Trade Errors Spike in 2020

With a significant increase in Trade Error claims submitted in 2020, we felt it both timely and important to provide some insight as to what actions RIA firms are undertaking around the country to mitigate this risk. From a sample of approximately 3000 advisory firms, trade error claims increased by 500% for the period of March-May 2020 vs. the same 2019 prior period.

What is a Trade Error?

A trade error can be defined as an erroneous execution or failure to execute an order to transfer, purchase or sell securities by an insured on behalf of a client. For example:

• Failing to implement a change in an allocation as discussed with a client.
• Allocating client funds into the market when such was purposed to remain as cash (typically these funds are expected to be used within a year for an asset purchase).
• Unintentionally selling out of a legacy stock position.
• Purchasing more shares of an investment vehicle than intended.
• Purchasing the wrong investment vehicle due to an incorrect ticker symbol.

How might an RIA firm mitigate Traded Errors?

Many firms have implemented the following procedures to reduce the likelihood of a trade error occurring and to quickly identify a trade error occurrence.

• Reconciling trades at the end of the day to make sure trades were executed as intended.
• Limiting the number of individuals with trading authority.
• Notifying custodians of software/platform issues to minimize the amount of manually executed trades.
• Having a designated individual who reconciles trades at the end of a trade day.

Are Trade Errors a Covered Event Under E&O Insurance?

While many E&O insurance carriers have the capability to provide coverage for execution errors, it is important to note that it is something that must be specifically negotiated and structured by your representative broker. Most business insurance types are highly commoditized because insurance companies have agreed to use standardized contractual language recommended by the Insurance Services Office, who act somewhat as the insurance industry’s governing body. Because the investment industry is continually ever-changing and unique, ISO has maintained the position that they will not establish an industry-standard RIA E&O contract (the fine-print), leaving it up to each carrier to author their own proprietary contract. As a result, each carrier treats the subject of trade errors differently. There are carriers that include trade errors in their definition of a claim, there are others for which such must be endorsed, and there are carriers that specifically exclude. To ensure that your coverage would respond to an execution error incident, it is important to consult with a specialist in the industry to affirm coverage, amend it to include coverage, or seek an alternative that responds to this type of event.

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.

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