Conflict of Interest Disclosures: Managing Policies

Managing conflict of interest policies

Homegrown conflict of interest policies often read like a shopping list of every scenario the company failed to consider in the prior versions of the policy. The fact that both the appearance of and the potential for abuse, irrespective of whether any abuse actually takes place, still takes you out of compliance, makes any comprehensive policy on conflicts of interest an extremely complex target. The National Conference of State Legislatures, for example, lists fifty different working policies on conflict of interest, with some States settling for a few paragraphs, and others extending to multiple pages.

In the financial sector, the role played by Credit Rating Agencies (CRAs) in the 2008 collapse in mortgage-backed securities in the US, led to detailed attention to the problem in the 2010 Dodd-Frank Act. Even though the 2006 CRA Reform Act took steps to reign in problems with conflicts of interest by forcing CRAs to register with the SEC and submit activity reports, the rating agencies continued to receive revenue from investment firms to issue allegedly impartial and objective ratings on the bundles of mortgages they were being paid to assess. In addition to requiring publication of rating methodologies and historical performance of ratings, Dodd-Frank paid particular attention to the question of conflict of interest for CRA compliance officers.

Under Dodd-Frank, compliance officers could no longer participate in the determination of ratings, the development of rating methodologies, or receive compensation linked to the financial performance of the CRA. Annual compliance reports to the SEC were now required annually, with the promise of further restrictions on sales and marketing activities and empowering the SEC to revoke CRA registrations for violations of these new policies.

The fact that legislation was required to stipulate that compliance officers should not have their pay linked to how much money the company was making, gives some indication of how far out of the realm of ethical conduct a business can fall without appropriate oversight. The metaphor of a fox guarding the hen house would seem to be appropriate when that fox is compensated according to the number of hens in that hen house.

Creating a conflict of interest policy by making a list of all of the possible scenarios that might appear to be, or indeed could be, inappropriate could mark the beginning of a very risky project. Compliance with the existing rules and regulations of the respective industry agency under which you operate must be a given, but assuming that your ethical company can imagine all the different ways that your operation could be led off the rails by one unethical employee is a huge assumption.

Without structured processes to manage the creation, review, revision and approval of such policies, potential conflicts of interest can undermine the integrity of your business. When the appearance of inappropriate conduct can carry as much weight as the actual conduct, the potential for such transgressions should be contained by a robust management system built on years of experience rather than the ability of your own team to anticipate all of the possible ways to take your company out of compliance.

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ConvergePoint (www.convergepoint.org) is the leading provider of compliance software solutions on the Microsoft SharePoint platform.Compliance products offered include Policy Management Software,Contract Management Software ,Conflict of Interest Disclosure and Employee Health and Safety Training Management Software.