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Conflict of Interest
210.1
Identifying Conflicts
Rules 210.1 and 210.2 together require members to determine whether there exist conflicts as between themselves and their clients or proposed clients, or between the duties and obligations owed to one client and the duties and obligations owed to another client or a proposed client. Where such a conflict is found to exist, the member must decline to act in the proposed affected engagement, or withdraw from the engagement, unless the consent of the client or proposed client to proceed or continue the engagement is implied by the client's or proposed client's conduct or the conflict can be managed as provided in Rule 210.3(a).
Conflicts in a member's firm or practice generally arise in three broad types of circumstance described as follows.
Public Practice Objectivity Issues
As provided in Rule 204 and the related Council Interpretation, the provision of assurance and insolvency services must be objective, both in fact and appearance. In considering conflicts of interest with respect to a professional engagement, members and firms should refer to Rule 204 and the related Council Interpretation for more complete guidance in determining objectivity.
Protecting Confidentiality of Client Information
As provided in Rule 208 and the related Council Interpretation, members and students must protect the confidentiality of client information and assure clients that this information will not be disclosed. The only exceptions to this obligation are set out in the Rule itself.
Pursuit of Clients' Interests
Members and students have an obligation to all of their clients to provide professional service with integrity and due care. Since members and their firms will have a number of clients, they may encounter conflicting client interests when fulfilling their obligations to each client. While a member or firm may be able to provide services to clients whose interests conflict, they must consider the extent of their obligations to each client and then use professional judgment to determine whether any particular conflict must be avoided, or whether explicit consent must be obtained or the situation reflects common commercial practice where the consent of the client to act is implied by the client's conduct. Where there is explicit or implied consent, the member or firm must also consider whether the conflict can be managed appropriately.
210.2
Common Commercial Practice
The following situations involve implied consent and reflect common commercial practice:
"The firm is acting as auditor for several clients who happen to compete in the same industry. They have hired us for our experience with their industry, and respect our reputation for protecting confidential information.
It is reasonable for members to conclude that clients with knowledge of the circumstances who do not object to a conflict at the outset of an engagement have accepted the conflict.
"I am doing an audit for Company XYZ and they have asked me to do some consulting as well. As an assurance provider, my duty is to report to the shareholders. As a consultant engaged by management, my duty is to the corporation."
Members must be aware of the implications to their objectivity and independence when providing consulting services to an assurance client.
210.3
Other Conflicts
Appropriate Management of Conflicts
There will be instances where a conflict will arise that can be appropriately managed provided the circumstances are clear to all parties and there is explicit consent on the part of all parties to proceed.
The following conflict situations may or may not be acceptable to the public:
"I would like to call upon an expert within my firm to assist on a particular matter for one of my clients. This expert is already committed to another client."
Whether this situation creates a conflict depends on many factors, including the number of experts in the firm.
"The firm has two separate clients who have asked it to take on a merger and acquisition assignment-however, each client is focused on acquiring the same target company."
Whether this situation creates a conflict depends on the ability to use distinct teams on each engagement and the effectiveness of procedures put in place to safeguard confidential client information.
There is a rebuttable presumption that the following conflict situations are unacceptable and, if the presumption is not rebutted, must be avoided:
"The firm has been asked by the husband and 50% shareholder of the firm's client, Company X, for assistance in purchasing the shares of the other 50% shareholder (his wife) in settling the distribution of assets in a divorce settlement."
"The firm has been asked to complete a merger and acquisition assignment for my client but the takeover target is already a client (or former client) of the firm."
"The firm is conducting a job search engagement for a client. I have found an excellent candidate to fill the position-only this candidate is currently employed by one of our firm's clients."
"I have been asked to pursue a strategic marketing study for one of my clients-however, the firm is already undertaking a similar marketing study for another client in the same market."
Whether this final example is a conflict that can be managed will depend on the ability of the firm to use appropriate institutional mechanisms on the two engagements.
210.4
Conflicts Encountered by Professional Service Area
Institute members who are also members of another professional body must also adhere to that other body's code of conduct. Other professional bodies would include, among others, the Canadian Association of Insolvency and Restructuring Professionals, the Canadian Institute of Business Valuators and the Canadian Institute of Actuaries. Where the Institute's rules differ from those of the other professional body, the higher of the two standards will apply.
It is possible that the nature of an engagement may change during the course of the engagement. This is particularly true when a member is asked to conduct an engagement in a situation that is potentially adversarial, even though the parties who engage the member may be in accord initially. Therefore, members must consider the possible existence and management of conflicts throughout the course of the engagement.
The following is a discussion of conflicts of interest commonly encountered by members and their firms in the significant areas of professional practice.
Assurance Services
(a)
A member or firm may be asked to provide assurance services for two or more clients who have competing commercial interests. There will either be implied consent on the part of all clients for the member or firm to act or the assurance provider will deal with the conflict by obtaining the informed consent of each client. In either case, the member should use procedures to protect confidential client information.
(b)
A member may possess confidential information obtained from one assurance client that is important to the fulfillment of the assurance engagement of a second client. For example, a member may learn during the course of an assurance engagement that the assurance client is in serious financial difficulty. If the member also undertakes an assurance engagement for a major supplier of the assurance client, the member will possess confidential information that could result in a material change to the financial statements of the supplier-client. The member may not rely on this confidential information to complete the engagement for the supplier-client. If the supplier-client is unaware of the information relating to the first client, the member has a conflict of interest that must be resolved.
In such circumstances, the member is expected to use reasonable efforts to obtain the confidential information from other sources, and if this is not possible, the member should seek legal advice.
(c)
A member may possess confidential client information gained in the course of an assurance engagement that would be useful in the provision of other professional services by the firm. Such confidential client information obtained in the course of the assurance engagement must be protected from disclosure or use for other purposes unless prior permission is obtained from the client.
(d)
An assurance provider has the right to obtain the information that is required in order to carry out the assurance engagement. For this reason, the assurance provider is expected to have all knowledge concerning the client that the firm possesses that is relevant to the assurance engagement. Clients are expected to give assurance partners the information directly but may authorize assurance partners to seek out the information from others within the firm. Information protected by legal privilege would be dealt with by following the protocol for enquiries established by the lawyers involved.
(e)
A member or firm engaged to provide an assurance report to the shareholders on a set of financial statements might be asked by one shareholder for confidential client information from the audit working papers to be used by that shareholder in a dispute with another shareholder. Since the assurance provider's duty is to the shareholders as a group and not to individual shareholders, such a request would present a conflict.
(f)
Members and firms should refer to Rule 204 and the related Council Interpretation for guidance on conflicts that may affect independence and objectivity with respect to an assurance engagement.
Taxation Services
(a)
A tax practitioner is likely to be involved in providing tax assistance and advice to a wide variety of clients who are entitled to expect their affairs to be kept confidential. The tax practitioner is expected to provide each client with the benefit of all of his or her professional knowledge unless the practitioner and the client agree, preferably in writing, that particular knowledge that the practitioner possesses may not be disclosed to third parties because it is proprietary to the client. Other clients should be made aware that this restriction might exist from time to time.
(b)
A member or firm may be asked to provide tax-planning advice to two clients who will use that advice to pursue an objective that only one of them can achieve. Since both of the clients are in pursuit of the same objective, there is an initial presumption that the firm can accept only the first request to act in the matter. It may, however, be possible for different persons within the firm to act for each client through the use of effective institutional mechanisms, thus rebutting the initial presumption that the firm cannot serve both clients.
(c)
A tax practitioner may obtain only the information that relates to his or her specific engagement. In such a case, it is reasonable to believe that the tax practitioner will not possess all of the firm's knowledge of a particular client and it may be possible to satisfy the onus of demonstrating that the firm's knowledge is not automatically shared by the particular tax practitioner.
Management Consulting Services
A management consultant may be involved in a variety of engagements such that there are conflicts which may be acceptable in one type of engagement but which are unacceptable in another. Since consulting engagements usually have clearly stated objectives and a defined life span, the issue of possible conflicts of interest is often dealt with in the terms of the engagement (i.e., the extent of the member's obligations are agreed to by contract).
Consulting engagements may be generally regarded in three categories for the purpose of considering the issue of conflict of interest, as follows:
(a)
Process and design consulting engagements, which generally involve the provision of specialized knowledge to assist a client to achieve an objective that the client has chosen. It is usual for a consultant to provide such assistance to a wide range of clients, some of whom may have competing interests. Often, the consultant is selected for specialized expertise. The clients recognize that, in the future, the consultant is likely to make that expertise available to others, having built on experience gained along the way.
(b)
Strategic consulting often involves a consultant assisting a client in the selection of optimum business strategies. Strategic consulting is likely to involve the most highly sensitive and confidential business information. Consultants providing these types of services typically recognize this sensitivity and do not work for clients who are in direct competition. It is, however, recognized that the business strategies selected often become publicly known within a short time frame and it is therefore possible that, after a suitable time, a consultant may undertake work for a direct competitor of a previous client. Such matters should be expressly addressed in the engagement contract.
(c)
Search consulting involves assisting a client to locate information or resources that are necessary for the client to attain an objective. Since the information or resource is likely to exist within another commercial enterprise, the opportunity for a conflict of interest to arise is particularly great. For this reason, it is customary for the consultant to disclose at the outset the nature and extent of any limitations on the scope of the search.
Merger/Acquisition Services
(a)
A practitioner involved in merger and acquisition activity is likely to be involved in a number of such engagements concurrently working for both existing and new clients. Where the practitioner is a member of a firm there may be several types of specialized support which the firm will offer in this area of activity ranging through due diligence, tax planning, market analysis and pricing of the proposed transaction.
A member involved in mergers and acquisitions is expected to use a variety of conflict management tools to provide the greatest possible assurance that confidentiality of the work will be maintained unless otherwise agreed with the client. A firm will be expected to regularly employ Fire Walls and to impose Cones of Silence on those who are consulted in the work. Where consultations beyond the firm are required, the use of confidentiality agreements will be necessary.
(b)
Due to the nature of the work of a merger and acquisition practitioner, it is recognized that the pursuit of an engagement for one client may run contrary to the interest of another client of the firm.
When a firm uses institutional mechanisms such as Fire Walls, it should be recognized that if their use is challenged in a court of law, the firm will be required to demonstrate that the institutional mechanisms are effective. Even then, when one or more of the firm's merger and acquisition practitioners are working for clients pursuing approximately the same objective within approximately the same time frame, the firm, with the permission of each client, is expected to obtain the informed consent of all such clients, ordinarily in writing. While able to provide advice, unless agreed otherwise by all clients, the firm should exclude itself from the client's decision-making role.
Forensic Accounting & Litigation Support Services
(a)
A forensic practitioner may engage in a number of different types of activity that will involve different expectations from a client. The most common different circumstances are finder of fact (including fraud investigations, breach of law investigations), quantification of losses and expert accounting and auditing testimony (including where a firm employs other experts such as actuaries, engineers, and economists).
In almost all circumstances, there is the real possibility that an engagement will become part of a dispute. There is, therefore, the expectation that the member will respect the firm's obligations to its clients by not acting against them. This expectation may be modified in circumstances where the client engaged the firm for a narrow and unrelated purpose (such as a productivity improvement consulting assignment or an employee search assignment), but the member will only be able to rebut the presumption if it is clear the information received from the client is not relevant to the matter in dispute.
In the case of current clients, the firm may proceed with the engagement with the informed consent of both parties. The use of tools such as informed consent, Cones of Silence and Fire Walls will assist the firm to demonstrate that confidential information will be protected.
(b)
It would ordinarily be appropriate for a member or firm to act as a finder of fact for parties on the opposing sides of a conflict where both parties agree to use the fact finding report as an agreed statement of fact within the legal process.
Valuation Services
(a)
A valuation practitioner may or may not be a chartered business valuator (CBV). Valuation practitioners recognize the need to avoid conflicts of interest by not acting for two or more clients whose interests may conflict, except after adequate disclosure to and with the express written consent of all parties.
(b)
Valuation practitioners must take care not to create a conflict of interest by accepting an engagement that will put them in a position of advocacy against another client or former client when the practitioner has confidential information of that former client. For example, a valuation practitioner should not accept an engagement from one shareholder group of a company that is being broken up (butterfly transaction) where the member has previously provided services to all shareholders of the company. Similar considerations also exist where the clients are a married couple who are divorcing.
Actuarial Services
A member who provides actuarial services may be a member of the Canadian Institute of Actuaries. Conflicts of interest should be less likely in actuarial assignments. However, when actuaries become involved in areas such as merger and acquisitions where conflicts frequently do arise, they are expected to conduct themselves as other members working in those areas.
Insolvency Services
A member who provides insolvency and corporate recovery services may be a licensed trustee and a member of the Canadian Insolvency Practitioners Association. Since much of this work is carried out under the auspices of the court, there is a special set of rules to deal with potential conflicts in the various roles that a member may serve. Although these rules prevent members from serving roles for different classes of creditor, they do permit the grouping of creditors of a single class into one pool, even though some of these creditors may have conflicting interests.
210.5
The Process for Dealing with Conflicts of Interest
Step 1: Identify Conflicts or Potential Conflicts
In order to identify conflicts or potential conflicts when accepting a new engagement, a member should seek information from others within the firm as to the interests of other clients and their affiliations. While many conflicts are obvious from the beginning, other conflicts may arise during the course of an engagement. Often, identifying conflicts is more difficult than dealing with conflicts.
There are three types of conflict, which may overlap, described as follows.
Professional Conflicts
Members, students and others within their firms are required by the profession to observe the rules of professional conduct. In order to preserve the highest possible standards for the CA profession, each member is expected to engage only in activities that will maintain the good reputation of the profession and its ability to serve the public interest. When this obligation runs contrary to a client's interest, a professional conflict exists.
Legal Conflicts
Legal conflicts of interest arise primarily out of a member's client obligations or specific contractual agreements. A member and his or her firm have a duty within the standards of the profession to pursue the client's interests and to protect confidential client information. Thus, when two clients have conflicting interests, the firm cannot fulfill a duty to both unless appropriate institutional mechanisms are in place.
In addition, when a member is acting within the framework of litigation or potential litigation, the courts will want to ensure that the legal process is not compromised by participants, who act as experts, being influenced by interests or relationships which impair or might impair their objectivity.
Business Conflicts
Business conflicts occur when the business interest of a client is contrary to the business interest of the member or his or her firm or the business interest of another client of the member or firm. A business conflict raises management, not professional, issues for the member and his or her firm and can be resolved without reference to the rules of professional conduct, unless it also involves a professional or legal conflict. Business conflicts include the following examples:
(a) a particular engagement may require too large a commitment of scarce resources in the firm;
(b) the provision of certain services to a client may preclude the provision of other, more lucrative, services to the same client;
(c) the firm is dissatisfied with the risk/reward analysis.
Each firm should develop a conflict identification process. This process should include a client information database and a system that allows for timely access to the database by members of the firm so that real or potential conflicts can be recognized promptly. Conflict inquiries should be documented. The client information database should be kept up-to-date, and should not include confidential client information.
A member who practises in an international partnership, or has an association with a firm or firms which have an international practice, will have to exercise professional judgment when deciding who should be consulted when seeking information about conflicts and possible conflicts. Consultation will normally be limited to the country or countries in which the particular engagement will be conducted unless the member is aware of the potential for conflicts arising in a broader geographical area. The nature of the partnership or association and the interests of the potential client are two factors the member should consider.
For areas of practice where conflicts must usually be avoided rather than managed, a firm's conflict identification process will likely need to be more extensive and formal and should include the identification of a person or persons in the firm to act above the wall as a conflict management officer or officers.
An effective conflict identification process will allow a firm to identify conflicts (or possible conflicts) early on in an engagement. The earlier a potential conflict is identified, the greater the chance the firm will be able to choose to manage the conflict, rather than avoid the engagement altogether.
Step 2: Assess the Conflicts
After conflicts and possible conflicts have been identified, a member should exercise professional judgment as to whether the conflict must be avoided altogether by declining the engagement, or whether the conflict can be appropriately managed.
When assessing the conflict, members and others in a firm should consider the following questions.
(a)
Is the conflict solely a business conflict such that it does not require any action under the rules of professional conduct?
(b)
Is the conflict one where consent to proceed can be implied from the client's conduct, in keeping with common commercial practice, or is it necessary to obtain explicit consent?
(c)
Does the conflict impair the member's or firm's independence and objectivity with respect to an assurance engagement?
(d)
Does the conflict hinder the member's ability to perform his or her duties?
(e)
What will be the impact on the client's ability to obtain professional services should the member or firm choose to decline the engagement? In smaller communities, where there are fewer practitioners available to serve clients' needs, there may be more occasions when it is necessary to manage conflicts.
(f)
Would a reasonable person be satisfied that the proposed conflict management approach is satisfactory to manage the conflict?
(g)
Is it likely the requested service will go before a court where another client of the firm will be an opposite party? Unless the member has been asked to act as a fact finder or is providing information that is not contested, a court is likely to find it unacceptable for a firm to represent two clients who are litigating against each other.
(h)
Will the institutional mechanisms available to the member or the firm be effective in managing the conflict? This will be determined by the facts of the situation and the onus will be on the member or the firm, where necessary, to demonstrate to the courts that the institutional mechanisms are effective in protecting confidential client information.
(i)
Will the member's or the firm's decision to avoid the conflict by resigning from the engagement be a commercially satisfactory solution for the client or clients in conflict? In many cases, the solution to avoid the conflict by resigning from the engagement with each of the clients will not be commercially satisfactory.
Once a member has identified a conflict and assessed its impact, he or she may decide to:
(a)
Decline/Terminate the Engagement - For those conflicts that are not possible or appropriate to manage, the member should inform the client that the engagement will be declined or terminated; or
(b)
Develop an Effective Conflict Management Approach - For manageable conflicts, the next step is to develop an effective Conflict Management Approach. Members must be aware that the decision to manage a conflict may be subjected to challenge later; or
(c)
Accept the Engagement - For those conflicts that, by reason of their common acceptance in practice, it is deemed not necessary to manage through special procedures or obtaining consent, no action is required before the engagement is accepted.
Generally, most decisions with respect to business conflicts of interest will be made by a member or the firm based on a desire to retain the confidence of and relationship with existing clients and potential clients and will generally not involve consideration of the rules of professional conduct. For this reason, a member or firm may decide to do work for competitors of a client; not to do work for a direct competitor of a significant client; or, to seek permission before providing a particular service to a competitor of a client.
Step 3: Develop a Conflict Management Approach
Once the member or the firm has identified a conflict that is potentially manageable, the next step is to examine the various institutional mechanisms that are available within the firm to manage the conflict. A Conflict Management Approach is then developed, incorporating the various institutional mechanisms selected. While no specific approach is prescribed, each Conflict Management Approach must be effective and the member or firm must be able to demonstrate that it is effective. The member should then provide disclosure to the affected client or clients and obtain client consent to proceed.
Choose the Institutional Mechanisms
The following institutional mechanisms may be incorporated in an effective Conflict Management Approach.
Firm Structure
A firm may organize itself in a variety of ways to deal with conflict issues, such that the organization itself becomes an effective Conflict Management Technique. A firm should consider the adoption of some or all of the following conflict techniques as part of its organizational structure. It is noted that, depending on factors such as the size of a firm, not every technique will be appropriate for every firm:
(a)
Adopt Conflict Management Policies that provide firm members with guidance on dealing with conflicts. These policies should recognize the role of professional judgment in the process and require members of the firm to be able to demonstrate that the interests of their clients will be served at a high professional standard. The policies should also require that clients be informed as to what they should expect when agreeing to allow a firm with a conflict to act on their behalf.
(b)
Implement an Engagement Reporting Structure that is overseen by a Conflicts Management Committee or by one or more persons within the firm. The role of the Committee or responsible person(s) is to (i) identify, at the outset, potential conflicts, and decide whether to avoid the conflict or manage it and (ii) be informed of possible conflicts and provide assistance to others within the firm on exercising professional judgment with respect to conflict management. The person(s) determining or managing a particular conflict should be above the wall with respect to that conflict.
(c)
Create separate areas of practice for specialty functions within the firm, which may act as a barrier to the passing of confidential client information from one practice area to another within a firm. The flow of information from one area to another should be restricted by firm policies and procedures. Such policies and procedures would not preclude the cross-departmental sharing of information by members of a particular client service team. Within each separate area, members must understand the expected limitations in sharing confidential client information across areas. It is recognized that the larger and more complex the firm, the more likely the need for creating separate areas of practice.
(d)
Establish policies and procedures to limit access to files. Much of the information obtained throughout the course of an engagement is retained in the files of the firm, either electronically or paper-based. To maintain the confidentiality of these files, a firm may put in place a formal system that limits access to these files to persons who are working directly on the engagement, logs access to files, and documents any access exceptions. The physical segregation of particular confidential information may further enhance its protection. Broad access to non-public information that has been retained by a firm may be viewed by its clients as contrary to its responsibility to protect confidential information.
(e)
Use blanket or engagement-specific confidentiality agreements signed by employees, which will emphasize the need to protect confidential information.
(f)
In areas of practice where it is likely conflicts of interest will arise on a regular basis, use code names or numbers to assist in the use of Fire Walls and other conflict management tools.
Fire Walls
The effectiveness of Fire Walls will be improved by the use of internal procedures such as designating an above the wall person to monitor the activities within the Fire Wall(s) and to ensure that the firm as a whole is not acting in an inappropriate manner. This person would:
(a)
ensure that the firm did not engage in activities that it was not appropriate or possible to manage;
(b)
ensure that persons joining or leaving a team within the firm do not create new unacceptable conflicts;
(c)
document the teams' respect for the wall; and
(d)
avoid involvement in or detailed knowledge of information contained within the wall.
Fire Walls should involve some combination of the following organizational arrangements:
(a)
physical segregation of people and files;
(b)
an educational program, normally recurring, to emphasize the importance of not improperly or inadvertently divulging confidential information;
(c)
strict and carefully defined procedures for dealing with a situation where it is felt that the wall should be crossed, and maintaining proper records where this occurs;
(d)
monitoring by compliance officers of the effectiveness of the wall; and
(e)
disciplinary sanctions where there has been a breach of the wall.
Cones of Silence
Cones of Silence may be used to:
(a)
demonstrate foresight of the need to maintain client confidentiality and thereby assist a firm to manage conflicts arising in various areas of its practice;
(b)
allow a firm specialist to work on a minor aspect of an engagement without being brought formally within a Fire Wall; and
(c)
demonstrate the commitment of those involved.
In some rare circumstances, a Cone of Silence is demonstrated implicitly by the special conduct of a member or another person in the firm. In such circumstances, there should be observable evidence that the Cone of Silence will be effective.
The limitations on the use of Firm Structure, Fire Walls and Cones of Silence must always be recognized and considered in terms of whether the firm's obligations to its clients can be fulfilled. A professional judgment must always be made in light of the particular facts and circumstances. Institutional mechanisms that are set up on an ad hoc basis, after a conflict is identified, will not be seen to protect confidential information that may already have been shared within a firm. Ongoing institutional mechanisms used on a regular basis are more likely to be effective and be seen to be effective that those set up on an ad hoc basis.
The uses of institutional mechanisms to restrict information flows between units or individuals within a firm may not be effective when:
(a)
a client expects to have complete access to all of the firm's resources. The use of a Fire Wall to protect the interest of another client may not be acceptable to the client.
(b)
a member or firm is not able to demonstrate clearly that they have been and will continue to be highly effective in preventing the sharing of confidential information.
(c)
there is a single department, operating unit or a large number of people coupled with a high turnover rate within the wall.
(d)
a member attempts to hide behind the wall. The existence of a Fire Wall does not relieve a member or firm from making the appropriate enquiries or exercising professional judgment.
Provide Disclosure and Obtain Client Consent
A fundamental underpinning to the management of conflicts of interest involves informed consent by clients. Unless the conflict is one that reflects common commercial practice such that the client's consent can be inferred from the client's conduct, informed consent should be obtained by:
a)
notifying the client of the existence of a conflict; and
b)
either declining or resigning the engagement or obtaining the agreement from the client to proceed in spite of the conflict.
The onus is on the member or firm to be able to demonstrate that informed consent has been obtained. In cases where the conflict is one referred to in Rule 210.3(b), the informed consent must be implied by the client's conduct and acceptance of the circumstances. In all other cases, it is desirable to obtain informed consent in writing. When written consent is not obtained, the client's verbal consent and the details thereof should be noted in the member's or the firm's files. The more direct the conflict is between existing or potential clients, the more important it is for the firm to ensure that the clients and potential clients know that their interests may conflict with the interests of other clients of the firm and that the firm has effective measures in place to ensure that confidentiality is maintained. In each case, members should use professional judgment in determining the nature and extent of disclosures required to be made to each client and the need to obtain consent in writing.
If notifying the client of the existence of a conflict would, in itself, constitute a breach of confidentiality, the member or firm will have no choice but to decline the engagement.
The appropriateness of managing a particular conflict is likely to depend on the particular facts and circumstances. As circumstances evolve, clients who initially agreed to allow a firm with a conflict to act may change their position. The risk and consequences of this possibility should be considered at the outset.
When a member enters into discussions with a client about the impact of possible conflicts on the client's interest, the member should specifically address how the obligations to the client will be met and what restrictions, if any, there will be on access to the expertise of the firm.
It appears that the courts will recognize the contractual clarification of a member's obligations by either express or implied terms along with disclosure and consent, for example:
(a)
An engagement letter or contract may be used to clarify the member's and the client's obligations in an engagement. The following wording might be used to inform a client of potential conflicts in an engagement, restrictions that could apply and the use of institutional mechanisms to protect confidential client information:
"We provide a wide range of services for a large number of clients and may be in a position where we are providing services to clients whose interests may conflict with your own. We cannot be certain that we will identify all such situations that exist or may develop and it is difficult for us to anticipate all situations that you might perceive to conflict. We therefore request that you notify us promptly of any potential conflict affecting the Contract of which you are, or become, aware. Where the above circumstances are identified by us or you and we believe that your interests can be properly safeguarded by the implementation of appropriate procedures, we will discuss and agree with you the arrangements that we will put in place to preserve confidentiality and to ensure that the advice and opinions which you receive from us are wholly independent of the advice and opinions that we provide to other clients. Just as we will not use information confidential to you for the advantage of a third party, we will not use confidential information obtained from any other party for your advantage."
(b)
Written expression in public policy statements of clarifications of obligations undertaken also appears to be a tool that a member or firm may use to further demonstrate the management of possible conflicts of interest.
(c)
To the extent that the matter is not dealt with in the foregoing, clarification of a member's or firm's obligations may also be included in final reports, proposals, etc.
In the engagement letter, public policy statement or contract, the relationship may be clarified by:
(a)
Clearly defining the obligations owed to the other party. This may be accomplished through an exclusion clause;
(b)
Clearly delineating the rights and duties of all parties; and
(c)
Where a conflict is managed in part by a client's informed consent, including provisions that set out the consequences should the client terminate its consent. It might be agreed, for example, that in such circumstances the member or firm would (or would not) be able to continue to act for one of the other parties, and if so, which one.
Step 4: Assess the Effectiveness of a Conflict Management Plan
After choosing the institutional mechanisms that will be relied upon, the member should assess the overall effectiveness of the plan. The onus will be on the member or firm to be able to demonstrate that the institutional mechanisms are effective in protecting confidential client information. In a particular case, the court may not accept the use of institutional mechanisms to manage a conflict. Members must assess the risk of such a finding by a court on a case-by-case basis and, where appropriate, obtain legal advice.
When assessing the effectiveness of the selected institutional mechanisms, members should ask the following questions:
(a)
Will the institutional mechanisms work effectively in practice? For example, it may not be possible to obtain the informed consent of two clients as the mere disclosure of the issue to one client might involve the disclosure of confidential information of the other client.
(b)
Are the persons required to perform the work able to remain within a Cone of Silence or behind a Fire Wall for the required period of time?
Step 5: Re-evaluate the Plan During Engagement
A client relationship will often exist for an extended period of time during which the client's interests may change. When in the course of an engagement for a client, conflict or possible conflict with an engagement for another client is discovered, a member or firm should consider the following actions:
(a)
resign from both assignments without disclosure of the detailed reasons if such disclosure would also disclose confidential client information; or with appropriate disclosure of the detailed reasons if confidential client information can be protected;
(b)
obtain informed written consent from both clients to continue their engagements in spite of the conflicts;
(c)
seek the informed written consent of both sides to continue for one side;
(d)
after obtaining the required consent in (b) or (c), use existing institutional mechanisms such as Cones of Silence or Fire Walls, to protect confidential client information in appropriate circumstances.
When the discovery of a conflict occurs while an engagement is in progress, it may be more difficult to then implement institutional mechanisms to protect confidential client information. It will also be difficult to clarify the firm's obligations by indicating that the firm intends to accept engagements for clients whose interests may from time to time conflict with those of existing clients.
If, however, institutional mechanisms such as Cones of Silence or Fire Walls have been in place from the outset of both client assignments, or clients have been informed at the outset of possible conflicts, the task of dealing with new conflicts that arise is made easier.
210.6
Documentation and Other Considerations
Since problems with the management of conflicts may arise in the future, it is important to document the process by which conflicts are assessed and managed. Documentation will normally include considerations with respect to the identification of conflicts; the assessment of conflicts and the facts considered in making the assessment; the conflict management plan adopted with the reasons the member or firm believes the plan will be effective; and the ongoing assessment of the plan's effectiveness.
When developing a Conflict Management Approach, the firm must ensure that the Conflict Management Techniques selected are robust enough to demonstrate that the client's interest will be served within the terms of the engagement.
The use of such techniques requires the use of professional judgment since ultimately their effectiveness and acceptability will be judged using the standard of "the expectation of an informed, reasonable observer".
In those areas of practice where relationships or engagements exist for extended periods of time, the question of potential conflicts should be addressed at least annually, perhaps as part of the ongoing client continuance review.
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