Risk Update

Financial Risk & Conflicts Reading — Wall Street, Law Firm PE, Banking, Consulting & Government Contracting Conflicts Updates

New SEC Guidance Tackles How to Handle Conflicts of Interest” —

  • “New guidance from the Securities and Exchange Commission warns firms that identifying and addressing conflicts under Regulation Best Interest and the Advisers Act fiduciary standard ‘should not be merely a ‘check-the-box’ exercise, but a robust, ongoing process that is tailored to each conflict [said Micah Hauptman, director of investor protection for the Consumer Federation of America].'”
  • “In its new guidance, released Wednesday morning in Q&A form, SEC staff notes that it’s ‘important that firms and their financial professionals review their business models and relationships with investors to address conflicts of interest specific to them.'”
  • “Industry sources I contacted see the bulletin as helping brokers and advisors figure out ‘how’ to identify and address conflicts.”
  • “‘This is one of the first substantive pieces of guidance on Reg BI for the brokerage industry and the fiduciary standard for investment advisers’ under SEC Chairman Gary Gensler, Jim Lundy, a partner and member of the Securities Enforcement & Litigation Practice at Foley & Lardner LLP, said in an email. “As such, brokerage and investment advisory firms should give this a close study and apply it to their business model and compliance and supervision programs as they best see fit to do so.'”
  • “The FAQ, Lundy added, ‘may be viewed as helpful in that it provides much greater detail and guidance for the ‘how’ aspect of getting into and maintaining compliance with these standards.'”
  • “Further, he [Hautpman] continued, ‘it makes clear that there are some conflicts that are of a nature and extent that firms would be unable to address in a way that would allow the firm or its financial professionals to provide advice or recommendations that are in the retail investor’s best interest. In those cases, firms would need to take much more aggressive action in addressing those conflicts, including eliminating them or refraining from providing advice or recommendations that could be influenced by the conflicts to avoid violating the obligation to act in the retail investor’s best interest.'”
  • “The guidance points out that there are no conflict-free business models. While all firms have some conflicts, the nature and extent can vary greatly from firm to firm based on business model or product mix.”
    “Addressing conflicts is also not a set-it-and-forget-it task. The steps to address conflicts need to be tailored to a firm’s particular business model. The guidance also provides steps firms can take to “identify” conflicts.”

Senate passes bill to crack down on conflicts of interest in federal contracting” –

  • “The Senate Tuesday passed a bipartisan bill aimed at rooting out any instances of conflict of interest in federal contracting by removing any conflicts between taxpayer-funded projects and federal government contractors’ other business opportunities.”
  • “The Senate passed the Preventing Organizational Conflicts of Interest in Federal Acquisition Act, led by Senator Gary Peters, D-MI., the Chairman of the Senate Homeland Security and Governmental Affairs Committee, that would require federal agencies to identify potential conflicts for specific contracts early in the process. The bill is expected to pass the House as well.”
  • “‘Federal contractors are entrusted to provide critical goods and services to the federal government as it serves the American people. If we don’t know whether they are serving other, potentially conflicting interests, we can’t be confident that Americans are getting exactly what they pay for,’ said Senator Chuck Grassley, R-IA., a lead co-sponsor of the legislation. ‘We’ve put together a good government bill that takes steps to eliminate these potential conflicts of interest to rebuild public trust in our contracting process.'”
  • “The new legislation aims to increase transparency in the federal contracting process by requiring Federal contractors to disclose other business relationships with entities that conflict with the specific work that an agency has hired them to do.”

Marco Rubio, Chris Smith, Brian Mast Want Information From McKinsey Regarding Work With China” —

  • “This week, U.S. Sen. Marco Rubio, R-Fla., and U.S. Rep. Chris Smith, R-NJ, sent a letter to McKinsey Global Managing Partner Bob Sternfels highlighting McKinsey’s apparent role in supporting various Chinese state-owned enterprises and asking for any and all information on these relationships.”
  • “‘In April, the U.S. Food and Drug Administration (FDA) announced that it would not issue new contracts with McKinsey & Company pending ongoing investigations into whether McKinsey failed to divulge potential conflicts of interest over its work with both the FDA and opioid manufacturers,’ Rubio’s office noted. ‘McKinsey’s conflicting interests appear to go beyond its work with opioid manufacturers. The company retains deep ties with the Chinese Communist Party (CCP) even as it continues contracting with federal agencies.'”
  • From the letter:
    • “To be clear, the behavior documented by the House Oversight Committee’s investigation is alarming. On at least four occasions, McKinsey appears to have passed along non-public information based on its relationship with the FDA or discussed its willingness to do so… ach example raises serious questions about the ‘internal firewalls’ McKinsey routinely claims to have in place when asked by lawmakers, federal contractors, or the press.”
    • “What is more, these examples revolve around a single client, raising the specter that such casual disclosure of firewalled information could be happening routinely across the company. That is particularly alarming given the sensitive nature of McKinsey’s federal contracts and questionable foreign contracts, including with the CCP, People’s Republic of China (PRC), and entities affiliated with them. Despite multiple assertions by McKinsey’s leadership to the contrary, legal filings make clear that the company did work on behalf of the Chinese government, and therefore, the CCP.”

HSBC Says Conflict of Interest Probably Prevents Appointing Ping an to Board” –

  • “HSBC is unlikely to appoint an executive of its biggest shareholder Ping An Insurance Group of China to its board due to a conflict of interest, HSBC Chief Executive Noel Quinn told reporters on Monday.”
  • “‘There is the potential for conflict of interest given there is an overlap in their business model with ours in terms of insurance and banking,’ Quinn said.”
  • “Quinn’s remarks follow media reports of Hong Kong lawmakers calling on HSBC to make such a move, and a wider debate between the British bank and its largest shareholder Ping An over strategy.”

Private Equity’s Top Lawyers Enjoy Prized Access to Buyout Funds” –

  • “Kirkland & Ellis became the world’s highest-grossing law firm in part by advising private-equity clients through an industry super-cycle. Its belief in the asset class didn’t stop there.”
  • “Partners have invested in a range of internal pooled investment funds that buy into private equity funds, according to regulatory filings and people familiar with the matter. In some instances, the vehicles have bought into specific deals where they are advising the buyside.”
  • “In the past 12 years, [Kirkland’s fund] Randolph Street has sought to raise more than $1 billion from Kirkland partners to invest in client funds and deals, a Bloomberg analysis of regulatory filings shows. The internal funds are among the largest in the legal profession, people familiar with the matter said. “
  • “Kirkland’s investment entities have no management or other control rights over the funds they invest in, according to the firm’s conflicts of interest disclosures in court filings. Lawyers are allowed to participate in investment programs and longstanding legal ethics rules are in place to deal with potential conflicts of interest.”
  • “Other US law firms have similar vehicles, people familiar with the matter say. Cooley’s affiliated investment fund — GC&H Investments LLC — has taken stock in startup clients, a regular practice among firms and lawyers that advise technology companies.”
  • “Some of the deals Kirkland has invested in alongside clients include taking stakes in Blackstone Inc.-backed benefits administrator Alight Solutions, Bain Capital-backed Aveanna Healthcare and GB Group, a software company previously backed by Audax Private Equity.”
  • “But — as with other advisers that invest money alongside clients — Kirkland’s internal funds have drawn some scrutiny for potential conflicts of interest.”
  • “‘Ethics regulators have given guidance for decades,’ on how such arrangements can be done ethically, said Abe Cable, a professor at the University of California’s Hastings law school. Still, investments in the private equity funds of clients could be difficult to monitor. ‘If the lawyer, or a different lawyer at the firm, then represents a portfolio company or an acquisition target, the potential conflict might be hard for the company to see or understand.'”