The days when firms could write off regulatory fines as the cost of doing business are long over. Both the financial penalties and the reputational damage are too costly in the current regulatory environment.
According to the 2023 Starling Compendium, firms must have processes in place to prevent misconduct from happening in the first place.
Conflicts of interest are at the core of many regulatory compliance issues. But solely reacting to conflicts of interest after the fact is not enough to meet regulatory expectations. Taking a predict and prevent mindset around managing conflicts of interest can provide the proactive approach that regulators are looking for—and the right technology can provide the means to get there.
“It is no longer acceptable for firms and their leaders to remedy misconduct after the fact. Instead, they are increasingly expected to prevent misdeeds or mishaps from occurring. This push comes both from aggrieved shareholders, tired of bearing the attendant costs, and in the form of regulatory and legislative requirements that seek to establish a ‘duty’ to prevent stakeholder harm.”
—Starling Compendium 2023
Conflicts arise when an employee’s personal interests can impact their conduct in the workplace. When employees give in to the temptation to act in their own best interests to the detriment of the firm and its clients, both the individual and the organization are subject to fines, loss of business and reputational damage. Read more about examples of conflicts of interest in the financial services industry.
Conflicts of Interest Remain in the Regulatory Spotlight
And regulators are paying attention. In recent months the SEC has sanctioned several firms and individuals for failure to provide full and fair disclosures regarding conflicts of interest, including for overcharging fees and failing to disclose fee calculation conflicts, failing to disclose a relationship with another company that involved asking for a personal favor, and failure to disclose personnel ownership in sponsors of special purpose acquisition groups (SPACs) in which the firm into advised its clients to invest.
According to Andrew Dean, Co-Chief of the Enforcement Division’s Asset Management Unit, “Investment professionals must be forthcoming about any conflicts of interest they may have with the companies in which they invest client funds, including situations involving favors or assistance to family members. Investors must be able to know that the advice they receive is free of undisclosed conflicts, regardless of whether the conflict is financial in nature.”
The SEC Chair recently released their Spring 2023 Regulatory Agenda, with 50+ rules at the proposed or final stage. Join MCO and Virtus LLC for a webinar that will provide insights and practical guidance on how SEC rule-making activity will impact your compliance program.
Culture Matters
"Focus must shift from rules to the organizational culture and values that drive behavior and set the conditions for inevitable performance outcomes, predictably."
—Starling Compendium 2023
Even the most comprehensive policies and procedures are of no use when employees don't follow them. In an essay in the Compendium, Eva Hüpkes, Head of Regulatory and Supervisory Policies at the Financial Stability Board (FSB) writes that "the financial crisis of 2008 exposed deep-seated flaws in the financial system. The crisis highlighted the importance of governance and ethics in finance, and policymakers subsequently sought to promote higher standards of corporate governance, industry culture, ethics, and trust. So why have regulatory reforms to date failed to prevent governance failures?”
See how MCO provides firms with a framework for comprehensive regulatory governance and oversight of compliance obligations.
Join MCO and Michael Rasmussen from GRC 2020 for a webinar designed to help compliance put the theory of a culture of compliance into practice in a way that’s pragmatic—and that can be evidenced to regulators.
Compliance technology and metrics help firms take a more forward-looking view
According to the Starling report, implementing reliable metrics provides firms with disclosable leading indicators of non-financial risks so that they can be addressed proactively. Utilizing tech-enabled methods allows firms to manage and supervise non-financial risk and compliance challenges with more success, and to establish reliable reporting tools to gauge progress and prompt real-time corrections of course.
MyComplianceOffice provides firms with a fully integrated suite of Employee Compliance solutions to monitor, identify and remedy code of conduct and conflict of interest issues.
- Our comprehensive system helps firms take a proactive approach by allowing for preventative pre-approvals.
- Having a centralized data source allows firms to develop an understanding of conflicts of interest across the organization, in areas including personal trading, gifts and entertainment, outside business activities and authorizations, registrations and licensing.
- Looking at data in aggregate can help the compliance team identify whose behavior is outside the norm and predict who might be on the path to bad behavior to be able to mitigate the situation before harm can be caused.
- Easy to use interfaces and standard processes, along with alerts and reminders for both the employee and the compliance team, help to keep compliance on track.
If employees clearly know what is expected of them—and are given the technology to meet those expectations easily and efficiently—compliance becomes a part of the everyday culture and operations of the firm.
At MCO, we recognize the need to operationalize employee conflict of interest policies and embed them into everyday processes. Our affordable solutions drive efficiency and help to establish consistent and repeatable compliance. Set up a demo to learn more.
