Industries and Professions

COI issues can vary considerably by industry , and the same can be said with respect to ethics standards for various professions (e.g., law, journalism). In this section of the blog we will seek to explore, among other things, broader lessons for business organizations that might be drawn from industry- and profession-specific COI matters.

Can ethics be “unbundled” from business?

Imagine the following: You need to hire a lawyer to advise you on a complex and highly confidential corporate acquisition, but the one you’d most like to have is pretty pricey. You explain this to her and she proposes what she calls a “win-win” solution:  if you sign an engagement letter that broadly states that she need not act in your best interests while performing services for you she’ll discount her hourly rate by 25%.

Or, imagine that your doctor has two schedules of fees: a “full price” one for patients who want the doctor to prescribe medicine based purely on what’s in their best interests and a lower-cost “value plan” for those who agree that the doctor can receive money from pharma companies for prescribing their medicines. Like the lawyer, your doctor is offering to “unbundle” his professional ethical obligations from the other aspects of his service – as a way of saving you money.

You seek clarification from both of them – what will this mean for me?  They both have the same response: while we won’t promise to act in your best interest we will act in ways that are “suitable” for you.

Would you be tempted by either offer?

Note that it is doubtful that either arrangement would be considered lawful – certainly the medical one  wouldn’t be, and I doubt the lawyer one would be either (although professional ethics issues arising from providing unbundled legal services are somewhat complicated – as reflected in this piece in the ABA Journal).    But even if they were permissible it is hard to imagine clients and patients saying yes to such options, where the risk of betrayal is so clear-cut and the adverse impact of such could be so great.

Yet a less obvious but not at all hypothetical version of ethics unbundled from business is already standard operating procedure in large parts of the investment world, where some of those who give advice to investors about retirement accounts have been allowed to operate outside of a best-interests-of-the-client framework. The main argument for this state of affairs is that “Consumers Deserve Choices”,  as described in this recent article in Investment News – including the choice of low-cost/non-fiduciary advice.

Of course, not all business relationships warrant the imposition of fiduciary duties. With some, “the morals of the marketplace” – in the immortal words of Judge Benjamin Cardozo – may well be morality enough.  But the business of providing advice about retirement accounts would not seem to be in this category, given how much is at stake for retirees (and, in a sense, for society as a whole), and the massive conflicts of interest problems that have beset the financial services industry for decades.

However, change is in the air. As described by the director of policy research at Morningstar,  last week “the Department of Labor proposed an amendment to the fiduciary definition under ERISA, the Employee Retirement Income Security Act. In short, the proposal would require any individual receiving compensation for providing investment advice to a plan sponsor, plan participant, or IRA owner making a retirement investment decision to adhere to a series of fiduciary duties–that is, to act in the best interests of their clients. The rule is based, in part, on a Council of Economic Advisors analysis showing that when individuals receive what the White House calls ‘conflicted advice,’ they tend to enjoy lower investment returns.”

Note that the even the proposed rule does have some exceptions built into it. For instance, “you can call a broker to execute a trade without triggering fiduciary duties, you just can’t ask for advice,…” as noted in this article in Forbes.   There are other exceptions too.  But overall it is a big step forward.

At this risk of being repetitive, I definitely recognize that there are times when it may indeed make sense to “unbundle” what would otherwise be an ethical duty from a business relationship.  An example from an earlier post is that joint ventures partners may and sometimes do waive fiduciary duties expected of board members on the JV.

However, one would be hard-pressed to look at instances such as this – where the investors in question tend to be powerful and sophisticated – as being relevant to the reality faced by most individuals struggling to grow/maintain their retirement accounts. Like the lawyer and doctor examples at the beginning of the post, if you take ethics out of the equation for investment advice involving retirement, what’s left might well be worthless …or outright damaging.


Internal auditors as compliance program helpers: opportunities and independence challenges

Internal auditors often have the skill set and opportunities to lend an important hand to their respective companies’ C&E programs beyond the program-related audits that they conduct.  But such assistance can raise independence issues where the activity in question itself  should be audited.  This post considers what some of these opportunities are and which are problematic from an independence point of view.

First, in some companies auditors answer the help line.  This seems problematic to me, as a company’s responding to help line inquiries is sufficiently important – particularly under the Caremark case – and challenging that it should be audited, at least in companies with a relatively high degree of compliance risk.

On the other hand, in many companies auditors do receive in-person compliance-related inquiries from employees on an ad hoc basis – particularly during site visits.  Given the relatively infrequent and unplanned nature of this sort of activity, it generally need not be audited – and so I think that no significant independence issues are raised by auditors helping C&E programs in this way.

Related to responding to help line inquiries is, of course, conducting investigations into suspected violations of  C&E policies – which internal auditors often do, particularly on financial-misconduct related matters.  I believe that an internal investigations functions should be audited periodically (either as part of the help line audits or on a stand-alone basis) but for many companies – particularly medium and small sized ones – there is no practical alternative to having auditors conducting investigations.  While not ideal from an independence perspective, I think this is a compromise many companies can live with (although for some having an external assessment for this activity may be warranted).

A somewhat less obvious, but often useful, C&E program role for internal auditors concerns training/other communications.  The line I would draw here is, on the one hand, between an auditor designing training and/or determining who should receive it – which one might want to audit, at least in high-risk companies, as they involve the exercise of a significant amount of judgment; and, on the other hand, acting in a more ministerial/facilitating capacity  – e.g., delivering training that others have developed, particularly on site visits – where there is generally less of a need to audit.

Finally, and perhaps most significantly, internal auditors sometimes assist in designing C&E-related policies, monitoring measures and process controls. Here, too, the appropriate line to draw is between the auditor acting in a facilitating role – which, in my view, is generally acceptable independence wise, versus her having principal responsibility for such activity – which should be avoided, if possible.   But, as with auditors conducting investigations, in some companies independence perfection is not possible with these sorts of efforts, and where that’s the case companies need to do whatever’s reasonably possible to maximize independence possibilities for such situations – including in some cases using external resources for the audit/assessment.

A final point:  I hope I don’t seem overly willing to accept compromises in this area, but in analyzing the involvement of internal auditors in C&E programs I’m mindful of the fact that so long as their pay (and that  of the boards that serve as their protectors) comes from the companies where they are employed total independence is not attainable.  (In this sense, independence issues and conflicts of interest in companies are indeed different – because one can have a zero tolerance approach to COIs, but not to independence challenges.)  So, the task here is striking the right balance and not seeking to attain complete purity.

For additional reading:

– A post regarding internal audit and reporting relationships on the web site of the Institute for Internal Auditors by Mike Jacka – Internal Audit is the Midst of a Great War.

An important real-world experiment involving conflicts of interest and auditors.

Is compliance anti-capitalistic?

In 1990, the dawning of what in retrospect can now be seen as an “age of compliance,” the senior partner in the law firm where I worked penned a note of dissent in an op-ed piece he published in the Wall Street Journal.  “Be a good corporate citizen,” he wrote, adding that by this he meant that companies should “fight the feds.” Although I saw great promise in the then-new notion of corporate compliance programs, I could also envision, as he did, the dangers in going overboard.

I still can.  Indeed, that is why – whether in my writing or advisory work – I promote a notion of “Goldilocks compliance.”

But a different issue is whether compliance should be seen broadly as anti-capitalistic.  This seems to be the gist of an argument against the Sunshine Act by libertarian commentator John Stossel who recently asked:  “[W]ithout government regulation, what prevents greedy doctors and greedy medical device makers or drug companies from colluding? ” His answer: “Market competition. Other scientists will try to replicate dramatic findings and debunk false claims and sloppy scientists. Companies worry about scandal, lawsuits, the FDA and recalls. They can’t get rich unless their reputation is good.”

I wish it were that easy, but also believe that the market in question is not as efficient as is suggested.   Rather, this seems to be an area of significant market failures – primarily “information deficiency” (but also public costs), meaning that information needed by patients, health care providers and manufacturers of pharmaceutical and medical device products has not always been readily available/understandable for the markets to work their magic. Indeed, the many prosecutions of life science companies for fraud are by definition cases of information deficiency, and the very purpose of the Sunshine Act is, at least in part, to remedy  deficiencies of this sort.  Also relevant here is the notion of moral hazard, and specifically the fact that for various reasons those who create COI risks in life science companies may not be the same individuals who bear the brunt of prosecution, scandal, etc., further diminishing the efficacy of the market in question.

Additionally, I don’t think that it in the interest of libertarians to broadly reject the notion of using a market failure analysis to help frame approaches to law or ethics (although I hasten to add that in his recent piece Mr. Stossel did not say that he was in fact doing this).   In that connection, I believe that part of the reason that public debt has reached the scandalous point that it has has to do with various conflicts of interest and other market failures, as discussed in this earlier post.  More broadly, there is nothing inherently politically left wing (let alone anti-capitalistic) about considering the impact of market failures.   Rather, a market failure analysis treats capitalism – appropriately – as an economic phenomenon, and not a theological imperative.

On the other hand,  care must always be taken that a market failure analysis doesn’t lead to compliance/ethics overkill.  To twist the words of Einstein a bit, market-failure-based interventions (whether legal or ethical) should be undertaken to the extent necessary, but not more so. At least as a general matter, I believe that Mr. Stossel and I would agree on this.

Finally, compliance generally and mitigation of  conflicts of interest in particular are not the only areas where business ethics can bump up against capitalism. For a look at this important and fascinating (at least to me) area through a broader lens I encourage you to read this recent post on “Three stories about capitalism”  by Jonathan Haidt on the Ethical Systems web site.

(For more on:

–  market failures and conflicts of interest generally see this post;

–  the Sunshine Act see this guest post by Bill Sacks and a recent post from another blog about how “[t]he federal government has made financial disclosure very easy with the Sunshine Act.”

– the many ways that COIs in fact corrupt the behavior of business people, including well meaning professionals, see the various posts collected here

– moral hazard, and its meaning for ethics and compliance,  see posts collected here.)

Strong ethics medicine: best practice COI policies for academic medical centers

In the universe of conflicts of interest, perhaps none are more significant – and worthy of study…. and action – than are those  involving doctors and health care industry (e.g., pharma, medical devices) companies.

On the one hand,  these types of conflicts are widely recognized to be very damaging.  Indeed, when I last compiled my largest  federal corporate criminal  fine list, three of the top four  cases of all time involved such COIs (though with a new entrant  to be added to this list  –   the SAC insider trading case – one should now say three of the top five).  On the other hand, this is one of the few areas where there is actually research to show that  good policies can in fact mitigate conflicts – as described in this earlier post

But that raises the question: what constitutes a best practice policy?

A new and useful resource in that regard is  this recently published article from Compliance Today by friend of the COI Blog Bill Sacks of HCCS,  which is based on a study issued by the Pew Charitable Trust late last year on best practice COI policies for academic medical centers. While most readers of this blog (to my knowledge) do not work in the health care area, C&E practitioners of all types (or others who are COI aficionados) might be interested in this case study of what strong COI-related mitigation can look like, and find useful ideas in it for dealing with COIs in their own respective fields.

Spanking bankers for conflicts of interest. Again.

Two years ago the Delaware Chancery Court had harsh words about Goldman Sachs’ advising El Paso Corporation on a possible sale of the company while also having an ownership interest in the buyer.   Ultimately, the bank lost a $20 million fee due to this and other conflicts.

Goldman’s ethical lapse was not unique in the banking world.  Indeed, just a few months before the El Paso case, Barclay’s paid/gave up claims for about $45 million to settle a lawsuit in the Chancery Court based on its undisclosed dual role  in advising Del Monte on a sale the company while also providing financing to the buyers.  

The most recent addition to the banking COI hall of infamy is the Royal Bank of Canada, which, as described in this Reuters piece, the Chancery Court last week found should be “held liable to former shareholders of Rural/Metro Corp because [the bank] failed to disclose conflicts of interest that tainted the $438 million buyout of [Rural/Metro. The bankers] were so eager to collect higher fees that they convinced Rural/Metro directors to sell the company in June 2011 to private equity firm Warburg Pincus LLC at an unreasonably low” price,  while “conceal[ing] their efforts to provide financing to fund the buyout and other transactions,…” The court will “decide later how much RBC should pay former Rural/Metro shareholders in damages, including possibly damages for bad faith.”

That this could happen after the El Paso and Del Monte cases seems amazing.  But maybe it isn’t – since we’re seeing only the cases where the conflicted bankers got caught.  Perhaps there are many others where the betrayal went undetected and the wrongdoing proved profitable.  If so, the prospect of giving back fees – even large fees – may be a weak deterrent.

A piece on the case in the Wall Street Journal concluded:   “The bottom line is that investment banks that aren’t paying attention the Chancery Court’s continuing admonitions on conflicts will continue to be spanked.”  Yes, but will they be spanked enough to deter future COIs of this sort?

(For those wanting to learn more about the actual spanking, the court’s 91-page opinion can be found here.) 

Two dubious ethical achievements

There is no official record book when it comes to conflicts of interest and related afflictions.  But it is still possible to take note of the unprecedented amounts of a given type of unethical conduct, and this was indeed done in two stories during the past week about public-sectors COIs (each of which is interesting in a different way).

First, a lengthy New York Times piece two days ago offered a “comprehensive examination” of the dealings of David Sampson, chairman of the Port Authority of New York and New Jersey and also a partner in the Wolff & Sampson law firm, with NJ Governor Chris Christie and his administration, both inside the Port Authority and out,  and detailed  “the extent to which their ambitions and successes became intertwined.” The story concludes: “Mr. Samson and his law firm benefited financially. Mr. Christie benefited politically. And each enhanced the other’s stature as their relationship deepened in ways that were not apparent at the time.”

It would be impractical to try to summarize here the great many components of what the Times charitably calls a “symbiosis” between these two powerful men, but the details may be less important than is this bit of information: “Jameson W. Doig, a scholar who has long studied the Port Authority, said that while the Port Authority had not been immune to allegations of political influence, he had not seen anything in his research going back to the 1920s that compared to how Mr. Samson and Mr. Christie have used the bistate agency’s vast resources to advance the governor’s interests, at times benefiting Mr. Samson’s clients in the process.”  Given NJ’s challenged ethical history – I’m a resident, and have long felt that our license plate should read, “The state of corruption” – this is quite a distinction.

Second, and redirecting our gaze from Trenton to Washington DC and from the questionable practices of a Republican to those of a Democrat, John McCain had an  opinion piece in the Wall Street Journal a few days ago called  “Abysmal Ambassadorial Nominations The tradition of giving diplomatic posts to campaign contributors has now officially gotten out of control.” As he writes, “There is only one reason why the ambassadorial nominees for Norway, Hungary and Argentina were selected for this high honor and huge responsibility. It is not because they are distinguished members of our Foreign Service. They are not. It is not because they have years of experience and expertise on U.S. foreign policy. They do not. No, the sole criteria that has gotten these individuals nominated is their wealth and their willingness to give large portions of it to President Obama and the Democratic Party.” McCain further writes: “It is not just the poor quality of some of the president’s political nominees that is so troubling; it is also the quantity of them. Twenty-four were big donors who bundled hundreds of thousands or even millions of dollars for the president and the Democrats. The old accepted practice has been to keep such nominees to 30% of the nation’s total foreign postings. However, just a year in, so far more than half of President Obama’s second-term ambassadorial nominees are political appointees and wealthy donors.”

I find what McCain describes as every bit as appalling as what is emerging about the Christie-Sampson connection. But the fact that the Senator’s principal objection to this trafficking in government offices apparently is to the quantity, not the practice itself, reminded me of this timeless  exchange:

George Bernard Shaw: Madam, would you sleep with me for a million pounds?

Actress: My goodness. Well, I’d certainly think about it.

Shaw: Would you sleep with me for a pound?

Actress: Certainly not! What kind of woman do you think I am?!

Shaw: Madam, we’ve already established that. Now we are haggling about the price.



Conflicts of interest and experts

While as a matter of professionalism experts are supposed to be resistant to the impact of conflicting interests, as a matter of human nature that is often not how it works. Indeed, over the past two years this blog has had no problem finding materials for posts on COIs in various professions – including auditing (see also this post  and this one ),  financial services,  compensation consulting,  medicine,   journalism,   law (my own profession) and even dentistry – many of which detail the harmful impacts of such COIs.

Of course, the news is not always all bad.  Indeed, 2013 saw what was undeniably a positive development on this front – the announcement by the global pharma company GSK that it would stop marketing related payments to physicians. (Here is a compelling piece by a doctor about how deleterious pharma-physician COIs have been to the practice of medicine.)

But then there’s the other side of the issue which has, as of late, included:

–          This piece in the NY Times in late December on “how major players on Wall Street and elsewhere have been aggressive in underwriting and promoting academic work…[as] part of a sweeping campaign to beat back regulation and shape policies that affect the prices that people around the world pay for essentials like food, fuel and cotton.” While the academics receiving the industry support deny that their efforts are influenced by the financial backing they receive –  e.g., “I call ’em like I see ’em,” said one – the totality of knowledge about COIs suggests that that is not what happens in situations of this sort.

–          Another article on economists from a few months ago  in Deutsche Welle which reported   that “German, Austrian and Swiss economists agreed a year ago to a code of ethics aimed at achieving greater transparency and fairness in political consulting. But there is little sign of it today.”

–          Most recently, a story about a just-published study showing: “Scientists receiving research funding from big beverage firms such as Coke or Pepsi are five times more likely to conclude in review studies that there is no link between soft drinks and weight gain.”   This is a striking finding and – given the threat that obesity poses to public health – a somewhat alarming  one. (Here is more information about this study.)

One hopes that all the experts who seem to think that their expertise renders them immune from the corrupting forces of COIs would respect the expertise of the various social scientists and others who have actually studied the issue.

An important real-world conflict of interest experiment

In today’s NY Times, Michael Greenstone, an economics professor at MIT, writes about a study on auditor COIs that he –  together with Esther Duflo of M.I.T.;  and Rohini Pande  and Nicholas Ryan, both of Harvard – recently published.   The study was conducted in Gujarat, India, where industrial plants with high pollution risks are required  “to hire and pay auditors to check air and water pollution levels three times annually and then submit a yearly report to” a governmental body. In the study, for a randomly selected set of companies, but not for a control group, “auditors were paid a fixed fee from a central pool of money, a subset of the audits was chosen to have its findings re-examined, and auditors received payments for accurate reports, judged by comparisons with the re-examinations. The control group continued under the status quo system in which auditors were chosen and paid by the plants they were auditing.”

The results of this real-world experiment  powerfully demonstrate the impact on the ethicality of conduct that financial incentives can have – even on the judgment of individuals who, by virtue of their professional norms, are supposed to be resistant to COIs.  That is: “While many of the plants violated the pollution standards, few of the auditors in the control group reported these violations. In the case of particulate matter, an especially harmful air pollutant, auditors reported that only 7 percent of industrial plants violated the pollution standard. In reality, 59 percent of plants exceeded it.” However, “[t]he rules changes [in the experiment] caused the auditors to report more truthfully. In the restructured market, auditors were 80 percent less likely to falsely report a pollution reading as in compliance, and their reported pollution readings were 50 to 70 percent higher than when they were working in the status quo system. This difference was as large even when comparing reports of auditors working simultaneously under the two systems. Finally, and most important, the plants that were required to use the new auditing system significantly reduced their emissions of air and water pollution, relative to the plants operating in the status quo system. Presumably, this was because the plants’ operators understood that the regulators were receiving more accurate information and would follow up on it.”

Three comments on this important study.

First, while most directly relevant to auditors, these results can, I believe, be broadly applicable to COIs generally.  That is, if professionals who are trained to rise above COIs fare this poorly, one can only imagine the impact of COIs on the rest of us.

Second, the more important compliance and ethics program efforts become to society, the greater the need for not just C&E auditing but other forms of checking – such as monitoring, as was discussed in a piece in Corporate Compliance Insights.   But monitoring  (as a general matter) is even less independent than is auditing, so this recent study underscores  the considerable  challenges for making forms of checking beyond auditing effective.

Third, research to determine “what works”   is vitally important for the C&E field to mature and realize its full promise,  and real-world studies such as this one can be particularly valuable in that regard.  Interestingly, another article in today’s NY Times describes how in the UK there is now an government-run effort (headed by a “Behavioral Insights Team”) to use research to determine what works with respect to various public policies, including some compliance-related ones. I hope that the US and other countries will follow the UK’s lead here.

Finally, here is a prior post on auditor COIs


When blowing the whistle is a conflict of interest

Employees generally owe duties of loyalty to their companies (at least under US law), but for some time whistleblowing has not seen as a breach of such duty.   This was the underpinning of an important Supreme Court case thirty years ago – Dirks v SEC  – which held that an employee who told a securities analyst about a fraud at the employee’s company had not breached a fiduciary duty to the company (and hence under applicable law the securities analyst could not be prosecuted for insider trading based on this disclosure). But not all duties of loyalty are the same, and lawyers (and other professionals) are typically seen as having a stronger duty in this area than are employees in general.   Additionally, the related obligation to protect the confidentiality attorney-client  privileged information is stronger than is the general obligation employees have to protect the confidential information of their employers. These differences, in turn, impact the analysis of whistleblowing by lawyers.

The propriety of attorney whistleblowing  (in the US)  is  generally addressed by state bar ethics rules and also (to some extent) by SEC Rule 205 promulgated pursuant to the Sarbanes-Oxley Act.  More recently, the prospect of  an attorney blowing the whistle to recover a bounty for her efforts has been the subject of concern with the promulgation of Dodd-Frank Act whistleblower bounty provisions, which permit bounties of 10-30% of certain securities-law related recoveries by the SEC, CFTC or DOJ where a whistleblower’s “original information” contributed to the recovery. This latter type of whistleblowing was analyzed in an important (for attorneys, that is) opinion issued last month by the New York County Lawyers Association  (“NYCLA”).

The Opinion notes initially that “SEC whistleblower rules exclude from the definition of ‘original information’ most material that lawyers, in-house or retained, are likely to gain in the course of their professional  representation of clients, and thus generally preclude attorneys, in most instances, from receiving  a bounty for revealing such information. SEC Rule 21F-4(b) acknowledges the importance of the attorney-client privilege, as well as state ethics rules, and presumptively excludes the use of privileged or confidential information from the definition of eligible original information under the whistleblower rule. Indeed, the SEC warns lawyers that there will be no financial benefit to lawyers who disclose such information in violation of the attorney-client privilege or their ethical requirements.”  However, the above-mentioned requirements (concerning privilege and state ethical standards) are determined not by the SEC itself but by various state bar entities, like the NYCLA.

Turning to those state law requirements, the Opinion notes that under NY’s Rules of Professional Conduct (“RCP”)  the situations in which a lawyer may disclose a client confidence are even narrower than they are under  applicable SEC rules.  Moreover, the RPC’s exceptions to confidentiality mandates generally permit disclosure only to the extent necessary to correct/prevent (the defined categories of) wrongful conduct – and seeking a whistleblower bounty would not seem to meet that requirement. Thus, even if permitted by SEC rules, the RPCs could independently prohibit a lawyer from seeking a whistleblower bounty in cases involving representation of a client.

Most significantly for the purpose of this blog, the NYCLA faced the issue: “Is a conflict of interest under RPC 1.7 presented when a corporate lawyer, functioning as a lawyer, seeks to collect a whistleblower bounty?” Their answer was presumptively yes. “A lawyer confronted with potential corporate wrongdoing must evaluate and consider varying requirements under SEC and state ethics rules and then make some difficult decisions: Is the potential violation material? Is the potential violation criminal? Should the lawyer report the wrongdoing up the corporate ladder? Should the lawyer report the wrongdoing to an outside body, and if so, when? These complex and potentially inconsistent considerations call for the exercise of objective, dispassionate professional judgment. A lawyer who blows the whistle prematurely could harm the client and be professionally responsible for the precipitous disclosure of client confidences. A lawyer who fails to report credible evidence of corporate wrongdoing up the ladder, if it amounts to an independent violation of the securities laws, could potentially be prosecuted by securities regulators, subject to professional discipline by the SEC, and subject to reciprocal discipline by state bar counsel. Especially under these delicate circumstances, a financial incentive [of the type offered by the Dodd-Frank bounty provisions] might tend to cloud a lawyer’s professional judgment.”

The NYCLA also noted that the ethical rules discussed in the Opinion “would not affect or apply to lawyers who are not representing, or did not represent clients. For example, a corporate officer or compliance officer who happens to be a lawyer may not necessarily be representing a client in the performance of his duties, depending on the facts of the individual case. To the extent that the lawyer is not representing a client, our opinion would not apply to that conduct simply because the lawyer happens to be a licensed attorney.”

For further reading…

Two points from earlier posts in this blog about attorneys, confidential information and compliance:

–          While providing strong protection of the attorney-client privilege is sometimes seen as catering  to corporate stonewalling, a more accurate view (to my mind) is that such protection encourages companies to get legal advice and thus promotes C&E – as discussed here.

–          The fact that client confidences and relationships should be protected does not mean that lawyers have no right or obligation to report wrongdoing of any kind.  See this prior post for a review of lawyer reporting obligations that do not involve client confidences  – and how certain behavioral ethics factors can inhibit compliance with such duties.

A  recent obituary for a famous whistleblower in the tobacco industry  who was a paralegal, and whose disclosures included attorney-client communications.

And, a piece about comparative conflicts of interest analysis.


The monstrous offspring of two conflict-of-interest titans?

Perhaps no types of conflicts of interest cast bigger shadows on the US ethical landscape than do those of doctors prescribing medicines based on the doctors’ economic interests and financial advisors giving investment advice motivated by their own, and not their clients’, economic interests.  And now, these two COI giants seem to have joined together to form a new and particularly grotesque COI:  doctors advising patients to sign up for medical credit cards where doing so benefits the doctor but causes economic harm to the patient.

As described in a NY Times editorial today: “Patients around the nation are being victimized by medical credit cards that can lead to financial calamity. These cards, issued by specialty finance companies as well as commercial banks, carry exorbitant interest rates after an initial period of zero interest expires — with heavy penalties for late payments. They are often pushed on patients with modest incomes by health care providers who want to make sure that they get paid, even if some of their patients end up with huge credit card bills they can’t afford. [It is] hard to imagine a situation in which a consumer is more susceptible to financial coercion by a provider with a conflict of interest.”  As also described in the Times piece: “Numerous civil lawsuits have been brought by state authorities and lawyers for consumers against care providers and financial companies for misleading practices,”  but the problem cries out for a national solution.

Meanwhile, efforts to find comprehensive solutions to the perils posed by the two COI titans proceed apace. With respect to medical doctors, the most important recent development on this front is the advent of the Sunshine Act  earlier this year.  Indeed, this new law may serve as an unprecedented test of Louis Brandeis’ famous saying  that “[s]unlight is said to be the best of disinfectants,” and so should be of keen interest not only to  C&E practitioners but also scholars  in the business ethics field looking for data to analyze.

And a potentially significant step forward regarding conflicted financial advice is this report issued last week by the Financial Industry Regulatory Authority (“FINRA”). As described by FINRA’s Chairman and CEO Richard G. Ketchum:    “While many firms have made progress in improving the way they manage conflicts, our review reveals that firms should do more,” and the report provides “examples of how some large broker-dealer firms address conflicts” including “identifying and managing conflicts on an ongoing basis through an enterprise-level approach that is scaled to the size and complexity of a firm’s business and that starts with a ‘tone from the top’ that carries through to the organization’s structures, policies, processes, training and culture; establishing new product review processes that include perspectives independent from the business proposing products, that identify potential conflicts raised by new products, that restrict distribution of products that may pose conflicts that cannot be effectively mitigated and that periodically re-assesses products through post-launch reviews; making independent decisions in the wealth management business about the products they offer without pressure to favor proprietary products or products for which the firm has revenue-sharing agreements;  minimizing conflicts in compensation structures between customer and broker or firm interests where possible and including heightened supervision when conflicts remain; for example, around thresholds in a firm’s compensation structure;   mitigating conflicts of interest through disclosures and other information that enables customers to understand the factors that may affect a product’s financial outcome—such as the use of scenarios and graphics for a particular product; and  including ‘best-interest-of-the-customer’  standards in codes of conduct that apply to brokers’ personalized recommendations to retail customers in order to maintain and increase investor trust.”

The FINRA report is indeed a virtual encyclopedia of COIs involving brokers and sound mitigation measures addressed to such COIs.    It is a must read not only for C&E professionals in the financial services industry but for COI aficionados of all kinds, and in future posts I hope to “mine” the report for mitigation ideas that could be useful in other contexts (perhaps even the credit card business).