John Greedyman has recently been awarded the rainmaker of the year for Merril, Money and Morality Inc. Interestingly in 10 years at the company he has only once issued a sell recommendation and that came one month after that company had hired another firm for an IPO. What are the rules governing potential conflict of interest?
In the modern day economy we are all forced to rely on others for information that we then use in making economic decisions. Purveyors of such information have a responsibility for making sure their information is accurate and that any advice they may give is done with the best interest of the clients involved. Offering recommendations whose main purpose is the benefit of the advisor, to the detriment of the client, is a violation of the Biblical prohibition of lifnei iver, placing "a stumbling block before the blind". This prohibition proscribes offering ill -suited or misleading advice, to one relying on you to "see" for them. What is relevant in assessing the behaviour of the advisor is not the outcome of the advice but rather the intent at the time it was given. If one's advice would suddenly change due to a changed fee structure then one is likely in violation of this edict. Thus advising an older conservative client to place the bulk of his assets in a speculative high tech fund, which offers higher commissions to the broker, would run afoul of this prohibition even if the returns were spectacular. Advising the same client to invest in a "blue chip" fund (do any still exist?) that ended up dropping 50% would entail no moral wrong. All humans can do is give advice they think is appropriate in the particular circumstances - only G-d can determine the results. Of course one can never know the intent of others and thus immediately following this directive the Torah adds the phrase "and you shall fear G-d". While good marketing may enable a firm to have a stellar reputation, G-d is not so "easily fooled".
While conflict of interest may give rise to potential violation of this edict there is nothing inherently wrong with an advisor having a conflict of interest; provided the conflict does not cause one to alter their advice. In fact, conflict of interest is inherent in any modern advisory role; be it a real estate agent, stock broker, investment banker, lawyer, accountant or even Doctor. While one may truly derive satisfaction in helping others, clearly one's own economic welfare is a major motivating factor in doing one's job. This is unavoidable - in fact it is part of human nature - and thus attempts to totally eliminate conflict of interest have by and large failed. Therefore Jewish law would not automatically ban many of the conflicts that secular law is so concerned about. Auditors would be allowed to offer consulting work, the debacle of Arthur Andersen notwithstanding. What Jewish law would demand is that these potential conflicts be publicized, leaving it up to the client to decide whether they nevertheless want to accept the advice.
Jewish law in seeking to balance the inherent competitiveness of the market and its zero sum nature, places a measure of responsibility on the recipient of the advice to do their own investigation. Participants in business are expected to have some knowledge of the business environment and they can not naively pass off all responsibilities to their investment advisors. It is this premise that allows Jewish law to distinguish between an advisor and a judge. A judge is disqualified even if the slightest conflict exists, even if the conflict is revealed. Their judgement is bound to contain slight biases despite efforts at impartiality. However the advisors role is to advise only - it is up to the advisee to act on that advice as they see fit, taking into account the potential biases that may exist.
While Halacha would not insist on placing a "Chinese wall" between the investment arm and research arm of brokerage houses, society has the right to do so if they so desire. However one must be aware of the inherent weakness of such an approach. A better approach, though not guaranteed, is to ensure that all employees have training in ethics and then choose people who (or appear to) demonstrate honest, impartiality and integrity.