Fund Management Risk: Fee Disclosure and Expense Allocation

February 1, 2018 | smeditor

There are few new cases keeping Fund Manager and Investment Advisor Risk in the public eye. In the US the case of Fenway Partners LLC, the SEC has issued a Wells Notice (a warning that regulators may take action) of possible civil litigation against the NY private-equity firm related to expense allocation, fee disclosure and financial reporting, as reported in the Wall Street Journal, here. There is a good article in Kevin M. LaCroix’s The D&O Diary, penned by Elan Kandel of Cozen O’Connor, here, summarizing a number of recent US cases.

We don’t have such resources in Canada, so I will attempt to give you a few. Seaquest Capital Corporation, and their alleged $75 million Ponzi scheme, as suggested by the RCMP charges, here. Syndicated Gold Depository and many other financial entities that saw convictions of two principals in this $100 – $400 million Calgary Ponzi scheme, here. Sellars Financial Inc., with a conviction involving a $27 million investment fraud, here. Unfortunately, there are many others, and based on the current status of enforcement and consequences, there will a many more.

The actual fraud might not resonate as a real risk to many Canadian advisors, but there is a direct connection as innocent advisors and managers have had direct investments and/or referral arrangements involving these schemes.  And the value of loss to the innocent parties is much higher than to the perpetrator because they, 1) didn’t benefit from the millions the perpetrators stole, 2) don’t have a ‘beyond a reasonable doubt’ defence, 3) are immediately hurt by massive reputational damage,  4) can suffer loss of insurance coverage (which means an immediate end to being able to earn a living), 5) are quicker to settle claims in an effort to help their clients (the perpetrators don’t care, and their settlement are rarely paid), and, 6) they face plaintiffs who only have to allege negligence, not prove fraud.

Other issues that could present financial, administrative and reputational risk to Managers, Advisors or Dealers include increased enforcement regarding fee disclosure. The Ontario Securities Commission’s Late Fee Amnesty under NI 33-109 (see AUM Law Bulletin, here), ended on March 27, 2015, which would suggest that they have given warning that they will come after disclosure violators without leniency. Also, the amendment to NI 31-103, to place registrant compliance obligations on all activities of a registrant, including formerly exempt activities (like distribution solely through 3rd Party registered dealers), will increase compliance and governance risk and the potential for claims related to disclosure and/or suitability.

Insurance for Investment Fund Managers, Advisors and Dealers, and other financial institutions includes, but is not limited to, Fidelity (aka Crime or Financial Institution Bond), Directors’ and Officers’ Liability (D&O), Professional Liability (aka Errors and Omissions (E&O) or Professional Indemnity), Fiduciary Liability, Employment Practices Liability (EPL), Cyber (1st party crime or costs and 3rd party liability), Trustee Bonds, Property, General Liability and Auto. These insurance contracts are unique and largely unregulated, and therefore the risk identification and insurance negotiations should be done by an experienced and independent insurance broker.

Greg Shields is a D&O, Professional Liability, Employment Practices Liability, Fiduciary Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at,  416-862-5626, or Skype at risk.first.

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to

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