On this week’s episode we have Core Compliance’s CEO Michelle Jacko. Michelle is here to speak on conflicts of interest. Our conversation was a little bit of a dive deep into some key issues, so we had to make it into a two-part series.
CCO Buzz: Hello and Welcome Back! We hope your bellies are full and you’re ready for the full force of holiday season. We here at the CCO Buzz are sorry we missed last week – I guess we had a bit too much turkey and lost track of time, but we’re back and ready to discuss the latest in the industry.
On this week’s episode we have Core Compliance’s CEO Michelle Jacko. Michelle is here to speak on conflicts of interest. Our conversation was a little bit of a dive deep into some key issues, so we had to make it into a two-part series. So, to kick it off…enjoy part one.
Michelle Jacko: Hello! This is Michelle Jacko, CEO of Core Compliance & Legal Services. And on this week’s CCO Buzz we are going to be focusing on the importance of identifying and managing conflicts of interest.
If you stop to think about it, conflicts exist in every business. And a conflict actually occurs when a person or firm has multiple competing objectives. So, when this occurs the Securities and Exchange Commission (“SEC”) expects that conflicts are either eliminated or mitigated to avoid harming investors.
If you think about it, conflicts can lead to unethical behavior. You know, if you’re serving one’s interest at the expense of others or concealing information. And when we look to the SEC’s guidance on this, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) have focused their attention on promoting compliance, preventing fraud, identifying and monitoring conflicts. And in order to do so, firms need to develop internal controls to mitigate those conflicts.
Today we are going to evaluate four particular areas that, as you’re going through your checklist of different compliance program initiatives, it’s important to take a moment and step back to think about all the different areas where conflicts can arise.
The first that comes to mind is Personal Trading. When you’re talking about personal trading you have the conflict of self-dealing. That could include areas such as front-running or obtaining a better cost of execution then your clients, or advisors may be considering positions for their own personal account but not of that for the firm’s own clients. Or perhaps the most egregious personal trading violation, which would be trading on inside information.
A lot of times where we see compliance program failures, that could be in the area of failing to pre-clear in accordance to code of ethics, failing to provide annual holdings reports to compliance, either at the time of hire or annually thereafter, and also failing to escalate issues to the Chief Compliance Officer (“CCO”) if a personal trading area of concern arises.
When evaluating this area think about the controls that you have in place to mitigate these conflicts, such as personal trading automation. Whereby you’re able to conduct surveillance or be notified if an individual may have traded on a security where a corporate announcement occurred seven days before, where say seven days after that individual’s personal trade. Think about whether or not, you have a system of controls in place to detect whether or not the individual has actually reported their personal trades at quarter’s end or in a timely basis, particularly if the statements have not been obtained from the broker-dealer custodian.
And also, consider how you’ll be able to demonstrate these controls to the examiners, such as having a new hire orientation at the time of onboarding of new employees that discusses the code of ethics, that gathers annual holding reports, and talks about the importance of not front running ahead of your client accounts.
A second area of conflicts of interests to evaluate are outside business activities. This conflict involves typically the receipt of outside compensation or competing with time interest, providing advisory activities or services for your client accounts.
So, consider this, what efforts are being spent during work hours on an outside business activity other than providing advisory services to firm clients? In those types of situations, that conflict must be disclosed in the Form ADV Part 2B of your investment advisory representatives. The most common situation occurs where an individual may be receiving compensation for his or her outside business activity efforts.
Often times, that individual may be providing services to a firm client. For example, providing advisory services and portfolio management and at the same time, then recommending a security offered through a broker-dealer. Or an insurance product offered through an insurance agency, where that individual happens to serve as a registered rep[resentative] or insurance agent- where by commissions are received by that individual.
Importantly, regulators today are also concerned that an employee’s ownership interest in outside companies are not disclosed to clients. Consider for example, if you have employees that are members of an LLC or perhaps they have a passive ownership interest in a private fund that isn’t disclosed on their Form ADVs or to the firm in general, that would be deemed as a conflict of interest.
When you’re looking at compliance controls, think about your supervisory efforts to oversee outside business activities. Are you doing enough? Are you aware of the outside compensation and conflicting interests of that individual? And what are you doing to mitigate those conflicts?
CCO Buzz: Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn or Twitter @CoreCLS. Thank you and we hope you tune into next week’s episode of the CCO Buzz.