Anyone involved in the compliance function for a financial services firm knows they need to be mindful of, and watchful for, potential conflicts of interest – whether real or perceived. Likewise, for example, CCOs at firms subject to the DOL’s Fiduciary Rule know that the stakes were raised on June 9, 2017 when the new rule took effect. In addition to firms’ existing disclosure requirements, the Fiduciary Rule requires clear and full disclosure any time there is a potential for a conflict.
Recognizing the need to manage conflicts and actually doing so are two different things. Most firms have a formal Code of Ethics or Code of Conduct governing employees’ behavior. However, relying solely on the Code of Ethics can leave organizations vulnerable, as the scope of potential conflicts goes well beyond the reach of many such documents.
Firms can lower their risk by formalizing the conflicts management process. This may involve establishing a separate department or subset of the compliance department, or it may simply mean taking a more deliberate approach, and leveraging compliance technologies to help ensure potential conflicts of interest are identified, reviewed and addressed. Using defined workflows and reporting can also help ensure that senior management and the board of directors are kept apprised of real or perceived conflicts.
Getting to the Heart of Conflicts
Conflicts can arise in a multitude of ways involving employees, clients, vendors and the firm itself. Compliance officers need to be aware of situations when a relationship could potentially impair an employee’s ability to be objective, create an unfair advantage, result in unfair personal gain, or even damage the firm’s reputation.
One of the biggest challenges CCOs grapple with is how to find out about potential conflicts in the first place. Most firms already have policies and processes in place for employees to report on things like gifts and entertainment or outside employment, both of which can give rise to conflicts. However, historically, many organizations haven’t been very good about diving deeper, asking about possible family relationships or other scenarios that could be perceived as a conflict.
The challenge for compliance officers and their teams then is how to identify self-dealing, nepotism, kickbacks, insider trading and any other sort of relationship that could create the potential for conflicts – and how to manage them.
The Case for a Formal “Conflicts” Program
Some organizations have implemented formal “Conflict of Interest” programs, with designated Ethics Officers. Doing so can help with instilling and fostering a culture of compliance. Another benefit is it provides employees an increased awareness of, and accountability for, potential conflicts.
Such programs typically include formally-documented conflict policies and procedures, employee questionnaires, channels for employee self-reporting, mechanisms for compliance monitoring and oversight and periodic acknowledgements and certifications of compliance. In firms with well-functioning conflict policies, regular and routine reports keep senior management and the board apprised of trends on a quarterly and annual basis. Individual issues are escalated as needed.
Designating a separate individual or team inside the firm with responsibility for reviewing, evaluating and reporting on conflicts of interest can go a long way toward demonstrating that the firm takes its regulatory obligations seriously, in the event something does slip through the cracks or the firm is under scrutiny.
Whether a firm chooses to formalize its conflict avoidance program or folds those responsibilities into the scope of the existing compliance department, using compliance systems to help with the capture, monitoring and reporting functions is key. There are simply too many moving pieces to rely on paper-based systems or spreadsheets to manage conflicts of interest effectively. Even in a firm where every employee was compliance-minded and self-reported all potential conflicts, using manual processes to review and track conflicts is fraught with the potential for errors.
Using technology to track conflicts allows compliance personnel to get to the underlying data quickly and easily, providing either a bird’s-eye view that can help identify trends, or detailed reports containing information the firm will need when creating or updating disclosure documents.
Having a formal system for employees to report potential conflicts, and establishing workflows and processes for reviewing and maintaining records, is critically important, regardless of who in the firm is reviewing and acting on reported information.
When you implement processes that make managing conflicts of interest easier on your employees and the firm itself, everyone benefits. As with the rest of your compliance program, the specific steps you take should be geared toward you firm’s size, products or services you offer and the potential risks that come with those offerings.