40-17G: NexPoint Funds Secure $6,025,000 Blanket Bond for Asset Protection

NexPoint Funds I has secured a blanket bond with a limit of liability of $6,025,000 to protect against various risks including fraud, forgery, and computer security breaches.

Summary

• NexPoint Funds I has obtained an investment company blanket bond from ICI Mutual Insurance Company, a Risk Retention Group.
• The bond provides coverage for various risks, including fidelity, audit expenses, on-premises losses, in-transit losses, forgery or alteration, securities losses, counterfeit currency, uncollectible items of deposit, and phone/electronic transactions.
• The total limit of liability for most insuring agreements is $6,025,000, with varying deductible amounts.
• Additional coverage is provided for computer security with a $6,025,000 limit and social engineering fraud with a $1,000,000 limit.
• The bond period is from December 15, 2024, to December 15, 2025.
• The bond includes multiple riders that modify and expand the coverage, including coverage for newly created investment companies and specific types of redemptions.
• The bond also includes an agreement among the insureds to ensure equitable distribution of any recovery.

Sentiment

Score: 8

Explanation: The document outlines a standard and necessary insurance policy for an investment company, indicating a proactive approach to risk management. The comprehensive coverage and inclusion of relevant riders are positive signs.

Positives

• The bond provides comprehensive coverage against a wide range of potential losses.
• The inclusion of riders expands coverage to include computer security and social engineering fraud.
• The automatic increase in coverage for Insuring Agreement A ensures compliance with regulatory requirements.
• The bond includes provisions for reduced deductibles for certain types of redemptions, which can reduce the financial impact of smaller losses.
• The agreement among insureds ensures equitable distribution of any recovery.

Negatives

• The bond has various deductible amounts that the insured must bear before coverage applies.
• Certain types of losses, such as those related to terrorism, are subject to limitations under the Terrorism Risk Insurance Act.
• The bond does not cover all types of losses, such as those resulting from war or nuclear events.
• The bond has specific exclusions for certain types of transactions and activities.

Risks

• The bond may not cover all potential losses, particularly those related to cyber attacks or social engineering fraud that circumvent security procedures.
• The bond has specific exclusions that could leave the insured vulnerable to certain types of losses.
• The Terrorism Risk Insurance Act could limit the amount of coverage available in the event of a certified act of terrorism.
• The bond has a maximum aggregate limit of liability for losses caused by online transactions of $6,025,000 for the bond period.

Future Outlook

The bond provides coverage for the next year, with provisions for automatic increases in coverage under Insuring Agreement A up to $6,150,000 if required by the Investment Company Act of 1940. The bond also includes a provision for newly created investment companies.

Management Comments

• The Board of Trustees and Board of Directors of the Funds have deemed the Joint Fidelity Bond to be adequate as to the type and amount for the Funds.
• The officers of the Funds are authorized to increase the amount of the Joint Fidelity Bond coverage from time to time to ensure adequate coverage based upon the value of each Funds assets and to enable the Funds to remain in compliance with the 1940 Act and the rules promulgated thereunder.

Industry Context

This type of blanket bond is standard practice for investment companies to protect their assets and comply with regulatory requirements under the Investment Company Act of 1940. The inclusion of riders for computer security and social engineering fraud reflects the increasing importance of these risks in the financial industry.

Comparison to Industry Standards

• The coverage limits and types of risks covered are generally consistent with industry standards for investment company blanket bonds.
• The inclusion of specific riders for computer security and social engineering fraud is becoming increasingly common due to the rise in cyber threats.
• The automatic increase in coverage under Insuring Agreement A is a standard provision to ensure compliance with the Investment Company Act of 1940.
• The bond's structure and terms are similar to those used by other investment companies, such as those insured by Chubb or Travelers, which also offer blanket bonds with similar coverage and riders.

Stakeholder Impact

• Shareholders are protected by the bond against losses due to fraud, dishonesty, and other covered risks.
• Employees are indirectly protected by the bond, as it helps ensure the financial stability of the company.
• The bond provides assurance to creditors and other stakeholders that the company has taken steps to mitigate financial risks.

Next Steps

• The insured will need to maintain compliance with the terms of the bond, including maintaining security procedures.
• The insured will need to monitor the value of their assets to ensure the bond coverage remains adequate.
• The insured will need to provide annual reports to the underwriter listing newly created investment companies.

Key Dates

Keywords

blanket bond, fidelity bond, investment company, insurance, risk retention group, fraud, forgery, computer security, social engineering, cybersecurity, securities, loss, coverage, deductible, liability