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.

A new player in the conflicts of interest pageant

“It is difficult to get a man to understand something, when his salary depends on his not understanding it” These famous words were uttered by Upton Sinclair long ago but, although his concern was more with politics than the types of conflicts of interest discussed in this blog, its logic is no less applicable to the latter – and no less forceful with the passage of time.  If money can’t always buy people’s souls, it still very frequently affects their understanding and actions. And, in at least one way, the situation may be getting worse.

The pageant of COIs indeed seems endless: lawyers, financial advisors, journalists, economists, medical doctors, auditors, compensation consultants.  (For more on this see the posts collected  in the  Industries and Professions tab on the left hand side of the screen.)  To this list should now be added – dental researchers.

According to story last month in Medscape Today News, a recent published study showed: “Researchers are more likely to report positive results about dental treatments if they get paid by the [companies’] marketing the treatments… In an analysis of 135 randomized clinical trials from leading dental journals, those in which the authors had a conflict of interest were 2.4 times more likely to have positive results, the study shows.”

The article did note the view of a “former editor-in-chief of the Journal of the American Dental Association and past president of the [International Association for Dental Research ] … that she is confident existing safeguards will keep the dental literature from being distorted.” On the other hand, one of the study’s authors – University of Toronto researcher Romina Brignardello-Petersen, DDS –  said, “many readers do not know how to assess the evidence critically…To be completely honest, probably it does have a big impact because most people who use the literature are not accustomed to doing critical analysis of it.”

Still, this may be a difficult problem to address.  As also noted by Dr. Brignardello-Petersen, “’unfortunately, it would be very hard to conduct clinical research if there was no sponsorship… . Randomized clinical trials are expensive to conduct, and researchers have a bigger opportunity to conduct research if they work with one of the companies,’”  a factor which is particularly relevant to dentistry  given that government funding for research in that field is “meager.”

Indeed, at a time when government funding for other types of medical research is increasingly in jeopardy, it is scary to contemplate the broader implications of the dental research COI study.  But Sinclair wouldn’t be surprised by any of it.

 

Preventing bill padding by lawyers: a case for compliance programs?

According to a story in yesterday’s New York Times, a global law firm – DLA Piper –  has recently been accused of overcharging a client.  The firm has denied the allegations – which arose in connection with a lawsuit it brought to collect fees from the client. A subsequent story reprinted a letter distributed within the firm by several senior partners stating that DLA Piper “has always adhered to the highest level of ethics and integrity in all of its work, including billing practices…”  What struck me about the letter is that there is nothing in it to suggest that the firm uses compliance program measures to actually maintain the highest level of ethics and integrity in billing matters by the several thousand lawyers who work for it, and how much more persuasive the letter would have been had it included a discussion of this sort.

Of course, this may have been a mere drafting oversight, since the firm clearly recognizes the value of compliance programs  for its clients  and indeed expresses pride in the expertise of its partners who help clients with such programs.  One hopes that the firm would have applied this expertise to protecting its clients from the possibility of bill padding.

Still, if DLA Piper, in fact, has not instituted real compliance measures to address this risk area I imagine that it isn’t alone among large law firms in that regard.  Indeed, at a conference held last fall by the Practising Law Institute, a noted federal judge gave a very thoughtful presentation on the ever growing importance of compliance programs – but when asked by an attendee (me) if he thought that law firms should have them to prevent overbilling, responded that, given the professional standards applicable to the field, this wasn’t necessary.

I don’t for a minute suggest that law firms need to implement the sort of process-heavy compliance programs expected of financial services providers, health-care related companies, defense contractors or organizations with serious FCPA risks.  But as some law firms increasingly swell in size, then a culture of professionalism will presumably provide less protection against billing abuses than was once the case.  Additionally, given the desperate need that some lawyers may have in this market to hold on to their jobs, and the pressure in some firms to hit time charging quotas, the case for billing related compliance programs becomes greater still.

Moreover, even before the job market for lawyers turned sour, research had shown that the problem of billing fraud was indeed growing.  According to the results of two surveys of attorneys conducted by Prof. William Ross at the Cumberland School of Law: “approximately two-thirds of the respondents to the 2006-07 survey and 1995-96 surveys stated that they had specific knowledge of bill padding. Moreover, the attorneys who responded to the most recent survey seemed, on the whole, to be less ethical in their billing practices than those [who] responded to the earlier surveys. For example, 54.6 percent admitted that the prospect of billing additional time had at least sometimes influenced their decision to do work that they otherwise would not have performed, compared with only 40.3 percent in the 1996 survey. Similarly, the percentage of attorneys who admitted that they had engaged in ‘double billing’ rose from 23 percent in 1996-96 to 34.7 percent in 2006-07. The percentage of the attorneys who believed that this practice was unethical fell from 64.7 percent in 1995-96 to only 51.8 percent in 2006-07… .”

So, the problem is real, and so is the need to take meaningful steps to address it.  Hopefully, the allegations against DLA Piper will provide a good opportunity for other large law firms to ask themselves:  if we were accused of overcharging, would we be able to point to real preventive efforts? Moreover,  by implementing such efforts, firms can prevent bill padding in the first place.

(A related post: Should dentists and lawyers be rotated, like auditors?)

What does the government “teach” about conflicts of interest?

Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example,” Justice Brandeis famously wrote in his dissent in Olmstead v U.S.  So, what has the government taught us lately about conflicts of interest?

According to this story in the New York Times,  a report recently issued by the Inspector General of the Department of Health and Human Services found that “the federal Medicare agency had not clearly defined ‘conflict of interest’” concerning doctors and pharmacists who make Medicare coverage-related decisions about pharmaceuticals, and “did not enforce standards meant to prevent such conflicts from influencing coverage decisions by the panels, known as pharmacy and therapeutics committees.’ ” The report also found that, “’23 percent of [such] committees did not have recusal policies’ requiring members to abstain from discussions or votes when they had conflicts of interest related to a particular drug.”  The story noted, too, that a “former Medicare official who is a consultant to many insurers and was not involved in the report, said, ‘Hundreds of millions, even billions, of dollars are at stake each year in decisions about whether and how a drug is covered by a Medicare drug plan.’” The original of the report – which identifies numerous other COI-related problems – can be found here,  and note that “the acting administrator of the federal Centers for Medicare and Medicaid Services… defended her agency’s work, [saying that] beneficiaries were adequately protected”; that  “[t]he inspector general ‘did not identify any actual conflicts of interest’”; and that her office did  not “believe it necessary to establish a uniform definition or standards for managing conflicts.”

As with a number of the stories covered in these pages, this one is pretty complex and resolving the many specific issues raised in it is beyond the scope/resources of my humble blog.  But assuming that the broad outlines of the piece are reasonably accurate (or even that just some of them are), I can say – as one who has  spent much of the past two decades reviewing compliance programs – that it has been a long time since I’ve seen a private organization take this loose an approach to conflicts of interest management (at least where the risks of COIs are significant, which they undoubtedly are in this case).

So, what is the government “teaching” here?  The lesson is not, I think, that conflicts of interest don’t matter, so much as that rigorous compliance measures to identify and mitigate conflicts are not necessary.  This indeed can be seen as part of a larger lesson from the government’s general failure to implement strong compliance measures with respect to its own operations.   (Note that there are a few exceptions to this – most notably the Federal Bureau of Investigation, which does have a rigorous compliance program.)  Until the government decides “eats its own dog food” (to borrow from a less lofty metaphor than that used by Brandeis) when it comes to compliance and ethics, it may be disappointed in the performance of the rest of its “students.”

(For further reading on this general topic I encourage you to explore the web site of the Rutgers Center for Government Compliance & Ethics.)

Facing up to COI Sunshine

By Bill Sacks

On February 1st, 2013, the Centers for Medicare and Medicaid Services (CMS) released the final rules implementing the “Physician Payment Sunshine” provisions of the Affordable Care Act. These provisions, originally introduced as a separate bill by Senators Charles Grassley (R – IA) and Herbert Kohl (D-WI), will require Pharmaceutical and Medical Device companies to track and report all payments or “transfers of value” to physicians and teaching hospitals that exceed $10.00 (or essentially…everything).

The “Sunshine” provisions were designed to increase transparency in industry’s formal and informal relationships with medical providers. Ever since astute observers noticed that physicians could be influenced by financial considerations there has been concern that industry largesse could unduly influence research results, continuing medical education, prescribing, and other practice patterns. The thinking is, to paraphrase Justice Brandeis, “Sunshine is the best disinfectant.”

A public database of industry payments to physicians and teaching hospitals will go online by late 2014. This forthcoming transparency, on top of new COI regulations published by the NIH and Public Health Service that took effect last August, has resulted in significant movement on the part of hospitals and academic medical centers to put in place automated systems to collect and review conflict of interest disclosures and – just as important – to manage the conflicts uncovered through the disclosure process.

Technology to Improve COI Management

Compliance Officers and General Counsels in other industries should take note. Government contractors have obligations to identify and manage conflicts of interest under the Federal Acquisition Regulations (FAR). Many such contractors have tried to manage their COI obligations with paper surveys or simple generic online survey tools. These manual processes often collapse under their own weight, filling file cabinets or Excel spreadsheets with unusable, inaccessible data.

Newer, relational database tools are becoming more popular with organizations that need the ability to provide targeted survey questions to people with different reporting obligations, to direct COI survey responses to designated project managers and reviewers, to conduct detailed analysis on survey responses across projects, to produce customized reporting, and to maintain a database of archived responses.

Organizations seeking or managing federal contracts should periodically evaluate their COI management processes and systems to assess their effectiveness and to determine whether more up-to-date technological solutions could enhance operational efficiency.

(Bill Sacks is Vice President and co-founder of HCCS Inc., which provides online compliance training and workflow tools to organizations subject to federal regulations.  He can be reached at bsacks@hccs.com.)

Top SEC official speaks on how to mitigate conflicts of interest

In a recent post,  we began to discuss a speech given last month by Carlo V. di Florio, Director, Office of Compliance Inspections and Examinations of the Securities and Exchange Commission  – which indeed is a font of COI-related ideas and information with respect to the financial services industry.  In today’s post, I want to consider what aspects of di Florio’s analysis should mean for COI mitigation in other industries.

At the outset, it is noteworthy that di Florio uses a broader (meaning not industry-specific) framework – the Federal Sentencing Guidelines for Organizations – to address COI financial services industry mitigation.  There’s no reason for me to repeat all that he says about each element of the Guidelines, but here are several parts of that discussion – along with my thoughts on how they might be applicable in other industry settings.

– Under standards and procedures he notes: “Since new conflicts of interest can arise rapidly as a business grows and evolves, and may become apparent to front-line employees before they come to the attention of more senior managers or control functions, communications about these standards and procedures are also an opportunity to emphasize to all employees the importance of their role in recognizing new conflicts of interest, and their responsibility to elevate such conflicts to appropriate control functions.”   While particularly important in the financial services setting, di Florio’s basic point here is clearly of wider applicability: given the many ways in which COIs (compared to various other sorts of C&E issues) tend to arise in organizations, having a broad safety net of employee awareness can be key to effective risk mitigation.   (For more information about COI risk assessment see these prior posts.)

– Under oversight DiFlorio states: “in the financial services world, unremediated conflicts of interest are a leading indicator of the types of problems that a compliance and ethics program is intended to root out,” and so he says C&E oversight by  boards of directors and senior managers should include attention to COIs.  Again, financial services firms do have a compelling need in this regard that generally goes somewhat beyond that of other industries (and indeed in a recent interview  di Florio warned:  “Directors need to be engaged in effectively overseeing compliance, and where fraud or other compliance failures occur, that suggest ineffective governance, Enforcement will be focused on that,…”)  But in other contexts, too, directors need to be focused on COIs – as is evidenced most strikingly this past year by the Chesapeake case discussed in prior postings.   Because of the misalignment of interests inherent in COIs, it is not an area where directors can broadly delegate mitigation duties to management.

– Under education and training he notes: “training and other communication should include communication about the responsibilities of everyone in the organization regarding identifying, escalating and remediating conflicts of interest. It should be tailored to specific conflicts in the business model and clearly set forth the governance, risk management and compliance procedures to mitigate and manage these conflicts.” Here, too, di Florio’s basic point transcends the financial industry context, as in all settings a) COI training should be risk relevant, and b) communicating about COI mitigation measures – not only what they are, but showing that they are taken seriously – should be part of any effective compliance regime for this risk area. (For more information on COI training and communications see these posts. )

– Under auditing and monitoring di Florio states, that, among other things, such efforts should include not only checking for violations but also “testing of the effectiveness of the organization’s policies and procedures regarding management of conflicts of interest.” I can think of no reason that this sort of checking should be limited to financial services organizations. (For more information on COI auditing and monitoring see these posts.)

As noted above, the instant post provides only a sampling of what is in the speech, and I  encourage you to read the original.

A never-ending story? Conflicts of interest in the financial services sector (Part One)

According to this recent article, “UK asset managers are unable to demonstrate they are not putting their interests before those of customers or saddling them with unneeded costs, a survey of sector firms by” the Financial Services Authority suggested last week.  Among other things, “the FSA highlighted inadequate controls on how much money was paid to brokers for research and execution, casting doubt on the transparency and control of such commission payments. Other failings identified by the regulator included inadequate reporting of errors to customers while some ‘applied limited thinking’ to conflicts of interest arising from accepting gifts or entertainment.”

Meanwhile in the US, Carlo V. di Florio, Director, Office of Compliance Inspections and Examinations of the Securities and Exchange Commission, recently gave an important speech on Conflicts of Interest and Risk Governance to the National Society of Compliance Professionals   Among other things, he noted:

– Conflicts of interest are significant to the SEC because of the “long experience of [its] exam program that conflicts of interest, when not eliminated or properly mitigated, are a leading indicator of significant regulatory issues for individual firms, and sometimes even systemic risk for the entire financial system.”

– “Especially when combined with the wrong culture and incentives, conflicts of interest can do great harm. [Thus,] conflicts of interest are an integral part of [the SEC’s] assessment of which firms to examine, what issues to focus on, and how to examine those issues.”

– “Failure to manage conflicts of interest has been a continuing theme of financial crises and scandals since before the inception of the federal securities laws”; “[r]ecent decades have seen numerous examples of conflicts leading to crisis”; and “ [t]he financial crisis of 2008 could itself be the basis of a seminar on conflicts of interest….”

In subsequent posts, we’ll examine Di Florio’s suggested framework for managing conflicts of interest in the financial services industry – and speculate on what aspects of it might mean for firms in other industries.

Conflicts of interest and industry culture

In the C&E world, culture most often refers to the culture of an organization.  In this connection, an earlier post discussed how permitting COI violations near the top of an organization can undermine the sense of “organizational justice” among employees generally – and thereby diminish the C&E program as a whole.

C&E-related culture also commonly refers to the culture of a given geography.  For instance, as this prior guest post by Judith Irwin of the Institute of Business Ethics describes, in some places what is considered a COI by Western standards might be seen an ethical mandate in other places.  (“Take the example of nepotism in Africa. In Africa, where family bonds are highly valued, nepotism is a common practice, and an employee may face ostracism for not hiring a relative for a position at the firm.”)

But there is also a third dimension to the intersection of culture and C&E that is too often overlooked: industry culture.

An example of this unrelated to COIs is that in the chemical industry some years ago there seemed to be a culture that encouraged sharing of information among competitors.  This contributed, predictably,  to a high incidence of antitrust violations.

And, industry culture can be relevant to COI risks, too.  For instance, the advertising business (at least in the U.S.)  is one in which gift giving/entertaining is pretty prevalent and so even an organization that has strong COI policies may wish to devote extra C&E-related attention to its employees (typically in marketing or procurement) who interact with members of that industry. (The Wal-Mart ad agency case from a few years back – discussed briefly here  – offers a pretty good lesson in how important that can be.)

Beyond the COI risks that industry culture can create in a company’s functions (as in the advertising example) culture can be risk causing vis a vis distinct business lines or units within a company, particularly a large decentralized one. So, for example, a large energy company whose principal business is a regulated utility that needs to maintain the trust of key regulators should be mindful of  the reputational danger of a casual approach to COIs in its unregulated subsidiaries. (Note that this sort of situation can also involve “moral hazard” –  a topic of occasional discussion in this blog.  Specifically, the risks of adversely impacting the interests of the organization as a whole might not be fully felt by the risk-taking unregulated business.)

As a general matter industry culture is not as significant a cause of risk as organizational or geographical culture.  But it can be potent, particularly in industries with a high degree of inter-company mobility, such as financial services.  And,  industry culture should be considered in all organizations’ COI risk assessments.

 

“History doesn’t repeat itself, but it does rhyme”: more on Facebook

I was reminded of this famous saying of Mark Twain’s when reading the latest news about the now notorious Facebook IPO.

A prior post described allegations that the lead underwriter,  Morgan Stanley, apparently shared information about Facebook’s flagging prospects with some, but not all, customers before the IPO — a claim of COI that will now be tested in the courts.  In the past few days  a different COI issue has surfaced, with reports that  “eight of the top nine U.S. mutual funds with Facebook shares as a percentage of total assets are run by Morgan Stanley’s asset-management arm [which may be suggestive of a COI  because] Morgan Stanley had a crucial role in lining up orders for Facebook as the social-media company prepared to go public. It helped advise Facebook executives to increase the size and price of the IPO, despite warnings the company was making about its profit outlook. The New York securities firm, which declined to comment, took in $200 million in underwriting fees and trading profits, according to regulatory filings and people involved in the deal.”   As noted by one commentator, “the Morgan Stanley funds’ large stakes raise questions about whether the firm’s role as lead underwriter influenced [the funds’ investment] decisions.”

It should be stressed that no one apparently has proven an improper motive in the purchasing decisions in this instance.   But, as was stated more generally by another commentator: “Institutions that underwrite shares and buy them on behalf of individuals represent another of those too-big-to-fail conflicts of interest that no one seems bothered enough by to actually change. Until, of course, they get burned by one of these deals.”

A famous case in COI history where regulators were able to prove that a bank’s investment advisory business was polluted by other commercial considerations involved HP and Deutsche Bank. In 2003 the Securities and Exchange Commission brought charges against the advisory unit of the bank  where its “investment banking division was working for HP on [a] merger, and had intervened in [an asset management] proxy voting process on behalf of HP.” As stated by the SEC: “This created a material conflict of interest for [the advisory business], which had a fiduciary duty to act solely in the best interests of its advisory clients.”

And looking back further still… nearly ten years before this, one of my colleagues at NYU’s business school had penned a case study that eerily prefigured the HP/Deutsche Bank matter, for use in discussing how external forces could impact investment decisions made by fiduciaries.  Perhaps it was a work of pure imagination (I never asked him) but even at the time it seemed to have the ring of truth – and does even more so today.

 

Is your company ready for a conflict of interest close up?

Last week an alert reader of the COI Blog forwarded to us a copy of this letter FINRA recently sent to broker-dealers.  While of most obvious interest to the financial services industry, the letter also provides an occasion for other types of organizations to engage in a “thought experiment” to see how – and how well – they would fare in the event that their COI assessment/management processes were ever scrutinized in legal or regulatory setting.  (Given the many ways that ethical handling of conflicts can be relevant to determining legal liability – some of which are discussed here  –  such an experiment could be a worthwhile preventive measure.)

Targeted Examination Letters

July 2012

 Re: Conflicts of Interest

 FINRA is reviewing how firms identify and manage conflicts of interest. As part of this review, we would like to meet with executive business and compliance staff of your firm to discuss the firm’s approach to conflict identification and mitigation. At the meeting, we would like your firm to present on, among other conflicts related topics, the most significant conflicts your firm is currently managing and the processes in place to identify and assess whether business practices put your firm’s-or your employee’s-interests ahead of those of your customers.

 This inquiry is not an indication that FINRA has determined that your firm has violated any rules or regulations. FINRA’s goal in speaking with firms about their conflict identification and review process is to better understand industry practices and determine whether firms are taking reasonable steps to properly identify and manage conflicts that could affect their clients or the marketplace. Knowing what firms do to address conflicts and the challenges they face will help FINRA develop potential guidance for the industry and determine other steps FINRA could consider taking in this area.

  In preparation for the referenced meeting, we request that your firm submit the following information to FINRA by September 14, 2012:

 1.Summary of the most significant conflicts the firm is currently managing.

2.Names of departments and persons responsible for conducting conflicts reviews.

3.Summary of the types of reports or other documents prepared at the conclusion of a conflicts review.

4.Names of departments and persons who receive any final report or other documentation summarizing a conflicts review.

5.Available dates and times in the fourth quarter of 2012 that executive management of your firm can meet with FINRA staff for approximately three hours to discuss the firm’s approach to conflicts of interest.

(The original letter is available at:  http://www.finra.org/Industry/Regulation/Guidance/TargetedExaminationLetters/P141240

Conflicts of interest in the Facebook IPO?

In the wake of the Facebook IPO the chief underwriter, Morgan Stanley, has been accused of a conflict of interest in alerting some, but not all, potential purchasers of the stock to negative news about the company.  Additionally, the sharp drop (more than 25% from its initial price  as of this writing) of Facebook shares is itself taken as indication of some kind of wrongdoing by the firm.

With respect to the latter issue, a piece in a blog published by The Telegraph argues –  pretty convincingly, I think – that this criticism is unfair: “the Facebook IPO hasn’t been all that great for those who bought shares in it is true. …But that’s not the point. Quite the contrary: that sagging share price is evidence of the huge success of the stock offer. For… the banks were not working for the new investors. They were selling to the new investors. And their gaining a good high price for the shares was exactly what they were supposed to do. Further, there is in fact a conflict of interest at such banks. If an IPO gets away with a good pop ….as the shares rise after issue, then the bank has failed its own customer, the issuer, for it has left money on the table. Money that rightly should be going into the pockets of the issuing company or the previous shareholders. However, making an issue with a good pop increases the business franchise of that issuing bank. It makes the various fund managers, hedge funds and investment managers like them. Be willing to do more business with them and thus increase their longer-term profits. Which is where the conflict comes in: screw the issuing company and be the popular boy on the block, or actually work for your customer, the issuing company, and damage your own longer term prospects?”

And what of the claim of selective disclosure?  According to this report,  the head of the chief industry self-regulatory body (FINRA) said, “The allegations, if true, are a matter of regulatory concern,..”  On the other hand, this analysis  suggested that due to rules that investment banks must follow in IPOs, Morgan Stanley in fact acted properly – although the piece also noted that the rules, which were intended to reduce conflicts of interest in the securities industry,  themselves are unfair.

For readers looking to learn more about this – particularly thorny – legal landscape, here  is a place to start.  But while in any  regulated business (such as financial services) an analysis of conflicts or any other ethics-related issue should generally start with the law, that ought not to be the end of the inquiry.  So, as this story develops, the COI Blog will return to it to see what broader ethical lessons (if any) can be drawn from it.

Finally, for “extra credit,” consider this story from the somewhat parallel universe of commodities regulation about a set of new rules which are also intended to reduce conflicts of interest but which some critics feel will end up having unintended negative consequences (perhaps similar to what happened with Facebook): “To the extent that the rule inhibits the flow of analysis and trade ideas to small investors, it will give an informational trading edge to larger entities…”