Intentional and unintentional conflicts of interest are nothing new in the world of finance, but a recent instance of alleged fraud serves to underscore how damaging these cases can ultimately.
In this particular case, Mario Hinojosa and his wholly-owned municipal advisor, Barcelona Strategies LLC ("Barcelona"), misrepresented their actual level of municipal advisory experience and failed to disclose conflicts of interests to a Texas school district client, including that Hinojosa had a financial interest in the school district's offerings. The SEC found that these failures prevented the school district from making an informed decision when it hired Barcelona. Barcelona disgorged fees earned, paid a substantial fine and Mr. Hinojosa agreed to be barred from association with any municipal advisor or other regulated entities. You can read more about this story here.
Conflicts of Interest Are Common Sources of Trouble for Many Firms
One could say that compliance falls into a variety of categories, and one category that more often than not leads to surprise and trouble for firms is the issue of conflict of interest.
Conflicts of interest, simply put, have the potential to seriously harm clients. Though we live in an era of increasing regulatory scrutiny, conflicts of interest have a unique ability to fly under the radar because they're often only discovered after the harm has already been caused. Conflicts of interest, when hidden, often lead to even more violations as the perpetrators attempt to cover up their actions, as was the case with John Rafal, former president and CEO of Essex Financial Services, Inc.
These cases are costly - well over $300,000 for Mario Hinojosa, well over $500,000 for John Rafal. In both cases, their firms suffered heavily (or were done away with entirely), and in both cases, the individuals involved had to find new lines of work.
Take the Time Necessary to Identify Areas of Potential Conflict of Interest
While the cases above are unique examples, firms routinely find that they are unaware of potential conflicts of interest until they look closely at themselves, their employees, their fellow executives, and view operations from the perspective of regulator.
We strongly encourage clients to examine potential conflicts of interest, both as a routine compliance step and also as part of a larger, enterprise-wide risk assessment. Conflicts of interest are a huge potential risk for a firm of any size, and no one wants to be blindsided when a regulator identifies a conflict that was not previously disclosed.
Identifying conflicts of interest requires a thorough understanding of a firm's business operations. Attempting to think just as regulators would can help firms recognize potential conflicts. Beyond that, there are some specific suggestions that may help your firm avoid regulatory problems and the types of issues discussed in the SEC cases above.
Robert D. Conca is a Partner at Jacko Law Group, PC. His practice includes representation of investment advisers, broker-dealers, private funds, and non-financial industry companies, and their personnel, in a variety of ...
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