Do you or any of your partners, members, managers, officers, directors, employees, or associated professionals act as a director, partner, member, manager, officer, employee, or any other position of control for any organization in which customers are solicited to invest?
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Why the carrier asks
This question helps the insurance carrier evaluate the risk of conflicts of interest that arise when you or your colleagues hold a position of control in an outside organization that your firm also recommends as an investment to clients. Such a dual role can compromise your impartiality, as your personal or financial interest in the outside organization could influence your advisory duties, increasing the risk of E&O claims for biased advice.
Key terms
- What is a "Position of Control"? This refers to any role where you have influence or decision-making power within an organization. This includes formal roles like a director on a board, a partner with an ownership stake, or an officer (CEO, CFO), but it can also include any managerial or employee role that gives you significant authority over the organization's direction or operations.
- What is an "Organization in Which Customers are Solicited to Invest"? This is any company, fund, partnership, or other entity for which your firm actively encourages, recommends, or markets investment opportunities to your advisory clients.
How to answer
To answer this, you must determine if anyone at your firm holds an influential role at an outside company that you also recommend to your clients as an investment. Consider two things:
- The Role: Does anyone at your firm (including you, partners, officers, etc.) act as a director, partner, manager, or hold any other position of influence at an outside entity?
- The Investment: Does your firm recommend or solicit investments from your advisory clients into that same outside entity?
If both of these conditions are met, you must answer "yes." If this situation does not exist, you can answer "no."
Common mistakes
- Mistake: Thinking an "employee" role isn't a position of control.
- Even a standard employee role could be considered a position of control if it involves significant influence over the organization's direction or products. The key is whether the role could create a conflict with your advisory duties.
- Pitfall: Believing that if the investment is suitable, there is no conflict.
- The conflict exists because of the dual role, regardless of the investment's quality. Your relationship with the outside organization could be seen as the primary motivation for the recommendation, even if the investment itself is sound.
- Mistake: Forgetting to ask all relevant personnel at your firm.
- This question is broad and covers everyone from partners to employees. You must make a reasonable inquiry across your firm to identify any such relationships.
Frequently asked questions
What information will I need to provide if I answer "yes"?
You should be prepared to describe:
- The person at your firm who holds the position.
- The name and nature of the outside organization.
- The specific position of control held (e.g., director, partner).
- How your advisory clients are solicited to invest in that organization.
- What disclosures you have made to clients about this conflict of interest.
I am on the board of a local non-profit, and I sometimes encourage clients to donate. Does this count?
This is a gray area and should be discussed with your agent. While charitable donations are different from investments, if you are providing formal advice related to a large donation, a conflict could still exist. Transparency is the best approach.
My firm recommends a mutual fund, and one of our junior analysts used to work for that fund company. Is that a conflict?
Generally, no. A past employment relationship, especially for a junior employee, would not typically be considered a current position of control. The question focuses on current, ongoing roles that create a present conflict.
This guide explains what application questions generally ask and how carriers tend to read the answers. It isn't legal advice or a coverage determination: your carrier's application and policy wording control. When you're unsure how to answer, ask your broker before you sign.
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