By David Mainzer

January 2014

The Securities and Exchange Commission's (the "SEC") Office of Compliance Inspections and Examinations (the "OCIE") conducts the SEC's National Examination Program (the "NEP"). An important part of the NEP is to promote compliance with the federal securities laws by publishing information to securities market participants, including SEC registered investment advisers.

On January 9, 2014, the OCIE published the NEP's "Examination Priorities for 2014." This document describes areas where the OCIE believes that investors are at "heightened risk." Therefore SEC registered investment advisers should expect that they will be a feature of the SEC's investment adviser examinations in 2014.

For investment advisers, some of the usual suspects are again in focus:

1. Conflicts of interest. For example, undisclosed compensation, allocation of investment opportunities, and favoring of clients/ products with higher fee arrangements.
2. Risk disclosures. For example, the higher risk of illiquid and leveraged investments and the marketing of risky investments to unsophisticated investors.
3. Performance advertising. For example, the construction and description of investment composites, performance record keeping and compliance oversight.
4. Custody of assets. For example, knowing when you have "custody" and ensuring compliance with the SEC's custody rule.

The NEP includes several new areas of focus related to investment advisers, including:

1. Advisers that have been registered for more than three years but never examined by the SEC.
2. Private fund advisers registered within the past three years.
3. Wrap fee programs.
4. Quantitative trading models.
5. Payments for distribution.
6. Risk disclosures by fixed income funds.

An emerging area of interest for hedge funds, private equity funds and venture capital funds in 2014 is likely to be the new "general solicitation" provisions (i.e. Rule 506(c)). One of the requirements for funds making general solicitations is that they conduct due diligence on investors to verify that they are "accredited investors." This due diligence is also new area of focus for the NEP.

The NEP is a good resource for investment advisers and their compliance staff. This update is not a complete description, so you should read the complete Examination Priorities for 2014 at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf.


©2014 Cohen/Mainzer LLP.  All Rights Reserved.  Attorney Advertisement.  This document is not legal advice and you should not rely upon it as a substitute for legal advice based on your particular situation.  This document may not be accurate, complete or up to date, based on the facts applicable to you, and Cohen/Mainzer makes no representation or warranty that it is.  Receipt or use of this article does not create any attorney-client relationship between the user and Cohen/Mainzer.

By Brian E. Shear

November 2013

So you’re the executive in your organization saddled with making sure that the company is adequately insured and hasn’t paid too much in premiums. You’ve just finished a meeting with the insurance broker. You know, the guy who was part of your foursome on the links last weekend, whose daughter is a player on your daughter’s soccer team, or the guy who came highly recommended by the neighbor you see walking his Labradoodle at 6:30 A.M. every morning. The neighbor picks up after his dog, owns the newly remodeled house on the corner and drives a Tesla…he must know what he’s talking about. The broker is well-groomed, charming and knowledgeable. He’s described a lot about different coverage options and various insurers and you feel confident that he’s steered you to the practical, sensible and cost-conscious decision. You complete the application or diligently delegate that task to someone capable. You weren’t 100% sure about everything the broker said, but it’s not your field; you know when to delegate and you check insurance off your list: one less thing to worry about. STOP!

If you’re not an insurance lawyer or someone who regularly deals with insurance, you probably don’t have the knowledge or experience to make informed decisions about insurance-related, risk management issues that may significantly impact your company’s operations. In fact, you may have just left your company’s fate in the hands of an insurance company, something that may or may not work out.

The insurance company’s underwriting department relies upon the accuracy of the information in that application your new employee is capably handling. The information in the application is used by the insurer to determine whether to insure certain risks and what premium to charge. How you answer the questions in the application is very important. The insurer is entitled to rescind or take away the policy, even after a loss has occurred, if you make material misstatements (even innocent ones) in the application. Additionally, exclusions in the policy may preclude coverage for certain matters listed by you in the application. The insurer has no duty to help you through these issues. You may not realize that an insurer’s obligations to an insured are limited to those arising out of the policy; an insurer owes no duty to investigate whether the policy meets your needs in any way.[1] Moreover, that knowledgeable and trustworthy insurance broker, the “independent insurance agent,” may be working for you, the insurance company or both you and the insurer…a double agent.

If you are obtaining insurance for your company, you are likely buying liability coverage (comprehensive general liability insurance, generally known as “CGL”). Liability insurance imposes two separate duties on the insurer: (1) the duty to indemnify your company against third party claims covered by the policy (by paying a judgment against the company or a settlement with a third party); and (2) the duty to defend claims against your company (by paying the company’s attorney fees or appointing a defense attorney). Although you might think that the duty to indemnify would be more important, that’s not necessarily true. The duty to defend is often more important because from the filing of a claim your company will likely incur substantial costs to defend a lawsuit. There are many types of policy provisions that can significantly affect the scope of defense, selection of attorney, cost of defense, etc. As one of my partners once said, “in a lawsuit it’s not who wins, but who pays.”

There is a common misperception that where an insurance policy is not reasonably clear to an insured, any dispute between the insured and insurer over the ambiguity must be resolved in favor of the insured. There is case law holding that an insurer “must defend a suit which potentially seeks damages within the coverage of the policy”;[2] a coverage defense is excused only when “the third party complaint can by no conceivable theory raise a single issue which could bring it within policy coverage”;[3] or “the insured need only show that the underlying claim may fall within policy coverage, the insurer must prove it cannot.”[4]

With cases like these, you might ask “how can an insured lose a coverage dispute”? Only if the policy has no “plain and clear” meaning is it considered ambiguous. In the name of protecting an insured’s “objectively reasonable expectations”, the cases hold that an ambiguous policy provision must be interpreted in the sense the insurance company reasonably believed the insured understood the provision at the time the policy was issued. [5]

When a court is attempting to decide whether coverage is consistent with the “insured’s objectively reasonable expectations”, the insured’s actual, subjective expectations are immaterial.[6] In making this determination, the cases require, or allow, the court to interpret policy provisions “in context”, “with regard to intended function”, “with the instrument as a whole”, and “to apply a little common sense”, among other nebulous guidelines. Only if you are experienced with insurance coverage can you be sure that you are making the best possible decisions regarding what coverage to buy and what arguments to make in the event of a coverage dispute.

An excellent example of the unpredictability of policy interpretation issues is the recent case of David Lerner Associates, Inc. v. Philadelphia Indem. Ins. Co.[7] Philadelphia Indemnity Insurance Company (“Philadelphia”) issued a D&O liability policy to New York-based broker-dealer David Lerner Associates (“DLA”), which served as the managing dealer for Apple real estate investment trusts (“REITs”). The Financial Industry Regulatory Authority (“FINRA”) brought a disciplinary proceeding against DLA, alleging that it misrepresented the value of certain REIT shares sold to investors, and failed to perform adequate due diligence in marketing those shares. Subsequently, three related class actions were brought against DLA. DLA tendered the FINRA proceeding and the class actions to Philadelphia for coverage. Philadelphia denied coverage based upon a “Professional Services Exclusion” in the policy, which provided that there was no coverage for any claim against DLA arising from DLA’s performance of, or failure to perform, “professional service for others.”

DLA sued Philadelphia for coverage, arguing that “professional services” was not defined anywhere in the policy. DLA also argued that financial advisors are not classified as professionals under New York state malpractice law and therefore could not perform “professional services” for purposes of coverage under the policy.

The Court disagreed, holding that the language of the Professional Services Exclusion was not ambiguous and clearly included DLA’s due diligence in the course of providing investment advice. The Court reasoned that the exclusion was not ambiguous merely because the words were undefined in the policy because the undefined term “should be read in light of common speech and the reasonable expectations of a business person.” The Court also rejected DLA’s argument that financial advisors are not considered professionals in the malpractice context because the context of insurance “professional services” encompasses a broader range of conduct.

Cases like this one illustrate that it is extremely difficult for those not experienced in insurance coverage matters to make significant decisions involving what type of coverage to purchase, what policy provisions to obtain, what amount of premium is reasonable and what risks are acceptable. It is even more important for an insured to involve a coverage expert after a dispute has arisen with an insurer. There are a myriad of nuances of policy interpretation and many cases interpreting them. Before making decisions that may significantly impact your company’s risk management, you shouldn’t rely only upon your broker…no matter how good his backswing is.  He may also be an agent of the insurer and have dual interests. In order to assure that you are making the best possible insurance coverage decisions for your company, consult an insurance coverage expert.



[1] Gibson v. Gov’t Employees Ins. Co., 162 Cal.App.3d 441, 452 (1984).

[2] (Gray v. Zurich Ins. Co., 65 Cal.2d 263, 275 (1966))

[3] (Montrose Chem. Corp. v. Superior Court (Canadian Univ. Ins. Co.), 6 Cal.4th 287, 295 (1993))

[4] (Montrose, 6 Cal.4th at 300)

[5] Bank of the West v. Superior Court (Industrial Indem. Co.), 2 Cal.4th 1254, 1264-65 (1992).

[6] AIU Ins. Co. v. Superior Court (FMC Corp.), 51 Cal.3d 807, 822 (1990).

[7] David Lerner Associates, Inc. v. Philadelphia Indem. Ins. Co., 2013 WL 1277882 (E.D. N.Y. March 29, 2013).


©2013 Cohen/Mainzer LLP.  All Rights Reserved.  Attorney Advertisement.  This document is not legal advice and you should not rely upon it as a substitute for legal advice based on your particular situation.  This document may not be accurate, complete or up to date, based on the facts applicable to you, and Cohen/Mainzer makes no representation or warranty that it is.  Receipt or use of this article does not create any attorney-client relationship between the user and Cohen/Mainzer.

Theodore J. Cohen and David E. Mainzer spoke at The ECHELON Partners Deals and Deal Makers Summit, September 26, 2013, Santa Monica, CA.

Click here to view their presentation.


©2013 Cohen/Mainzer LLP.  All Rights Reserved.  Attorney Advertisement.  This document is not legal advice and you should not rely upon it as a substitute for legal advice based on your particular situation.  This document may not be accurate, complete or up to date, based on the facts applicable to you, and Cohen/Mainzer makes no representation or warranty that it is.  Receipt or use of this article does not create any attorney-client relationship between the user and Cohen/Mainzer.

By David Mainzer

September 2012

Effective on August 27, 2012, the California Department of Corporations (the “Department”) has amended Section 260.204.9 of Title 10 of the California Code of Regulations (the “New California Private Fund Exemption”) to address certain changes to the Investment Advisers Act of 1940 (the “Advisers Act”) required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

Prior to the adoption of the Dodd-Frank Act, California provided an exemption from its investment adviser registration requirements for investment advisers that, among other things, were able to come within Section 203(b)(3) of the Advisers Act. However, Section 203(b)(3) of the Advisers Act was eliminated by the Dodd-Frank Act. In addition, the Dodd-Frank Act created a new registration exemption under the Advisers Act for advisers of private funds that, among other things, either have less than $150 million in assets under management or manage only venture capital funds (these investment advisers are referred to as “exempt reporting advisers”). The New California Private Fund Exemption makes the California rules more consistent with these changes to the Advisers Act.

Under the terms of the New California Private Fund Exemption, a “private fund adviser” is an investment adviser that provides investment advice only to “private funds” (i.e. 3(c)(1) funds, 3(c)(5) funds and 3(c)(7) funds). A private fund adviser is exempt from the requirement to register with the Department as an investment adviser if: (a) it is not subject to disqualification by the SEC and has not breached certain provisions of the California Corporate Securities Act of 1968; (b) it files Form ADV with the Department (the adviser may or may not be required to file Form ADV with the Securities and Exchange Commission under the Advisers Act); and (c) it pays the required fee (currently $125.00) each year.

In addition to the foregoing requirements applicable to all private fund advisers, private fund advisers that advise “retail buyer funds” (i.e. private funds other than 3(c)(7) funds and venture capital funds that meet the definition of “venture capital company” in the New California Private Fund Exemption) have additional obligations. Private fund advisers that advise one or more retail buyer funds are generally required to: (a) offer interests in the retail buyer funds they manage only to “accredited investors” (as defined in Regulation D under the Securities Act of 1933) and managers, directors, officers and employees of the private fund adviser; (b) deliver a private placement memorandum or similar document to each investor at or before the time they make their investment in a retail buyer fund; and (c) cause an annual audit of each retail buyer fund by a CPA firm registered and examined by the PCOAB. Also, private fund advisers that advise one or more retail buyer funds are prohibited from charging performance fees unless all of the investors in the applicable private fund are “qualified clients” (as defined in Rule 205-3(d) under the Advisers Act).

Private fund advisers that managed a retail buyer fund prior to August 27, 2012 may be able to take advantage of certain grandfathering provisions in the New California Private Fund Exemption.

Investment advisers that desire to make use of the New California Private Fund Exemption must file their Form ADV with the Department on or before October 26, 2012. We expect that this will include most private fund advisers with less than $150 million in assets under management that either (a) have a place of business in California or (b) have six or more clients that are California residents.


©2012 Cohen/Mainzer LLP.  All Rights Reserved.  Attorney Advertisement.  This document is not legal advice and you should not rely upon it as a substitute for legal advice based on your particular situation.  This document may not be accurate, complete or up to date, based on the facts applicable to you, and Cohen/Mainzer makes no representation or warranty that it is.  Receipt or use of this article does not create any attorney-client relationship between the user and Cohen/Mainzer.

David E. Mainzer spoke at the Dimensional Fund Advisors’ Succession Planning Conference, July 17, 2012, Santa Monica, CA. 

Please click here to view his presentation.


©2012 Cohen/Mainzer LLP.  All Rights Reserved.  Attorney Advertisement.  This document is not legal advice and you should not rely upon it as a substitute for legal advice based on your particular situation.  This document may not be accurate, complete or up to date, based on the facts applicable to you, and Cohen/Mainzer makes no representation or warranty that it is.  Receipt or use of this article does not create any attorney-client relationship between the user and Cohen/Mainzer.