IA entity. The definition of “adviser” includes
“personal”. The corporate entity may not necessarily
act as a shield of protection.
Categories of risk are wide and multiple.
Monetary exposures can be deep and catastrophic. The
occurrence of an “action” against an adviser should be
expected, based on success and longevity. The degree
of severity is somewhat unknown.
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IV. INSURANCE (RISK-TRANSFER) MECHANISMS
What are the primary insurance coverage forms available in the insurance marketplace to wholly or
partially insure (transfer) the risks of operating as an Investment Adviser?
COVERAGE LINE DESCRIPTION
Errors & Omissions Liability
(aka Professional or Investment
Management Liability)
Coverage for actual or alleged mistakes or misconduct, claims or suits for
Breach of Fiduciary Duty, client suitability, not meeting client expectations,
violation of regulations, accountability imposed under the Investment
Advisers Act of 1940, and related matters.
Directors & Officers Liability
(aka D&O)
Covers management liability suits for Directors, Officer, and Managers in
their roles as such. Unfair competition, breach of duty, slander, violation of
trade practices, and regulatory proceedings are examples of types of
complaints covered.
Employee Dishonesty
(aka Crime or Fidelity)
Covers loss of property due to theft by employees and/or third-parties.
ERISA Bond (In-House) Covers loss of company plan assets due to theft/fraud of the plan sponsor.
ERISA Bond (Client/3
rd
Party Plans)
Covers loss of clients plan assets due to theft/fraud of the investment
manager/adviser.
Cyber/Data Breach Liability
Coverage for third-party (cyber liability) and first-party (cyber crime
expense) to address risks associated with technology/cyber risks. Failure to
properly manage cyber exposure can trigger Breach of Fiduciary Duty claim.
CAUTIONARY NOTE: The Insurance Services Office (ISO), the governing body for the property/casualty insurance
industry, to which all insurance companies are members, customarily issues recommended forms (contract language)
for most commonly purchased commercial insurance (property, general liability, auto, etc.). However, ISO has decided
against recommending any commoditized standard form for the above specialty coverage. Each underwriter
independently issues their own unique contract forms with differing terms, conditions, exclusions, limitations,
conditions, etc. Caution is recommended to the RIA community to recognize the specialty of the RIA underwriting
marketplace and to solicit advice from qualified and experienced professionals possessing superior knowledge of
fiduciary exposures and risk-transfer solutions.

16. Golsan Scruggs RIA Risk & Insurance Guide
IV. DISCLAIMER & CORPORATE INFORMATION
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17. Golsan Scruggs RIA Risk & Insurance Guide
VI. REFERENCE INDEX
i
SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963).
ii
Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979).
iii
In re Hughes, SEC Release No. 4048 (February 18, 1948).
iv
E.g., In re Fregien, 2013 WL 1364297 (Wisconsin Com. Sec. March 21, 2013).
v
Investment Advisers Release No. IA-1406.
vi
Transamerica Mortgage Advisers, Inc. v. Lewis, 444 U.S. 11 (1979).
vii
69A Am. Jur. 2d Securities Regulation—State, Section 13; 15 U.S.C. § 80b-18a.
viii
CCP § 339.
ix
. CCP § 338.
x
SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963); In re Rizzo, Inv. Advisors Act Release No. 897 (Jan.
11, 1984); Nat’l Ass’n of Personal Financial Planners, Code of Ethics (Oct. 1989).
xi
CCP § 343. When more than one cause of action is pleaded, each with different causes of action, California
courts will look to the “gravamen,” or essence of the suit, to determine which applicable statute of limitations
should govern the entire action. Hydro-Mill Co. v. Hayward, Tilton & Rolapp Ins. Assoc., 115 Cal. App. 4th 1145,
1154 (Cal. Ct. App. 2004).
xii
See also ERISA sections 3(38)(C), 104, 402, 403, and 404; Dardaganis v. Grace Capital, Inc., 664 F. Supp. 105,
(S.D.N.Y. 1987).
xiii
CCP §§ 337, 339.
xiv
Suh v. Dong Won Securities Co., 2004 WL 1843276 (Cal. Ct. App. 2004).
xv
The “Code of Ethics Rule” is Rule 204A-1 under the Advisers Act.
xvi
28 U.S.C. §1658.
xvii
15 U.S.C. § 77k.
xviii
In re First Atlantic Investment Advisory Corp., Fed. Sec. L. Rep. P 79,746, 1974 WL 10170 (SEC No-Action Letter
March 22, 1974); In re McGovern Advisory Group, Inc. 1984 WL 45930 (SEC No-Action Letter).
xix
In re Boston Advisory Group, 1980 WL 14910 (SEC No-Action Letter October 2, 1980).
xx
In re PRA Securities Advisors, LP, Fed. Sec. L. Rep. P. 76,603, 1993 WL 67873 (SEC No-Action Letter, March 3,
1993).
xxi
See Thomas Lee Hazen, “Broker-Dealer Registration; Definitions and Exemptions,” Treatise on the Law of
Securities Regulation § 14.4.
xxii
Cal. Wel. & Inst. Code Section 15657.5.
xxiii
Wood v. Jamison, 167 Cal. App. 4th 156 (Cal. Ct. App. 2008); Zimmer v. Nawabi, 566 F. Supp. 2d 1025 (E.D. Cal.
2008).
xxiv
See William Campbell Ries, 1 Regulation of Invest. Mgmt. & Fiduciary Serv., §§ 13.21-.24.
xxv
See ALI-ABA Course of Study, “Fiduciary Litigation Under ERISA,” SN080 ALI-ABA 243 (April 2008).
xxvi
Pegram v. Hedrich, 530 U.S. 211 (2000).
xxvii
See supra, note xxv.
xxviii
In re Michael T. Jackson, Advisers Act Release No. 2374 (April 6, 2005).
xxix
SEC v. Capital Gains Research Bureau, Inc. 375 U.S. 180 (1963); see also ERISA sections 3(14), 404 and 406.
xxx
See Exchange Act Release No. 23170 (April 23, 1986); Investment Adviser Act of 1940, Section 211(g)(1);
Herman v. NationsBank Trust Co.,126 F.3d 1354 (11th Cir. 1997).
xxxi
Investment Advisers Act Release No. 1406 (March 16, 1994)l Laborers National Pension Fund v. Northern Trust
QuantitativeAdvisors,Inc.173F.3d313(5thCir.).
xxxii
Cal. Fin. Code. §§ 4051-4057.