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Advisors: Do You Know Where Your Conflicts Are?


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Written by: Elin Cherry | Compliance Risk Concepts 

Wikipedia is not always considered a reliable source, however, I quite like Wikipedia’s definition of Conflict of Interest.

Conflict of Interest according to Wikipedia: “A situation in which a person or organization is involved in multiple interests (financial, emotional, or otherwise), one of which could possibly corrupt the motivation of the individual or organization.”

On the other hand, defines Conflict of Interest as:

Conflict of Interest according to “The circumstance of a public officeholder, business executive, or the like, whose personal interests might benefit from his or her official actions or influence.”

Merriam or definitions of Conflicts of Interest are muddled and unclear. No matter how you define Conflict of Interest, Conflicts have become a buzz phrase by financial regulators. It seems as if you can’t read a new rule, regulation or enforcement action and not find a reference to Conflicts of Interest.

Andrew Bowden, Head of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations, has stated that his No. 1 piece of advice for firms is to decide their ethical standard, and there is no law that directly addresses ethics. He went on to state that the overwhelming majority of people in the industry are trying to do the right thing in a competitive, complex environment, however in regard to Conflicts of Interest, there can be good people trying to do the right thing that can be blinded and convince themselves that they are in the right – no one is immune to conflict. Conflicts of Interest will remain one of the top priorities of the SEC in 2015.

In addition, Conflicts of Interest is one of the five main areas that contribute to compliance and supervisory breakdowns in FINRA’s 2015 Regulatory and Examinations Priority Letter. FINRA goes on to say, Conflicts of Interest are a contributing factor to many regulatory actions FINRA (and other regulators) have taken…” FINRA emphasized the importance of firms moving to identify and mitigate Conflicts of Interest.

The CFTC as well has now implemented specific regulations regarding Conflicts of Interest for Swap Dealers. The Conflicts of Interest rules require additional disclosures of potential Conflicts of Interest and separation of certain business units. Specifically, the rules require that research analysts are separate from non-research personnel and that clearing functions are separate from affiliated business trading units.

What is clear, other than the regulatory focus, is that firms need to proactively address and mitigate known Conflicts of Interest. In addition, firms should take steps to identify Conflicts that may not be easily identifiable. By undertaking a Conflicts of Interest Review firms are headed in the right direction of creating an ethical standard – as well as creating a Culture of Compliance within the Front Office. A Conflicts of Interest review should include a business unit review and policy and procedure review.

Conflicts of Interest

The business unit review should incorporate business unit meetings including senior business unit management, business unit compliance representatives, senior compliance representatives and legal. The meeting agenda should include a discussion of each of the types of conflicts identified by FINRA and whether or not those conflicts exist within the business, and if so how the conflicts are mitigated.

The policy and procedure review would include: compliance policies, procedures, training, and compliance forms (such as outside business activities). This portion of the Conflicts Review would consider whether identified conflicts as well as prohibited and restricted conflicts are covered within relevant policies and procedures.

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