Failure to properly disclose conflicts of interest and failure to properly discharge a firm's fiduciary duties -can result in costly penalties.
In a one such case, Merrill Lynch, Pierce, Fenner & Smith ("Merrill") recently agreed to an $8.9 million settlement with the U.S. Securities and Exchange Commission ("SEC").
The firm was charged with failure to disclose a conflict of interest in which its own business interests improperly influenced decisions of whether to continue offering its clients products managed and offered by an outside third-party advisory firm.
Conflict of Interest and Breaking from Standard Procedure
According to the SEC, the third-party manager contacted Merrill executives in an attempt to persuade them not to terminate specific product offerings by appealing to its "overall business relationship" with Merrill and a break in ordinary practices soon followed.
As a result, the governing committee at Merrill broke from its customary procedures by deferring a vote on termination of the third-party services. The hold on those services, which was placed due to management changes at the third-party, was later lifted, and the third-party products were again offered to new Merrill customer accounts.
SEC Finds a Conflict of Interest and Failure to Disclose
The SEC's order found that Merrill Lynch failed in its duty to disclose this conflict of interest, and its deviation from standard decision-making process to its customers resulted in depriving customers of their right to unbiased financial advice.
Marc P. Berger, Director of the SEC's New York Regional Office, described the effects of the firm's actions in this statement:
"Retail clients must feel confident that their advisers are eliminating or disclosing such conflicts and fulfilling their fiduciary duties."
Ensuring Compliance: Identifying and Disclosing Conflicts of Interest
When dealing with potential conflicts of interest and ensuring your firm is properly upholding its fiduciary responsibilities, internal examination and introspection is key.
Is your firm:
- Reviewing its internal controls on how the firm identifies and mitigates risks related to conflict of interest?
- Reviewing its policies and procedures on how and where potential and actual conflicts of interest are disclosed to clients and prospects?
- Reviewing its processes for monitoring any potential conflicts of interest before trouble arises?
Once a conflict of interest is detected, it should be escalated to senior management for review and mitigation considerations. If the conflict cannot be eliminated, it should be promptly disclosed to clients, which is typically occurs the firm's Form ADV, advisory contract and/or other disclosure documents.
Reviewing Internal Controls and Disclosure Practices - Jacko Law Group Can Help
Jacko Law Group, PC, provides legal consulting and strategy development services to help our clients establish effective written policies, procedures, and internal controls that assist in identifying and mitigating possible conflicts of interest. Through risk assessments and mock SEC examinations, we are able to help detect conflicts that a firm may not have considered.
Using a practical, systematic approach, we can help your firm develop proper disclosure policies and practices that take into account the need for your clients to receive unbiased financial guidance required for SEC compliance, in addition to providing legal support for any additional issues that arise - contact us with any questions you may have.
- Managing Partner and CEO
Michelle L. Jacko, Esq. is the Managing Partner and CEO of Jacko Law Group, PC, which offers securities, corporate, real estate and employment law counsel to broker-dealers, investment advisers, investment companies ...
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