Monday, December 3, 2012

Controlling Conflicts of Interest

Two of the leading regulators’, the SEC and FSA, have voiced concerns about conflicts of interest.

The SEC took a broad look at conflicts of interest in all sectors of the financial industry with particular focus on broker dealers and financial advisors. Conflicts of interest arise in a broad variety and potentially cause big damage. The SEC therefore includes them in their key risk analysis. Financial intermediaries are called upon to constantly identify conflicts of interest, establish compliance and ethics programs and integrate them in the overall risk management framework. Effective policies and procedures must cover a wide range of topics like staff education and training, incentives, persistent identification of conflicts of interests, senior management commitment, monitoring and auditing, as well as enforcement.
The FSA researched the management of conflicts of interest of asset managers. It identified good and bad practices in the purchase of research and trade execution services, gifts and entertainment, access to investment opportunities, employee trading for personal accounts, and the allocation of cost of errors. The FSA concluded that a firm’s culture makes the crucial difference. Senior management must constantly demonstrate its commitment. And business and compliance functions must work together in monitoring and mitigating conflicts of interest to achieve best results.
The FSA found a number of shortfalls in the current management of conflicts of interest and has announced follow-up measures. Other regulators might follow this initiative of the FSA and the SEC for the proper management of conflicts of interest. It is certainly worth reviewing respective practices now.
SEC: 'Conflicts of Interest and Risk Governance', speech by Carlo V. di Florio (
FSA: 'Conflicts of interest between asset managers and their customers: Identifying and mitigating the risks (

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