Did you know – most stockbrokers and registered investment advisors (RIAs) are not required by law to carry errors and omissions insurance?
Beginning July 31, 2018, with an amendment to the Oregon Securities Law, Oregon became only state in the nation to require certain state-regulated financial professionals to carry errors and omissions insurance. These financial professionals must now carry at least $1 million in errors and omissions insurance in order to qualify for licensing in Oregon.
ORS 59.175 now provides:
. . .
(5)(a) Except as otherwise provided in paragraph (b) or (c) of this subsection, every applicant for a license or renewal of a license as a broker-dealer or state investment adviser shall file with the director proof that the applicant maintains an errors and omissions insurance policy in an amount of at least $1 million from an insurer authorized to transact insurance in this state or from any other insurer approved by the director according to standards established by rule.
(b) A licensed broker-dealer subject to section 15 of the Securities Exchange Act of 1934, as amended, is not required to comply with paragraph (a) of this subsection.
(c) A licensed state investment adviser who has its principal place of business in a state other than this state is exempt from the requirements of paragraph (a) of this subsection.
Why is this important?
Investors are rightfully confused about what protections they have when they sign over their life savings or transfer a retirement account to the care of a financial professional. One might assume the advisor is insured, just like many attorneys, doctors, and other professionals are insured.
There is no current federal requirement for FINRA-registered brokers or SEC-registered investment advisors to carry basic errors and omissions (“E&O”) insurance. E&O insurance is a form of liability insurance for professionals who provide advice or other services. Some call it “professional liability insurance.”
You may have seen reference to “SIPC” on a sign in your advisor’s office, or on account statements from a firm. The Securities Investor Protection Corp. (SIPC) insures cash and securities in a brokerage account up to a certain amount of losses incurred because of the bankruptcy of a broker-dealer. SIPC does not cover losses caused by faulty or negligent conduct by the broker or brokerage firm.
Wait a minute – A financial advisor may handle millions and millions of dollars of investor money, but not carry insurance for professional misconduct? Yes.
Investors may win a substantial recovery of losses that were caused by their financial professional’s misconduct, either through a FINRA arbitration award or court judgment. However, many awards and judgments go unpaid. A smaller firm may simply close shop rather than pay. Or a culpable advisor might leave his or her firm and start working for a business or investment vehicle that is not licensed by FINRA or the SEC. If there was applicable insurance that covered the investor claims, the insurance policy would pay the investor at least part if not all of the award or judgment. Large firms that have significant net capital, or firms that otherwise responsibly carry insurance as a matter of choice, already provide reassurance that they can make good on a successful customer claim.
Generally speaking, E&O insurance should cover mistakes, errors, negligent conduct, and breaches of fiduciary duties by a professional relating to the professional service that result in harm to the client. In the case of financial professionals, that usually takes the form of recoverable financial losses caused by unlawful conduct. For example, losses caused by a broker (or RIA or someone dual-licensed as a broker/RIA) failing to follow client instructions, making recommendations to purchase investments that are “unsuitable” for that particular investor, or acting in a way that violates a fiduciary duty to the investor.
The good news for Oregon investors is that there are now at least some new protections at the state level, relating to certain financial professionals. If you invest with a financial professional and want to know if they have E&O insurance – ask! Responsible advisors and firms should be able to provide a clear explanation as to what protections their customers have in case of a customer claim to recover investment losses.
Darlene Pasieczny’s practice at Samuels Yoelin Kantor LLP focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, elder financial abuse, and complex civil litigation. Darlene’s practice includes representing investors nationwide in investment disputes through FINRA arbitration.