In the 2022 fiscal year, the SEC filed 760 enforcement actions, up 9% from the previous year, including several addressing undisclosed conflicts of interest. For example, the SEC charged one investment adviser with a conflict of interest and fiduciary duty breach in July 2022 which resulted in the firm paying a $5.8 million civil penalty to impacted clients.
Regulations change often, so it’s of utmost importance that your firm implement formal compliance policies and procedures to make sure you keep up. Your team is probably told to follow a Code of Ethics, whether it’s one aligned with the SEC, FINRA, FCA, state regulators or another governing authority.
But no matter how hard your compliance team works to keep your firm’s operations all above board, there will inevitably come a time when you have to manage a conflict of interest breach. You may have an employee who incorrectly self-reports or, worse yet, fails to report an activity altogether. If that’s the case, your compliance department may come across the breach through an internal inspection – or you may end up finding out when the SEC orders you to pay a hefty fine.
However a breach comes to light, every firm needs to know what to do next.
What to do when a conflict of interest breach is discovered
Before jumping to conclusions or taking impulsive action, it’s important to gather the facts. Make sure your compliance team and key leaders have all the relevant information and details before moving forward. Let the employee in question know you are aware of the situation and allow them to provide a response or any other documentation that may help shed light on the issue.
Throughout the process of managing a breach, be sure to document the situation thoroughly and maintain contact with anyone who needs to be notified both internally and externally.
Remove the conflict
Once you’ve identified an issue, it’s important to follow through and remove the conflict. Whether the employee receives disciplinary action or not, you still need to document the breach and remedy it as soon as possible. If you are questioned by regulators, it will be helpful to have a paper trail indicating when the conflict was identified, what your due diligence process looked like and how it was handled.
Implement appropriate consequences
When determining how to handle the offense, look first to the underlying policy which governs your conflict of interest reporting procedures. If your internal Code of Ethics provides specific consequences for violating policies, follow that first.
Consequences may have varying degrees of severity depending on the frequency or type of offenses. But in some cases, policies are vague. The only direction you may be given could be something like, “Violations may result in disciplinary action up to, and including, termination of employment.” In this case, it isn’t clear whether or not to take more or less severe disciplinary action.
If the person in question has been a model employee thus far and clearly did not intend to violate policy, your leadership team may find termination to be too harsh of a punishment. But if the employee has a history of testing your policy limits or took steps to conceal their actions, it may be in the company’s best interest to let them go.
Send out a reminder of the rules
The most effective way to avoid future conflict of interest breaches is to remind employees of your firm’s policies and procedures.
While new employees are often presented with the firm’s Code of Ethics at the beginning of their employment, they’re often barraged with information in a short amount of time. Unless you’re reiterating your compliance policies regularly, it’s easy for this information to be forgotten over time.
Aside from regular trainings, anytime there’s a major compliance breach is a good opportunity to remind employees of the rules. It can be especially effective now since they can see your leadership team’s clear commitment to enforcing these policies in real-time.
How to prevent a future conflict of interest breach in 2023
Your code of ethics and conflict of interest policies are critical steps to protecting clients from dishonest practices which could lead to missed opportunities or bad investments. Following and enforcing these policies is something everyone in your company should be on board with, especially your key leaders and management team.
When a breach or violation occurs, look to your policies for guidance, and implement disciplinary actions designed to address and correct the behavior. If you haven’t yet developed a formal procedure for policy breaches, consider adding this task to the top of your to-do list.
The good news is that you don’t have to manage compliance process development or monitoring all on your own. ComplySci makes it easy for compliance teams and managers to monitor, verify and mitigate employee trading risk to help prevent conflict of interest breaches before they happen.
Want to learn more about how ComplySci can amplify your compliance efforts? Book a demo today.