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.

The lawyer as whistleblower

When can a lawyer blow the whistle on her own client?

My latest column in Compliance & Ethics Professional (p2 of PDF) takes a look at this ethically fraught issue.

I hope you find it of interest.

What Can We Learn from the Latest “Open Payments” Data?

By Kevin Kovalsky and Bill Sacks, HealthStream*

The Center for Medicare and Medicaid Services published a new trove of payment data on June 30, 2017. Since 2013, the “Open Payments” database, created under the Affordable Care Act, has been used to collect and publish information about payments from medical device and drug companies to physicians and teaching hospitals. All payments above $10.00 are reported in various categories, including speaking fees, travel, research, gifts, and meals.

Under the theory that “Sunshine is the best disinfectant”, the hope was that publishing detailed information about industry payments to physicians would have a prophylactic effect on potential conflicts of interest. There was speculation that some physicians would stop taking money from big pharma if they had to answer questions about those payments from skeptical patients. Perhaps payments would be funneled more directly into research, rather than to physicians themselves?

So what does the latest data show? What kinds of trends can be seen? While it is difficult to draw conclusions based on the year to year fluctuations in payment data, we can begin to see trends by analyzing the data over three years.

The total dollar value of reported payments from industry has increased slightly, to $8.18 billion in 2016 from $8.09 billion in 2015 and $7.86 billion in 2014. In each of those years, more than 50% of all dollars went to research. Interestingly, the number of companies making payments dropped by more than 6%, from 1,614 in 2014 to 1,481 in 2016. Since few companies completely stop payments to physicians once they have started, this raises some interesting questions about consolidation in the industry. At the same time, the number of physicians accepting payments stayed level, dropping by a fraction from 632,000 in 2015 to 631,000 in 2016.

While total payments directed to research increased by 7.1% from 2014 to 2016, the amount paid directly to physicians for research decreased by 7.1%, from more than $102 million in 2014 to $95 million in 2016. From 2014 to 2016, general (non-research) payments to physicians also saw a slight decline, from $2.11 billion in 2014 to $2.07 billion in 2016.

While some have expressed concern at the 6.0% year to year jump in payments to physicians classified as “ownership or investment interests” (from $962 million in 2015 to more than $1.0 billion in 2016), the three-year trend is negative, with an overall 8.1% decline from 2014 to 2016.

While it is too early to tell if these trends will continue, it is clear that while the Open Payments database has not adversely affected the overall funding of industry research, it may be causing some physicians to take fewer direct payments, which could reduce, in some small way, the potential for conflicts of interest in medicine.

Bill Sacks is  Vice President, COI Product Management and Kevin Kovalsky is COI Product Manager at HCCS – A HealthStream Company.

Why avoiding conflicts of interest matters in the investment business

By Knut A. Rostad*

Introduction. This commentary would never be written in most professional settings today. The reason: avoiding conflicts obviously matters. It’s self-evident. Yet, in many quarters in brokerage and investment advice, it’s not self-evident at all. Instead, in these quarters conflicts are deemed quite acceptable or even beneficial. This is why the commonsense and logic in the voices of these eight investment advisers is important. In the market place today, they are usually overwhelmed by conflicted product recommendations that are packaged as “trusted advice”. This is why the research was conducted and this commentary was written.  

 On July 7th the Institute for the Fiduciary Standard released a white paper on Securities & Exchange Commission (SEC) registered investment advisers’ (RIAs) disclosure of various conflicts of interest. The disclosures are drawn the form ADV, an SEC required disclosure, of 135 RIAs. 1.This paper focuses on 25 of the 135 RIAs that go an additional step and further minimize their conflicts by refraining from certain practices. The 25 firms are identified and eight firm principals comment on ‘Why avoiding conflicts of interest matters.’

Their remarks address topics from the philosophical to the practical. They can be distilled to ‘Avoiding conflicts is essential to providing true advice.’ Of particular note:

– These firm principals believe their mandate is to avoid conflicts; it is not to disclose conflicts. Why? Disclosing conflicts can limit or taint the client relationship, add burdens to the firm and confuse staff.

– Avoiding conflicts reinforces objective advice. Clients sense the difference, that objective advice is not conflicted advice and a product recommendation. They sense the difference between a client advocate and a product advocate. With a client advocate, clients tend to be more trusting and respectful and have deeper advisor relationships. They show greater confidence in the advice rendered and in their own financial situation. This is powerful.

The eight advisors (and firms) are: Michael Delgass (Sontag Advisory), Derek Holman (EP Wealth Advisors), Joel Isaacson (Joel Isaacson & Company), Josh Itzoe (Greenspring Wealth Management), Ross Levin (Accredited Investors), Dan Moisand, (Moisand Fitzgerald Tamayo), Tom Orecchio   (Modera Wealth Management) and Patrick Sweeny (Symmetry).

The full remarks of each advisor are in the paper linked to above . Key excerpts are selected here.

Early career experiences in brokerage firms. Patrick Sweeny, “I was taken aback by how much pressure there was (at a brokerage) to sell proprietary products… Derek Holman adds he was told, “Success in the industry depends on selling and not on advising.” Tom Orecchio recalls he started in a firm with commissions and an annual sales contest where prizes and trips were awarded. “I was never comfortable. These incentives changed behavior and I did not like what I witnessed.”

Fees, planning versus asset growth. Joel Isaacson, “There is a tension between planning and asset management growth. Planning is as close to pure advice as we can get, where we can provide the greatest value.”

Clients: conflicts undermine the value of your advice. Ross Levin says his clients know, “They receive our advice for only one reason … we believe it our best advice.” Dan Moisand says it this way, “Clients take advice more to heart when they know it’s true advice.” Holman, who dropped insurance licenses three years ago, “There was always confusion when we would switch and disclose our sales biases. This was not the way we wanted to provide advice…. Straight fee only provides clarity and simplicity.”

Transparency. Sweeny stresses, “We take a lot of time to make sure investors understand what they are paying. Total cost transparency is so important.” Holman adds, “Most investors we meet pay more in fees but don’t see it. With us, they generally pay less, but see it. When investors don’t see the fees they tend to think the services are free.” Josh Itzoe, “Full fee transparency … (creates) a depth of trust you can’t get otherwise. At the wire houses we felt conflicts and the lack of fee transparency created more of an adversarial relationship.”

Conflicts, professionalism and trust. Michael Delgass points out how “Firm culture matters. We aim to “walk this walk”, in part, by embedding issues of fiduciary due care and loyalty into our annual employee and executive reviews. Itzoe, “There is no doubt in my mind that conflicts around compensation prevents the advisory industry from being recognized as a true profession.” Moisand says conflicts must be avoided because managing conflicts doesn’t cut it for clients or the firm. “Managing conflicts requires the firm follow additional procedures… I don’t worry about conflicts I avoid.” Levin concludes, “Nothing is completely without conflict, but reducing conflicts as much as possible increases the likelihood of receiving objective, client-centered advice.

* Knut A Rostad is president and founder of the Institute for the Fiduciary Standard. The Institute is a non-profit that exists to advance the fiduciary standard in investment and financial advice through research, education and advocacy. For more information see


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.