To Pre-Approve or Not to Pre-Approve: What’s the Question?

When compliance teams build and assess their firms’ compliance programs, there is often significant emphasis placed on preventing and detecting potential conflicts of interest – and rightfully so.

Whether related to outside business activities or gift and entertainment expenses, these aspects of a compliance program can play a key role in eliminating risk. Yet, there’s one major aspect of preventing conflicts that firms often underemphasize with staff: getting pre-approvalAs simple as a concept as it may seem, this failure to receive preemptive notice to a transaction, or purchase, is something firms continue to struggle with year after year.

And while you may never be able to fully guarantee your staff will willfully pre-disclose every potential conflict of interest they encounter, there are steps your firm can take to ensure a majority of those business transactions are properly being reviewed and approved by compliance. In this article, we offer five tips to help encourage your staff to pre-disclose potential conflicts of interest.

Educate your Employees

Employees can usually tell you that their firm has a policy governing conflicts of interest. They may even be able to recite key provisions of that policy. Where firms and employees often fall short, however, is truly understanding what that policy means (in layman’s terms), why the rule it governs is in place and how the firm plans to supervise for compliance. Use your annual training program as an opportunity to educate and remind staff about enforcing these policies and procedures.

Help Explain the “Why”

Firms can strengthen their conflict of interest programs by helping employees better understand the reasons behind the policy. For broker-dealers and investment advisory personnel, it’s often simple enough to point to specific rules and draw from published guidance. For instance, pull from FINRA rule 3220 and section 17(e)(1) of the Investment Company Act, when looking for regulatory insight on tracking gifts and entertainment.

Break Down the “How”

Helping your employees to understand “how” exactly the rule works and what’s required of them is quite arguably the most important step you can take in improving the likelihood of pre-disclosure.  Help define examples of conflicts of interest (i.e. difference between OBAs vs. PSTs), discuss exclusions or reasons why something may not require pre-approval (i.e. nominal gifts and entertainment) and reinforce exactly how your firm’s internal pre-approval process works.  

Be Meticulous During Onboarding

FINRA has recently encountered several instances where new-hires failed to notify their prospective firm, in writing, of existing disclosures. In some cases, individuals did not understand that the rule required written rather than verbal notice. In other cases, individuals failed to provide the information with sufficient detail for their new firm to make an adequate determination as to whether to allow a proposed disclosure to proceed. Be sure to take advantage of this time in the onboarding process to ask the right questions.

Give your Team the Tools to be Successful

Pre-disclosure is an important first step in reviewing potential conflicts of interest at your firm, and your internal procedures should reflect that. For instance, if you’re using a third-party expense reimbursement tracking solution to manage your firm’s gift and entertainment expenses, have you also put in place special protocols that track whether each requested reimbursement was properly pre-disclosed in the first place? Using an electronic system that focuses on the pre-disclosure can help alleviate missed information, while eliminating red flags later on down the line.

To learn more about Quest CE’s disclosure tracking system, click here.