Investment advisor and security broker bonds are a subset of the broader license bond category that must be filed with the state government agency responsible for regulating investment services in the advisor’s jurisdiction as a condition of licensure for most investment advisor or security broker dealer firms. Security broker/dealer bonds are also commonly referred to as Blue Sky Bonds. While investment advisor and Blue Sky bonds are similar in nature, Investment Advisor bonds are required for investment advisors registered with the Securities and Exchange Commission (“SEC”) while Blue Sky bonds are required for securities brokers/dealers registered by the Financial Industry Regulatory Authority (“FINRA”). Most states require licensing in addition to the SEC and FINRA registration requirements.
Investment advisor bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as an investment advisor bond, will also be referred to as the “surety company” or the “bond company”. Investment Advisor license bonds refer to the advisor or securities dealer as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Investment advisors are required to purchase license bonds by state statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from an advisor or dealer breaking state securities and investment regulations. The surety company provides the government a guarantee (the surety bond) that the customers of a licensed investment advisor or dealer will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, advisors and brokers are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Investment advisor or broker bond violations triggering a bond payout may include an advisor or broker providing false representation, breaching fiduciary duties, or violating federal securities law .
Investment advisor bonds generally cost between 1% and 10% of the bond limit.
|Credit Score||Premium Rate||Bond Cost|
|800 or above||1.0%||$100|
|650 - 799||1.5%||$150|
|625 - 649||3.0%||$300|
|600 - 624||3.75%||$375|
|550 - 559||5.0%||$500|
|500 - 549||7.5%||$750|
|499 or below||10.0%||$1,000|
The actual cost of a specific investment advisor bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the advisor’s license history, experience and creditworthiness.
Credit checks are required for investment advisor or broker bonds. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and investment advisor (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the investment advisor via higher bond premiums, stricter underwriting or collateral. The primary text to consider in an investment advisor bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 investment advisor bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Investment advisor bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the investment advisor and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the investment advisor failing to pay premiums due, claim payouts, or material changes in the advisor’s credit score. Investment advisor bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Investment advisor bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.
To find information on specific investment advisor bonds, select the state to find any requirement across the country.