At StarCompliance, we focus on employee conflicts of interest almost exclusively and as a result we spend a great deal of time thinking about conflicts of interest issues and how we can automate a solution for our clients. That being said, it is our opinion that compliance officers should be thinking about some of the following issues and ensure that they have not only the right policies and procedures, but also a 21st century way to monitor, detect and prevent potential violations.
The real challenge for compliance officers these days is to “see over the edge of the horizon” to see the issues coming so that your firm is prepared the next big issue. When ferreting out conflicts of interest, the old adage always seems to work: follow the money, which is just what regulators are expecting compliance officers to do. For many years, regulators examining investment firms for conflicts of interest focused particularly on issues relating to personal trading and gifts and entertainment. But over the past few years, we have seen the regulators take an expanded view of potential conflicts of interest issues to include outside business activities, political contributions and other items.
Examples of items that fall into this category include spouses or friends with significant positions at publically traded companies or friends and family that work on trading desks. The potential conflicts of interest issues are endless for large companies and the best way manage this process is through the use of better and smarter technology to inquire of key individuals to uncover any potential conflict. Also, this is NOT a one and done process, because as we all know, relationships come and go and firms need to be vigilant to have a process in place to update the data in the system to be current and up to date.
The first area that we see coming over the edge of the horizon is an extrapolation of the current regulatory focus on private funds. The issue coming over the edge of the horizon pertains to mutual funds and whether investment managers have a robust process in place to ensure that managers do not inappropriately allocate expenses to the mutual funds instead of the adviser absorbing those expenses.
The second area that we see coming over the edge of the horizon relates to employee activity. This may not seem like a “future” issue since firms already monitor many different areas for conflicts, but many firms may not currently be focused on ensuring that their insider trading policies and procedures are strong enough to ensure that employees are not engaged in insider trading separate and apart from front running. It is critical for any compliance program to have the right policies, but an effective compliance program must also have the ability to monitor, prevent and detect violations of the firm’s policy. This issue is one that many firms have focused on from the company perspective, but not necessarily from the individual (employee) perspective outside of comparing the employee trading versus the firm’s transactions on behalf of the company. Firms should ensure that their employees are not engaged in any illegal activity and that technology solutions are preventing and detecting employee insider trading, not just front running. Compliance professionals need to be asking: can we evidence that the monitoring program for employee insider trading is as effective as any other significant part of our compliance program?
The third area that we see coming over the edge of the horizon also pertains to employee activity and relates to certifications and attestations of company policies and procedures. If firms are attempting to manage their books and records obligation manually, there is a high likelihood that they cannot properly evidence that their employees have affirmatively reviewed and acknowledged their relevant policies and procedures. With the right technology and processes in place, this is an easy issue to avoid. The documentation that technology solutions produce can prevent a problem when there is a compliance event.
The last area that we see coming over the edge of the horizon also relates to employee activity. Compliance professionals in the financial services industry should look carefully at their policies and procedures as they relate to the Foreign Corrupt Practices Act (“FCPA”) and for global firms, the UK Bribery Act. While many may think that this is outside of the typical securities laws, there is always the risk of inappropriate inducements (gifts and entertainment) to secure contracts, gain entry into new markets etc. Firms need to not only have strong policies but also a strong training program, as well as a process in place to detect potential violations of the policy.
We would love your feedback on the evolving world of conflicts of interest issues. The next update of “Can You See Over the Edge of the Horizon” will focus on global compliance matters and emerging global compliance issues.
StarCompliance is a technology company focusing on employee conflicts of interest issues, and provides solutions for many of the issues that we view as emerging and critical. StarCompliance has the tools to help monitor, prevent and detect violations in a format that can be customized for your compliance needs.
