Registered investment advisers and registered commodity pool operators navigate a complex set of disclosure requirements and other rules imposed by federal regulatory agencies. In February 2024, the Commodity Futures Trading Commission (CFTC) and the US Securities and Exchange Commission (SEC) announced new disclosure requirements for Form PF. With each new regulation, registrants and their directors and officers should consider whether and how insurance may respond to increased regulatory exposures, including potential disclosure violations. As discussed below, careful assessment of available coverages and coordination between directors and officers (D&O), errors and omissions (E&O), cyber, and other liability policies can help maximize coverage in the event of a claim.

The New Disclosure Rules

On February 8, 2024, the CFTC and the SEC adopted rules amending Form PF disclosure requirements for registered investment advisers and commodity pool operators, including certain hedge fund advisers. Form PF is a quarterly disclosure form required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The amendments will become effective one year after publication of the new amendments in the Federal Register. The SEC’s and CFTC’s amendments to Form PF come on the heels of other recent SEC activity impacting investment advisers, including vast new rules for advisers to private funds and significant changes to Schedule 13G and 13D reporting.

Among other things, the amendments to Form PF enhance reporting by large hedge fund advisers regarding qualifying hedge funds to provide more insight into the operations and strategies of these funds and their advisers and to improve data quality and comparability. The amendments also enhance reporting of hedge funds to provide greater insight into hedge funds’ operations and strategies, to assist in identifying trends, and to enhance data quality and comparability. Firms will be required to report assets under management, withdrawal and redemption rights, gross and net asset values, inflows and outflows, borrowings and types of creditors, and fund performance.

Further, the new change amends how advisers report complex structures to improve the ability of the Financial Stability Oversight Council (FSOC) to monitor and assess systemic risk and to provide greater visibility for both FSOC and the Commissions into these arrangements. Advisers will be required to identify trading vehicles used by reporting funds and to report those trading vehicles on an aggregated basis. The amendments remove aggregate reporting for large hedge fund advisers to lessen the burden on advisers and to focus Form PF reporting on more valuable information for systemic risk assessment purposes.

Insurance Implications

The SEC’s and CFTC’s new rules carry with them new insurance implications for registered investment advisers and commodity pool operators, including hedge funds. These firms very likely have D&O, E&O, or similar management liability insurance in place to protect against claims made by investors, regulators, and other stakeholders alleging errors, misrepresentations, fiduciary violations, and similar mismanagement in the operation of the business. Robust D&O coverage can also mitigate risks to the company and its officers and directors for potential regulatory investigations, enforcement actions, and similar claims concerning alleged violations of SEC and CFTC rules.

The scope of coverage depends on a variety of factors, including whether the claims are against the company or individuals, whether the company is public or private, and the strength of the standard forms and endorsements that make up the policy. For instance, most D&O policies will cover the cost of responding to government investigations or subpoenas issued to insured persons. This can include costs associated with an agency investigation before a formal enforcement action is initiated, including the costs of responding to voluntary requests for information or interviews, preparing for and giving testimony, and responding to subpoenas. However, coverage may be limited or even absent if the investigation targets the company instead of its individual directors and officers.

Numerous other policy definitions, insuring agreements, exclusions, and conditions may impact coverage, including:

• the definition of “Insured,” ensuring that it covers an appropriate group of former and current individuals;
• the definition of “Claim,” including whether it includes coverage for informal investigations initiated by a regulatory agency before a formal enforcement action is filed;
• provisions clarifying that certain coverages will be triggered in the context of government investigations even where a “Wrongful Act” has not been alleged;
• the definition of “Loss,” which may have significant carve outs for fines and penalties;
• exclusions for violations of laws or statutes, intentional conduct, or fraud, including whether it contains a sufficient “final adjudication” trigger to preserve defense cost reimbursement;
• sublimits on particular coverages or claims that may restrict access to the full policy limits; and
• advancement provisions addressing the timing of defense cost reimbursement and the insurer’s right to recoupment, if any, in the event of an adverse determination.

The above examples present only an illustrative list of some high-level considerations that can arise when evaluating potential coverage for government investigations.

Takeaways

The new SEC-CFTC rules may not represent a sea-change of new claims materially impacting the D&O insurance landscape, but they likely represent an incremental change in potential regulatory exposures or, at worst, an opportunity for companies to revisit their future insurance needs as a tool to mitigate those risks. Impacted firms should analyze existing insurance policies before a claim arises to determine whether they may offer protection for violations of the new reporting requirements.

If a person or entity receives inquiries, demands, notices, subpoenas, or other documents concerning potential violations from the SEC or CFTC, as part of the response process they should immediately review any potentially applicable insurance policies to determine what coverage (if any) may be available for the claim and to ensure compliance with the notice requirements under those policies. Additionally, coverage counsel can help insureds obtain appropriate coverage before a claim arises, understand their available coverage, navigate through the claims process, and avoid coverage pitfalls after a claim rises.