Reaching Us: Loss Prevention Seminar for RIAs

1. REACHING US HOW TO REACH US: Alex E. Wayne, RPLU Alexander J. Wayne and Associates, Inc. 2551 North Clark Street, Suite 601 Chicago, IL 60614 TEL: (773)-305-7686 or 773-328-0500 ext. 129 FAX: (773)-328-0508 E-MAIL: alexwayne@ajwayne.com E&O Insurance for RIAs

2. Loss Prevention Seminar 1.FINRA ARBITRATION STATISTICS Claims Against Financial Professionals 2. LOSS PREVENTION 3. THE INSURANCE MARKETS OUTLINE

3. Loss Prevention Seminar NASD ARBITRATION STATISTICS

4. Loss Prevention Seminar NASD ARBITRATION STATISTICS

5. Loss Prevention Seminar NASD ARBITRATION STATISTICS

6. Loss Prevention Seminar NASD ARBITRATION STATISTICS

7. Loss Prevention Seminar NASD ARBITRATION STATISTICS

8. Loss Prevention Seminar THE ABC’s OF LOSS PREVENTION LOSS PREVENTION AVOIDING LOSS IS NEITHER BRAIN SURGERY NOR ROCKET SCIENCE • Trade Matching and Confirmation • Client Selection (and De-Selection) • DOCUMENT, DOCUMENT, DOCUMENT!!! • A Word on “Alternative” Investments

9. Loss Prevention Seminar TRADE MATCHING AND CONFIRMATION LOSS PREVENTION THE EASEST CLAIMS TO AVOID AREEXECUTION ERRORS Match Every Order Against the Return Confirmation, and Promptly Resolve Discrepancies Example: - Trade was forwarded by fax to Andrews Air Force Base, failure to trade remained undetected for two months; loss of $70,000 - Verbal order to buy was executed in shares, not dollars, as securities title contained the word “shares”; trade was outstanding for 7 minutes, resulting in $20,000 loss

10. Loss Prevention Seminar LOSS PREVENTION We have come to know: • Avoid Trades at market opening • Avoid end of day trades • Expect market corrections • When possible, have a separation of duties • Keep a log of erroneous trades, look for patterns and address them • Avoid market orders and stop loss orders due to “flash crash” of electronic trading systems

11. Loss Prevention Seminar LOSS PREVENTION CLIENT SELECTION (AND DE-SELECTION) MANY CLIENTS WOULD BE BETTER SERVED BY YOUR FRIENDLY COMPETITOR DOWN THE STREET

12. Loss Prevention Seminar LOSS PREVENTION DOCUMENT, DOCUMENT, DOCUMENT!! NEWS FLASH – CLIENTS ARE NOT ALWAYS TRUTHFUL A WELL DOCUMENTED (I.E. DEFENSIBLE) CLAIMS FILE WILL CONTAIN: • Documentation of life circumstances, tolerance for risk, investment objectives and “style”, leading to plan and/or broad (but brief) investment policy statement • Dated and Organized File notes on every interaction with the client – need not be extensive, but should capture essence of interaction

13. Loss Prevention Seminar LOSS PREVENTION DOCUMENT, DOCUMENT, DOCUMENT!! NEWS FLASH – CLIENTS ARE NOT ALWAYS TRUTHFUL (2) A WELL DOCUMENTED CLAIMS FILE WILL CONTAIN: • Complete documentation of any changes in objectives, advice given, but not heeded • BEST PRACTICE – Quarterly summary of activity or discussion which is signed by client acknowledging understanding • And if you have a claim, it will be more defensible

14. Loss Prevention Seminar THE ANATOMY OF A Y2K MARKET LOSS CLAIM LOSS PREVENTION

15. Loss Prevention Seminar LOSS PREVENTION ALTERNATIVE INVESTMENTS – RISK AN ALTERNATIVE VIEW RISK HAS TRADITIONALLY BEEN DEFINED AS PRICE VOLATILITY. THE MORE OF THE ELEMENTS BELOW WHICH EXIST, THE GREATER THE POTENTIAL FOR LOSS:

16. Loss Prevention Seminar IMPACT ON FINANCIAL PROFESSIONALS THE INSURANCE MARKETS • FINANCIAL ADVISORY PROFESSIONAL HAVE BEEN PARTICULARLY HARD HIT OVER THE YEARS • Many insurers were largely undisciplined, in pricing and risk selection, during the 1990’s • Several insurers have thrown in the towel, resulting in diminished financial capacity to underwrite the business • Lack of underwriting expertise and experience resulted in limited insurance marketplace • Claims have increased in severity and frequency • Competitors have priced themselves out of the reach of smaller advisors • Large pricing gap between smaller RIAs and middle market portfolio managers • For the reasonably foreseeable future, until competitive conditions improve, broker dealers and middle market RIA’s may expect relatively high premiums, more restrictive terms and higher deductibles

17. Loss Prevention Seminar IMPACT ON FINANCIAL PROFESSIONALS SUMMARY BATTEN DOWN THE HATCHES – PRACTICE DEFENSIVELY • Institute Trade Confirmation Practices • Carefully Review Problematical Clients • Put the files in order and institute rigorous client documentation procedures • Institute periodic training sessions for staff to keep up to date with latest loss control tools and procedures • Carefully review adequacy and completeness of disclosures • Think of alternative investments in the context of Risk vs. Reward • Insurance is a business asset and a risk management tool

18. Loss Prevention Seminar • Covers “Mistakes” – Errors & Omissions • Claims Made & Reported • Defense Costs / Allegations Covered • Defense Costs Within Limits • Deductible Applies to Defense & Indemnity • Exclusions • Various Policy Provisions ERRORS AND OMISSIONS

19. Loss Prevention Seminar CLAIMS-MADE VS. OCCURRENCE

20. Loss Prevention Seminar • Professional Services Definition • Exclusions Uninsurable Covered Elsewhere Negotiable • Other Policy Provisions Duty to Defend Choice of Counsel Settlement Provisions Incident Trigger COVERAGE ISSUES

21. Loss Prevention Seminar Application / Submission requirements: • Application • ADV Part I (if not available online) • ADV Part II with Schedules (if not available online) • Client Contracts • Financial Information • Performance Figures (some companies) APPLICATION PROCESS

22. Professional Liability Insurance • Markel Cambridge/Evanston/Essex • Scottsdale • Chubb • Travelers • AmTrust • Houston Casualty • ACE • CNA • Hartford • AXIS POTENTIAL MARKETS

23. Loss Prevention Seminar • Group Plan • Depletion of Limits • Income Source / Liability • Cost • Autonomy • Control Over Policy Provisions • Prior acts / exit plan BROKER DEALER VS. INDIVIDUAL COVERAGE

24. Loss Prevention Seminar • Directors and Officers Management Liability • Employment Practices Liability including Third Party Discrimination • Combo policies vs. stand alone coverage OTHER INSURANCE PRODUCTS

25. Loss Prevention Seminar Cyber Liability coverage / Data Breach: Types of exposures covered this type of insurance: • First Party coverage – notification costs • Third Party coverage – liability for cost of data breach • Extortion, Media Liability, Business Interruption, Cyber Crime • Wire transfer fraud - not covered by cyber liability • Social Engineering or Cyber Deception - usually covered under crime, but may be covered by Cyber Liability OTHER INSURANCE PRODUCTS

26. REACHING US HOW TO REACH US: Alex E. Wayne, RPLU Alexander J. Wayne and Associates, Inc. 2551 North Clark Street, Suite 601 Chicago, IL 60614 TEL: (773)-305-7686 or 773-328-0500 ext. 129 FAX: (773)-328-0508 E-MAIL: alexwayne@ajwayne.com E&O Insurance for RIAs

27. REACHING US HOW TO REACH US: Suzie Dodds, CIC Alexander J. Wayne and Associates, Inc. 2551 North Clark Street, Suite 601 Chicago, IL 60614 TEL: (773) 572-0047 FAX: (773)-328-0508 E-MAIL: suziedodds@ajwayne.com E&O Insurance for RIAs