GENERAL INTRODUCTION
Financial Institutions
The recent growth of financial markets, the creation of new sophisticated financial instruments and the globalisation of the economy have favoured the expansion of the services offered by financial intermediaries and the development of multifunctional financial intermediaries.
Non-qualified investors wishing to invest in financial instruments end up transferring the control and/or management of their investment portfolios to their financial intermediaries, thereby establishing a fiduciary relationship with the latter, which are then expected to manage clients’ portfolios in their clients’ sole interest.
However, the circumstance that financial intermediaries may provide different services and use their discretion in the management of client portfolios may well raise the risk of conflicts of interest.
Conflicts of interest may be of different nature. Examples which may occur in the provision of banking and financial services include: (i) conflicts between the fiduciary relationship due to a client and the structure of financial incentives which may influence the conduct of single employees or of an entire business division vis-à-vis that client (eg the conflict between the investment banking or financial advisory activity, on the one side, and the trading activity, on the other); (ii) conflicts between the duty of a financial consultant to advise a client on the best investment possible and the interest of same consultant to maximise commissions to be paid by that client; and (iii) conflicts between opposite interests of a financial intermediary’s clients to which a fiduciary relationship has to be equally guaranteed by that financial intermediary (eg the conflict between the activity of research analysts, whose clients are qualified investors, and the interests of investment banking divisions’ clients).
In Italy, specific rules aimed at preventing conflicts of interest are contained in laws, regulations etc aimed at guaranteeing financial intermediaries’ independence, the fiduciary relationships with their clients, the fair treatment of each client, as well as transparency. The surveillance, construction and enforcement of such provisions are primarily carried out by CONSOB (Commissione Nazionale per le Società e la Borsa, the Italian supervisory authority on financial markets) and the Bank of Italy, as well as by the courts.
Auditors
Conflicts of interest of auditors have recently drawn public attention in Italy, partly due to the Cirio and Parmalat cases, which caused great instability in the domestic capital market. One of the most sensitive issues pertains to the avoidance and/or mitigation of circumstances which may result in conflicts of interest (i) by determining the categories of individuals to whom independence rules should apply and the cases of incompatibility, as well as (ii) by regulating the relationship between auditing firms (or individuals within auditing firms) and their clients. As a matter of fact, conflicts of interest normally occur where members of the audited company (eg shareholders, directors, statutory auditors, employees etc) have a financial, business, or other kind of relationship with the auditing firm (and vice versa), or where the auditing firm also provides the audited company with other (non-audit) services.
In Italy, specific rules aimed at preventing auditors’ conflicts of interest are contained in laws, regulations etc, whereas the surveillance, construction and enforcement of such provisions are primarily carried out by the Ministry of Justice and CONSOB as well as by the competent courts.
Lawyers
Conflicts of interest affecting lawyers’ conduct are viewed as a matter intimately connected with the proper administration of justice and people’s confidence in it. Their potential adverse impact on the efficiency and integrity of the economic system is of concern to a few, but has not drawn the attention of the general public. Recent political and financial scandals involving lawyers have not changed this, except that lawyers’ incompatibility with positions held within governmental authorities is being debated.
Broadly, conflicts encompass: (i) any divergence between the interests of two or more clients of a lawyer, or those of a client and the lawyer’s personal interests; (ii) any contrast between the confidentiality a lawyer owes a client and another client’s expectation to receive all information available to the lawyer which is material to an engagement; (iii) any situation where the information a lawyer has obtained from a client may otherwise provide an unfair advantage to another client; (iv) any other engagement or office held by a lawyer which may interfere in the performance of an engagement received from a client or otherwise limit his independent judgment; and (v) any engagement involving a litigation against an existing or (unless a reasonable period of time has elapsed) a former client even if unrelated to the engagement(s) received from such client and regardless of the possibility of using information acquired from such client. In case of a law firm, conflicts are considered as existing if any of the above circumstances affects any of the lawyers working within the firm.
Conflict management is essentially governed by ethical rules developed through decisions of the local and central bodies representing the Italian Bar Association. These rules were for the first time codified at national level in 1997.
SECTION A: FINANCIAL INSTITUTIONS
1. Background
The Italian approach on conflicts of interest of financial institutions is largely influenced by the rules enacted both at the EU and international level.
At the European level, the matter has been mainly regulated by the following:
1 Directive 2003/125/EC of 22 December 2003, implementing Directive 2003/6/EC of the European Parliament and of the Council (the so-called Market Abuse Directive), concerning fair recommendations on investment and disclosure of conflicts of interest, pursuant to which EU member states must issue appropriate regulations to ensure disclosure of (i) all relationships and circumstances that may be reasonably expected to impair the objectivity of investment promotions, specially where the promoting person has a significant financial interest in one or more of the promoted financial instruments, or (ii) significant conflicts of interest in relation to the issuer of the relevant financial instruments. In particular, where the promoting person is a legal entity, Directive 2003/125/EC specifies the minimum information which must be disclosed; and
2 Directive 2004/39/EC of 21 April 2004 of the European Parliament and of the Council (ie the Markets of Financial Instruments Directive), pursuant to which EU member states shall, inter alia, require investment firms to take all reasonable steps to identify conflicts of interest between themselves, including their managers, employees and related agents, or persons directly or indirectly linked to them and their clients, or between two clients, in the provision of any investment and non-core services. In addition, where arrangements made by an investment firm to manage conflicts of interest are not sufficient to ensure, with reasonable certainty, the prevention of possible prejudices to a client’s interests, the investment firm shall disclose to the client the general nature and/or the sources of the conflicts before carrying out the relevant transaction on its client’s behalf.
At the international level, the International Conduct of Business Principles prepared by the International Organization of Securities Commissions (IOSCO) provide that an investment firm has to avoid conflicts of interest and, when these conflicts cannot be avoided, a fair treatment should in any case be guaranteed to clients.
The Italian legislation reflects the EU and international approach on conflicts of interest concerning financial institutions. In particular, financial intermediaries are (i) bound to organise themselves so as to avoid the occurrence of conflicts of interest and (ii) allowed to provide financial services to their clients even where situations of conflicts of interest exist, subject however to transparency and fair treatment protections in favour of investors.
2. Applicable laws, regulations and codes
The main legal sources providing for rules on conflicts of interest regarding financial institutions in Italy are (i) the Legislative Decree no 58 of 24 February 1998 (the so-called Unified Financial Act, the UFA), (ii) Legislative Decree no 385 of 1 September 1993 (the so-called Unified Banking Act, the UBA), and
(iii) the CONSOB Regulation no 11522 of 1 July 1998, as amended (the CONSOB Regulation 11522/1998), together with other communications issued by CONSOB.
In addition, other non-mandatory provisions – like the so-called Codice Preda (ie a non-binding code providing for rules on corporate governance of listed companies) and the Protocollo di Autonomia per le società di gestione del risparmio (ie a non-binding code prepared by Assogestioni providing for rules on corporate governance of asset management companies) – have been adopted.
As to case law, the matter of conflicts of interest regarding the provision of banking and financial services has also been recently dealt with by Italian courts.
Finally, a draft bill on protection of savings (Disposizioni per la tutela del risparmio), which also contains new rules on the provision of banking and financial services, is currently under discussion within the Italian Parliament (the Bill).
3. The requirements
The Unified Financial Act
The matter concerning conflicts of interest regarding financial intermediaries is mainly regulated in the UFA, which requires (i) corporate bodies’ members to satisfy independence requirements and (ii) the compliance by intermediaries with specific rules aimed at avoiding and/or mitigating the occurrence of conflicts of interest in the provision of investment services.
In particular, Section 13 of the UFA requires individuals performing administrative, managerial or control functions within Italian investment firms (società di intermediazione mobiliare), asset management companies (società di gestione del risparmio) or SICAVs (società di investimento a capitale variabile) to meet certain experience, integrity and independence requirements established by regulation enacted by the Ministry of Economy and Finance (the MEF), in consultation with the Bank of Italy and CONSOB.
In addition, Section 21 of the UFA – which applies to investment firms, asset management companies, SICAVs, financial intermediaries and banks providing investment services and non-core services in Italy on a professional basis sets forth general rules on business conduct, including the duty (i) to act diligently, correctly and transparently in the interest of clients and for the integrity of markets, (ii) to be organised so as to minimise the risk of conflicts of interest, and (iii) to act so as to ensure transparency and fair treatment of clients in the event of the occurrence of unavoidable conflicts.
Furthermore, it is worth mentioning that Section 114, paragraph 8, of the UFA provides that persons, including credit rating agencies, producing or disseminating research or evaluations on listed financial instruments, or on the issuers of such instruments, and persons producing or disseminating other information who recommend or suggest investment strategies intended for distribution channels or for the public must present the information fairly and disclose any interest or conflict of interest they may have with respect to the financial instruments to which the information refers. Such Section has been recently implemented by CONSOB in regulation which is still under discussion.
The CONSOB Regulation 11522/1998 and other communications issued by CONSOB
Section 27 of the CONSOB Regulation 11522/1998 – which implements Section 21 of the UFA – specifies that authorised intermediaries cannot carry out transactions with or on behalf of their clients where they have, directly or indirectly, a conflicting interest, also deriving from intra-group relations, the joint provision of more than one service or other business relations regarding themselves or entities belonging to their group, unless (i) they have previously informed the investor in writing of the nature and extent of their interest in the transaction, and (ii) the investor has expressly agreed in writing on the execution of the transaction.
Also, Section 45 of the CONSOB Regulation 11522/1998 provides for a specific regime applicable to the provision of discretionary asset management services. In particular, the intermediary may obtain from the client, by execution of the relevant agreement, a single authorisation allowing the carrying out – on an ongoing basis – of transactions involving a conflict of interest. In particular, Section 45, by derogating to the provisions of Section 27 of the CONSOB Regulation 11522/1998, specifies cases which are subject to a single authorisation provided that the nature of each conflict of interest is described in the management agreement and the investor has expressly authorised the transactions in such agreement.
Sections 56, 57 and 58 of the CONSOB Regulation 11522/1998 contain rules regarding the internal organisational structure of intermediaries. In particular, Section 56 of the CONSOB Regulation 11522/1998 provides that, in order to minimise the risk of conflicts of interest, authorised intermediaries shall, inter alia, establish internal procedures aimed at ensuring that no exchange of information occurs between the different divisions of the intermediary, which must be kept separate in accordance with the regulations issued by the Bank of Italy pursuant to Section 6, paragraph 1(a), of the UFA. As pointed out by some commentators, a good internal organisational structure may increase intermediaries’ level of efficiency in the provision of their investment services.
Several communications have been issued by CONSOB with regard to conflicts of interest regarding intermediaries. In particular, CONSOB has clarified:
1 that conflicts of interest must be assessed based on the specific circumstances, and that no conflict of interests arise when the investment instructions to the intermediary are spontaneously given by the client (ie are not solicited by the intermediary);
2 that conflicts of interest occur when the intermediary (i) receives commissions depending on the number and/or value of the transactions executed on behalf of its clients, or (ii) invests (on behalf of its clients) in financial instruments promoted or managed by itself or by an asset manager belonging to its group, or (iii) receives commissions for both the advisory and the placement activity; and
3 with regard to reports and statistics, the criteria to determine the specific interests of the persons distributing such reports and statistics, which are likely to influence their correctness and accuracy.
The Unified Banking Act
The matter concerning conflicts of interest of banks and other financial intermediaries (pursuant to the UBA, financial intermediaries are entities registered in the rolls provided under Sections 106, 107 and 113 of the UBA and authorised to carry out the following activities: (a) acquisition of holdings;
(b) lending activities; (c) money transmission services; (d) trading in foreign exchange) is also regulated by the UBA through provisions requiring the independence of members of corporate bodies. In particular, with regard to banks, Section 26 of the UBA provides that the individuals performing administrative, managerial or control functions within the bank must meet certain experience, integrity and independence requirements established by the regulation enacted by the MEF, in consultation with the Bank of Italy.
Similarly, with regard to financial intermediaries, Section 109 of the UBA provides that the individuals performing administrative, managerial or control functions within the financial intermediary must satisfy certain experience, integrity and independence requirements established by the regulation enacted by the MEF, in consultation with the Bank of Italy.
In addition, Section 136 of the UBA rules on conflicts of interest which may arise between (i) individuals performing administrative, managerial or control functions within a bank and such bank, and (ii) individuals performing administrative, managerial or control functions within a bank or a company belonging to a banking group and such company or another company/bank of the group.
The Bill on protection of savings
The current draft of the Bill provides for a number of provisions that, if conclusively approved by the Italian Parliament, would modify the current Italian legal framework regulating the provision of financial services. In particular, the Bill:
1 introduces a new paragraph to the UFA requiring CONSOB to issue a regulation aimed at preventing the occurrence of conflicts of interest in the provision of investment services. To this end, different investment services shall be provided by different business divisions of same entity and, with regard to banks, by divisions other than the banking division, in order to assure the separation of the different services provided and the decisional independence of the individuals responsible for each division; and
2 introduces administrative sanctions in case of breach of the provisions
under Section 21 of the UFA. In addition, the Bill should be introducing a new paragraph to the UFA providing that any breach of the provisions concerning the general rules of conduct for investment services (including those under said Section 21) will determine the relevant agreements to be null and void.
4. Outlook
The Italian legal framework on conflicts of interest regarding financial institutions has developed over the years. As stressed by some authors, in the past years the approach on conflicts of interest was aimed at merely prohibiting intermediaries from executing transactions involving a conflict, unless a specific authorisation was granted by the client duly informed of the conflict. In other words, the former provisions were based on the illusion that the combination of the disclosure duty and the client’s authorisation was sufficient to protect the client.
Such approach, however, appeared to be too rigid as the mentioned requirements were affecting the intermediary’s ability to provide its services. Therefore, the Italian legal framework, also inspired by the UK approach, has changed in the last years so as to focus the attention on the “fair treatment” of each client, being the “fair treatment” both the goal to be eventually achieved and the parameter for the assessment of the intermediary’s conduct.
Considering the increasing number of intermediaries providing financial services, the Italian legislator has acknowledged that such a circumstance may also increase the risk of occurrence of conflicts of interest and, therefore, has adopted new provisions aimed at improving the efficiency of the relevant rules. Such renovation process is not terminated yet. For instance, the new provisions contained in the Bill would further contribute significantly to the improvement of the current legal framework on conflicts of interest regarding financial intermediaries.
As stressed by some authors, although the occurrence of conflicts of interest within intermediaries seems to be unavoidable also in light of the increasing number of services provided by them, possible ways to manage and mitigate such conflicts in the future could be, inter alia: (i) the recourse to best practice codes prepared with the support of professional associations (associazioni di categoria); (ii) the establishment of transparent operational procedures; (iii) the appointment of independent directors and of audit committees composed by independent members; (iv) the restructuring of management’s and employees’ remuneration mechanisms so as to avoid the possible influence related to financial incentives; (v) the improvement of corporate governance rules; and
(vi) the enforcement of the current provisions on conflicts of interest and, where necessary, the enactment of new provisions.
5. Principal institutions
The main Italian authorities involved in the regulation and supervision of the activities carried out by the mentioned financial institutions (including the management of conflicts of interest) are CONSOB, the MEF, the Bank of Italy, the Ministerial Committee for Credit and Savings (the CICR) and the Italian Exchange Office (ie the Ufficio Italiano Cambi, the UIC).
The Unified Financial Act
Section 5 of the UFA states that the supervision upon the intermediaries providing investment services is carried out by both the Bank of Italy and CONSOB. More specifically, the Bank of Italy has authority for matters concerning intermediaries’ risk limitation and financial stability, whereas CONSOB has authority for matters concerning intermediaries’ transparency and proper conduct. Both the Bank of Italy and CONSOB, which operate in a co-ordinated manner, supervise intermediaries’ activities and their compliance with the provisions set forth by the UFA and the implementing regulations.
Pursuant to Sections 6, 7, 8, 10 and 12 of the UFA, CONSOB and the Bank of Italy have, according to their field of competence, authority to, inter alia: (i) enact regulations on specific matters; (ii) convene directors, statutory auditors and managers and call the corporate bodies’ meeting; (iii) require intermediaries to provide data and information and transmit documents; (iv) carry out inspections within the intermediaries’ offices and require the production of documents; and (v) provide instructions regarding the entire group to which intermediaries belong.
More particularly, with regard to the experience, integrity and independence requirements provided for by Section 13 of the UFA, paragraph 2 of such Section reads that the failure to fulfil said requirements shall cause termination from the office, to be declared by the board of directors, the supervisory board or the management board within 30 days of the appointment or of the knowledge of the failure. In the event of inaction by the board of directors, the termination is declared by the Bank of Italy or by CONSOB.
In addition, Section 190 of the UFA states that individuals performing administrative, managerial and control functions and employees of authorised intermediaries, who do not comply with the provisions under, inter alia, the mentioned Section 13, paragraph 2 and Section 21 of the UFA and their implementing rules, are subject to administrative fines ranging between €516 and €25,822.
The Unified Banking Act
Pursuant to Section 2 of the UBA, the CICR is the highest supervisory authority for credit and the protection of savings, and decides on matters assigned to it by the UBA or other laws. For the exercise of its powers the CICR avails itself of the Bank of Italy.
Pursuant to Section 3 of the UBA, the MEF adopts by decree the provisions, within the scope of its authority, required under the UBA and may submit such provisions to the CICR for its prior consideration. In the event of emergency, the MEF may also act in place of the CICR.
Pursuant to Section 4 of the UBA, the Bank of Italy issues regulations in the cases provided by law and has vis-à-vis banks and financial intermediaries (providing financial activities), inter alia, the same supervisory powers mentioned under Sections 6, 7, 8, 10 and 12 of the UFA.
With regard to the experience, integrity and independence requirements provided for by Section 26 of the UBA, paragraph 2 of such section reads that the failure to meet said requirements shall cause the termination from the office, to be declared by the board of directors, the supervisory board or the management board of the bank within 30 days of the appointment or of the knowledge of the occurred failure. In the event of inaction by the board of directors, said forfeiture shall be declared by the Bank of Italy. The same provision is contained in Section 109, paragraphs 2, 4 and 4-bis of the UBA with regard to the experience, integrity and independence requirements set forth by Section 109, paragraph 1 of the UBA.
In addition, breach of the provisions under paragraphs 1 and 2 of Section 136 of the UBA shall be sanctioned with imprisonment from one to three years and with a fine ranging between €206 and €2,066. Section 144 of the UBA also states that individuals performing administrative, managerial and control functions and employees of banks and financial intermediaries, who do not comply with the provisions under, inter alia, the mentioned Section 26, paragraphs 2 and 3 and Section 109, paragraphs 2 and 3 of the UBA (and their implementing rules), are subject to administrative fines ranging between €516 and €25,822.
6. Useful references
European Union Website: http://www.europa.eu.int
IOSCO Website: http://www.iosco.org
Ministry of Economy and Finance Via XX Settembre, 97 00187 Roma Tel: +39 06 476111 Website: http://www.mef.gov.it
Bank of Italy Via Nazionale, 91 00184 Roma Tel: +39 06 47921 Website: http://www.bancaditalia.it
CONSOB Via GB Martini, 3 00198 Roma Tel: +39 06 84771 Fax: +39 06 8417707 E-mail: consob@consob.it Website: http://www.consob.it
Branch office: Via Broletto, 7 20121 Milano Tel: +39 02 724201 Fax: +39 02 89010696
Italian Foreign Exchange Office Via Quattro Fontane, 123 00184 Roma Tel: +39 06 46631 Fax: +39 06 4825591 Website: http://www.uic.it
SECTION B: AUDITORS
1. Background
The Italian approach on conflicts of interest of auditors has been influenced by new rules both at the EU and US level. At the EU level, two recommendations were issued by the EU Commission,
(i) the Recommendation of 15 November 2000 on quality assurance for statutory audit and minimum requirements, and (ii) the Recommendation of 16 May 2002 on fundamental principles of auditors’ independence (the EU Recommendation).
In particular, the EU Recommendation provides, inter alia, that auditors must be independent from their clients and abstain from carrying out any audit services where financial, business, employment or other kind of relationship with clients exists, such that a reasonable and informed third party would consider the auditors’ independence compromised. Such requirement applies to the auditor as well as to whoever is in a position to influence the outcome of the audit (eg all persons directly involved in the audit or forming the chain of control of the auditing firm or within the network of the auditing firm). Pursuant to the EU Recommendation, auditors’ independence can be impaired by different factors, including the existence of personal interests. In this respect, the EU Recommendation also provides that different types of safeguards – including prohibitions, restrictions and disclosure obligations – must be established within the EU member states in order to mitigate or avoid the occurrence of factors potentially impairing auditors’ independence.
Likewise, in the US, the Sarbanes-Oxley Act of 2002 (the SOA) provides, inter alia, that it is unlawful for a registered accounting firm to provide an issuer with any non-audit services contemporaneously with the audit, including bookkeeping or other services related to the accounting records or financial statements, financial information systems design and implementation, appraisal or valuation services, fairness opinions or contribution-in-kind reports, actuarial services, internal audit outsourcing services, management functions or human resources, broker or dealer, investment adviser, or investment banking services, legal services and expert services unrelated to the audit etc.
In line with the EU and US provisions briefly summarised above, the provisions on auditors enacted in Italy aim at safeguarding auditors’ independence vis-à-vis audited companies. In particular, as pointed out in the Final Report dated 27 September 2002, which was issued by the Galgano Commission, auditors’ independence may be safeguarded at two levels, where the first level of safeguard relates to the corporate purpose of the auditing firm, while the second level relates to the audit itself.
2. Applicable laws, regulations and codes
The main legal sources providing for rules on auditors in Italy are (i) the Civil Code (the Code), (ii) the Legislative Decree no 58 of 24 February 1998 (ie the so-called Unified Financial Act, the UFA), (iii) the CONSOB Regulation no 11971 of 14 May 1999, as amended (the CONSOB Regulation 11971/1999), together with other communications issued by CONSOB, and (iv) the Presidential Decree no 99 of 6 March 1998 (the Presidential Decree 99/1998), implementing the Legislative Decree no 88 of 27 January 1992 (the Legislative Decree 88/1992).
In addition, other self-regulating provisions – like the Codice Preda and the Principi di Revisione (ie auditing principles prepared by the Consiglio Nazionale dei Dottori Commercialisti) – have been also adopted, and a special commission – the so-called Galgano Commission – was set up on 9 April 2002 within the Ministry of Economy and Finance to monitor, inter alia, the transparency and prevention of conflicts of interest with respect to listed companies.
In addition, a draft bill on protection of savings (Disposizioni per la tutela del risparmio), which also contains specific provisions on auditors, is currently under discussion within the Italian Parliament (the Bill).
As far as case law is concerned, the issue concerning auditors’ conflicts of interest has not been addressed by Italian courts very often. In particular, an Italian court has ruled in favour of the suspension from the auditors’ roll of one of the statutory auditors of a limited liability company (società a responsabilità limitata) who was also member of a firm carrying out, on a permanent basis, tax, accounting and corporate consulting activity in favour of same company.
3. The requirements
The Civil Code
Sections 2409-bis et seq of the Code, as amended by the Legislative Decree no 6 of 17 January 2003 (enacting the corporate reform in Italy), contain specific provisions on audit. In particular, Section 2409-bis states that the audit on (non-public) joint stock companies (società per azioni) is carried out by an auditor or by an auditing firm registered in a roll held by the Ministry of Justice. In contrast, the audit on (public) companies, which make recourse to capital markets or which are listed on regulated markets, is carried out by duly registered auditing firms subject to the supervision of CONSOB. The bylaws of non-public companies, which are not required to prepare consolidated financial statements, may also provide that the audit be carried out by the board of statutory auditors composed of members registered in the roll held by the Ministry of Justice.
Section 2409-quinquies of the Code lists the cases where statutory auditors cannot be entrusted with the audit. In particular, statutory auditors of a company, its subsidiaries, holding companies or companies subject to common control, as well as those falling in any of the situations referred to under Section 2399 of the Code, cannot be entrusted with the audit. The bylaws of the company may also provide for additional cases of ineligibility, incompatibility or further requirements concerning the professional qualifications of the person(s) entrusted with the audit. With regard to auditing firms, the above provisions shall apply with reference to the shareholders of same auditing firms as well as to the individuals entrusted with the audit.
The Unified Financial Act
With regard to public companies, Section 160 of the UFA provides that the audit cannot be carried out by an auditing firm falling in a case of incompatibility as set forth in a regulation still to be enacted by the Ministry of Justice, in consultation with CONSOB. In this respect, until the enactment of said regulation by the Ministry of Justice, the Presidential Decree no 136 of 31 March 1975 (the Presidential Decree 136/1975) shall continue to apply. In particular, pursuant to Section 3 of the Presidential Decree 136/1975, the audit cannot be carried out by auditing firms falling in a situation of incompatibility due to the existence of contractual or shareholding relationships with the audited company or whose shareholders, directors, statutory auditors or general managers: (i) are related to the shareholders, directors, statutory auditors or general managers of the audited entity or its controlling company;
(ii) are (or have been in the preceding three years) employees or self-employees of the audited entity or its controlling company; (iii) are or (or have been in the preceding three years) directors or statutory auditors of the audited entity or its controlling company; or (iv) are in any other situation which may affect their independence vis-à-vis the audited company. Moreover, shareholders, directors, statutory auditors or employees of the auditing firm cannot act as directors or statutory auditors of the audited company, nor may be self-employees or employees of same audited company until the expiry of three years from the termination or revocation of their office or their capacity as shareholders, directors, statutory auditors or employees of the auditing firm.
The CONSOB Regulation 11971/1999 and other communications issued by CONSOB
Section 146 of the CONSOB Regulation 11971/1999 provides that listed companies must transmit to CONSOB, along with the resolution resolving upon the appointment of the auditing firm, inter alia: (i) specific statements issued by the legal representatives of the auditing firm and of the audited company regarding the inexistence of the incompatibilities referred to under Section 160 of the UFA; and (ii) the board of statutory auditors’ opinion (required, pursuant to Section 159, paragraph 1 of the UFA, for the appointment of the auditing firm) containing the assessments as to the independence and technical capability of the appointed auditing firm.
CONSOB also issued a communication providing that, in order to safeguard the independence requirement, the audited entity must not avail itself of the professional advice provided by firms which have relations – on an ongoing basis – with the auditing firm entrusted with the audit. Moreover, in the event that corporate functions of the audited company are carried out by people belonging to consulting firms, the auditing firm must not avail itself of any services performed by such consulting firms.
The Presidential Decree 99/1998
The Presidential Decree 99/1998, which implemented the Legislative Decree 88/1992, contains general provisions on the modalities concerning the carrying out of the audit, including provisions on suspension and removal of auditors in the event of conflicts of interest (for more detailed information, see Section B.5 below).
The Legislative Decree 88/1992
Section 6 of the Legislative Decree 88/1992 provides, inter alia, that the corporate purpose of auditing firms must be limited to the companies’ audit and accounting organisation. Therefore, the Legislative Decree 88/1992 implicitly excludes that auditing firms may carry out other (non-audit) activities (eg tax, legal, financial consulting).
The Bill on protection of savings
The latest draft of the Bill provides for a number of provisions which, if conclusively approved by the Italian Parliament, would modify the current legal framework on audit. In particular, the Bill provides for:
(iii) amendments to the UFA, introducing a fine of between €100,000 and €500,000 for certain irregularities in the performance of the audit.
4. Outlook
The current Italian legal framework concerning auditors’ conflicts of interest could well be improved in the near future. As already mentioned, the existence of a “network” within which auditing firms normally operate may help in eluding the restrictions.
In this respect, the Galgano Commission has already stressed that, without prejudice to the restriction on auditing firms’ corporate purpose, some of the steps – which should be made in order to achieve a more efficient system of rules on auditors’ conflicts of interest – would be as follows: (i) the concept of “network” should be introduced and defined; (ii) entities belonging to the network to which the auditing firm belongs should not be allowed to provide the audited company with non-audit services; and (iii) the audited company (and its controlling companies and subsidiaries) should be prohibited from providing non-audit services to its auditing firm and to any entity of the network to which such auditing firm belongs.
In addition, if the Bill is conclusively approved in the terms described above, it will contribute significantly to the improvement of the Italian legal framework on auditors’ conflicts of interest.
In any case, there is still a risk that the Italian rules on auditors’ conflicts of interest may not take into consideration other cases of conflicts occurring in practice, which are not addressed by the current regime. In this respect, the SOA, for instance, has opted for an ongoing and flexible adjustment system of the incompatibility rules by granting to a board (ie the Public Company Accounting Oversight Board) the power to supplement the list of incompatibilities or to exempt from the prohibition – due to specific circumstances and where this may be necessary or appropriate to protect the public’s and the investors’ interests – individuals, issuers and auditing firms. A similar approach has also been adopted at the EU level by the EU Recommendation.
Therefore, the outlook over the next five years in Italy should be in the sense of a principles-based approach on auditors’ independence at the primary legislation level and implementation of said principles at the secondary legislation level. This approach would be preferable to the adoption of detailed rules as it would create a flexible framework suitable to adapt itself to new business developments and to catch new circumstances and scenarios that may arise in practice.
5. Principal institutions
The principal institutions involved in the management of auditors’ conflicts of interest are the Ministry of Justice and the CONSOB.
Pursuant to the Presidential Decree 99/1998, the Ministry of Justice shall supervise, by means of a central commission, the activities carried out by registered auditors. In particular, the general director of civil affairs of the Ministry of Justice may decide to suspend auditors from their office (for a period not exceeding one year) upon occurrence of certain circumstances, like, inter alia: (i) serious technical incapability (for individuals) or disorganisation (for entities); (ii) negligence; (iii) ongoing and relevant consulting or co-operation relations between the audited entity (or its subsidiaries) and the auditor (or its directors, general managers, shareholders or representatives), even if such relations took place in the preceding two years;(iv) employment and self-employment relationships between the audited entity (or its controlling entities) and the auditor (or its directors, general managers, shareholders or representatives), even if such relationships took place in the preceding three years; (v) the auditor, or its directors, general managers, shareholders or representatives are (or have been in the preceding three years) directors of the audited entity (or its controlling companies); or (vi) any other fact that may affect the proper provision of the audit. Where, instead, the above-listed circumstances are particularly serious, the general director of civil affairs of the Ministry of Justice may even decide to remove the auditor from the roll.
Auditing firms carrying out the audit on listed companies must be registered in a special roll held by CONSOB. Pursuant to the UFA, the appointment of auditing firms (which must not be in situations of incompatibility) does not need to be authorised by CONSOB. Section 159 of the UFA, in fact, did not reproduce the provision of Section 2, paragraph 6 of the Presidential Decree 136/1975, which – instead – required CONSOB’s authorisation for the valid appointment of the auditing firm. Therefore, following the appointment of the auditing firm, CONSOB may exercise supervisory powers only and remove the appointed auditing firm from the special roll in the event of serious irregularities in the performance of the audit pursuant to Section 163 of the UFA.
6. Useful references
European Union Website: http://www.europa.eu.int Ministry of Justice Via Arenula, 70 00186 Roma Tel: +39 06 68851 Website: http://www.giustizia.it
Ministry of Economy and Finance Via XX Settembre, 97 00187 Roma Tel: +39 06 476111 Website: http://www.mef.gov.it
CONSOB Via GB Martini, 3 00198 Roma Tel: +39 06 84771 Fax: +39 06 8417707 E-mail: consob@consob.it Website: http://www.consob.it
Branch office: Via Broletto, 7 20121 Milano Tel: +39 02 724201 Fax: +39 02 89010696
Borsa Italiana SpA Piazza degli Affari, 6 20123 Milano Tel: +39 02 724261 Fax: +39 02 72004333 Website: http://www.borsaitalia.it
National Accountants’ Council Piazza della Repubblica, 59 00185 Roma Tel: +39 06 478631 Fax: +39 06 47863349 Website: http://www.cndc.it
SECTION C: LAWYERS
1. Background
A national ethical code (the Code) was first issued by the National Bar Council (Consiglio Nazionale Forense, the CNF) in 1997. The structure of the Code is simpler than those of many jurisdictions. Its provisions are divided into “principles”, expression of general ethical norms, and “canons”, dealing with the most frequently recurring situations within the scope of each principle. In many respects, the Code reflects a traditional view of the legal profession, its rules being tailored to the needs of lawyers who practice individually or as members of small firms, mostly in litigation matters. The specific characteristics of more sophisticated segments of the legal profession receive little consideration generally. The provisions on conflicts of interest reflect this approach. No rules govern cases where instructions can be accepted by a law firm with the clients’ informed consent despite a potential conflict. A canon expressly extending the duty to abstain from acting (in conflict situations) to all lawyers practicing within a firm established as a company or a professional association was introduced in 2002 by a provision not dealing with any of the conflict management issues large firms are routinely faced with.
After recent financial scandals, the attention of the media to the role played by lawyers in large business and financial transactions is increasing. However, the current rules on conflicts are not under discussion. Rather, in the context of a proposed reform of the law governing the legal profession, incompatible occupations for lawyers are likely to be revised. Positions held within governmental authorities are particularly controversial.
Law firms that act mainly for large corporate clients are confronted with conflict issues not thoroughly covered by the Code. Business conflicts are an increasingly important area for proper client relationship management. Technical conflicts frequently take forms and have ramifications different from those of traditional conflicts in judicial or simple transactional matters. While Code-based principles provide initial guidance, managing conflicts properly means adapting these principles to the peculiar circumstances of a business environment and to client expectations. In a client-lawyer relationship characterised by considerable interplay of ethical and business considerations, the best decisions meeting both ethical requirements and clients’ expectations are not always obvious. The firms most sensitive to the complex nature of these decisions tend to develop internal conflict management policies also as a way of ensuring that their conduct is inspired by the highest ethical standards. These policies normally include databases or other systems to record prior engagements and procedures by which potential conflicts are identified by checking proposed engagements against prior or current engagements. Conflicts are managed in accordance with sets of internal rules and, in non-recurring or the most delicate cases, through a decision of an appropriate committee.
2. Applicable laws, regulations and codes
Conflicts of interest are regulated by different bodies of law. In judicial matters, specific provisions are laid down by the Code of Criminal Procedure (Section 106) and the Criminal Code (Section 381). Basic ethical principles applicable to lawyers’ conduct are contained in the Law Decree no 1578 of 27 November 1933 (Sections 12 and 38), which is the fundamental law governing the legal profession (the Legge Professionale Forense). Such principles are further developed by the Code, which sets forth specific rules covering conflicts of interest (Section 37) and certain related matters (particularly Sections 7, 10, 16 and 51). Legislative Decree no 96 of 2 February 2001 contains procedural provisions applicable to conflicts affecting the members of a law firm established in corporate form.
3. The requirements
Code of Criminal Procedure (CCP)
Section 106 of the CCP provides that a lawyer may represent two or more indicted persons provided that their defensive positions are not incompatible with each other. The provision is devised to preserve a lawyer’s ability to perform his defensive functions effectively, thereby safeguarding the proper administration of justice.
Criminal Code (CC)
Pursuant to Section 381 of the CC, a lawyer commits a criminal offence if: (a) he represents two or more opposite parties to a court proceeding; or (b) after having represented a party to a court proceeding, he represents a conflicting party without the consent of the former one in the same proceeding.
Legge Professionale Forense (LPF) and Code
Section 12 of the LPF provides that lawyers shall fulfil their duties with dignity and decorum as appropriate in consideration of the importance of their role in the administration of justice. Section 38 of the LPF provides that lawyers who commit abuses or faults in the exercise of their profession or whose conduct otherwise breaches the principles of professional dignity and decorum are subject to discipline.
These provisions form the basis of the Italian system of ethical rules. It is widely recognised that the CNF issued the Code under Section 38 of the LPF. This provision is regarded as giving the CNF the power (and duty) to identify existing ethical rules within the legal profession, the breach of which is subject to discipline. As such, the Code serves the purpose of giving certainty to ethical rules and ensuring their orderly development as social conscience and professional ethics modify over time.
Conflicts of interest are expressly regulated by Section 37 of the Code, which provides as follows:
“A lawyer shall refrain from accepting any engagement which may create a
conflict with the interests of a client or otherwise interfere in the
performance of any other engagement, even if not a professional one.
I. | A conflict of interest arises if the acceptance of a new client may result |
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| in a violation of confidentiality duties relating to information supplied |
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| by another client, if the knowledge which the lawyer has about an |
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| existing client’s business may provide an unfair advantage to a new |
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| client, or if the representation of a former client limits the lawyer’s |
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| independence in performing a new engagement. |
II. | A lawyer who assists a married couple in a family controversy may not |
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| represent either of them in a subsequent controversy between husband |
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| and wife. |
III. | The duty to refuse an engagement shall be respected also if the |
conflicting parties seek the assistance of different lawyers who are members of the same firm established as a company or a professional association.”
Complementary or related (and, to some extent, overlapping) rules are contained in other sections of the Code, including Section 7 (duty of loyalty), Section 10 (duty to exercise independent professional judgment), Section 16 (duty to avoid incompatibility) and Section 51 (claims against former clients).
The following points should be made about decisions of the CNF in discipline proceedings for breaches of conflict rules:
A. The vast majority of cases decided by the CNF relate to litigation matters involving a “traditional” client-lawyer relationship. Ethical rules on conflicts do not appear to have been tested in a sophisticated financial or business context in relation to transactional engagements.
B. As stated above, ethical rules condensed in the Code are rooted in the general principles of professional dignity and decorum and have been developed through determinations of local Bar Councils in discipline proceedings and decisions of the CNF. Although the main purpose of conflict rules is to preserve lawyers’ independent judgment and exclusive care of clients’ interests from external ties and personal interest, strong attention to the above principles emerges from decisions as an important ratio decidendi of many if not most cases.
C. A corollary of the above attention can be found in the broad definition of “conflict” reflected by decisions. Both actual and potential conflicts trigger a duty to abstain. Potential conflicts are generally deemed to exist wherever the circumstances of an individual case do not make it apparent that a risk of conflict can definitely be excluded. In other words, when elements of doubt or ambiguity affect a lawyer’s conduct in assessing a potential conflict, thereby making such conduct open to suspicion of impropriety, a potential conflict is almost invariably found to exist, even though there may be evidence of specific circumstances that have induced the lawyer to reasonably exclude the risk of a conflict.
D. Whether a lawyer may rely on his clients’ informed consent to accept an engagement in a conflict situation is not an issue that decisions address exhaustively. While it has not been excluded in principle that clients’ consent can provide relief, there are cases in which a breach of conflict rules was affirmed despite clients’ consent. In other cases, a claimed consent from a lawyer’s client was found not to have been actually given (irrespective of the question whether it would have provided relief). Although the CNF does not seem to have taken a systematic view of the conditions subject to which clients’ consent can provide relief, the major areas of concern evidenced by decisions appear to be the following:
(iii) the mere generic acknowledgement of conflicting engagements by
clients does not qualify as consent. Overall, the Italian system of ethical rules looks less client-oriented than other systems. Compared with the sophisticated bodies of ethical rules guiding lawyers’ conduct in other jurisdictions, the Italian system is not only much simpler but is also characterised by a pervasive concern for lawyers’ reputation as well as for the dignity and decorum of the legal profession. This concern transpires from most decisions as the main driver of the underlying ethical considerations.
4. Outlook
The Italian ethical rules governing lawyers’ conduct, on one hand, and the best policies developed by prime law firms to handle conflicts in accordance with sets of detailed internal rules, on the other, seem prima facie to diverge in two significant areas: (a) the attention paid to business conflicts; and (b) the reliance on clients’ informed consent in accepting engagements where a potential conflict exists.
The first area, indeed, falls outside the scope of technical conflicts. However, business and technical conflicts often overlap. In addition, it is fair to state that there is a grey area where perceived business conflicts are sometimes borderline technical conflicts from the Code’s perspective. In all these cases, a considered policy on business conflicts can also help firms identify and prevent potential technical conflicts.
The second area deserves more attention. The best policies adopted by reputable law firms address clients’ consent, establishing at least (a) the matters in relation to which a firm cannot rely on clients’ consent in a conflict situation (including litigation, litigation-related and other delicate matters), and (b) the conditions subject to which reliance on clients’ consent is admitted (including full disclosure of all material aspects to a decision, written form of the consent, and possible conditions being attached to the consent such as Chinese walls, monitoring and possible subsequent reconsideration of the engagement etc). In this frame, law firms’ reliance on clients’ consent is widely accepted within the business and financial community, and no reputational issues can reasonably be raised if all proper precautions are taken in the circumstances. Hence, the apparent divergence looks more a question of the nature and the individual circumstances of the cases examined by the CNF than of ethical rules.
Possible revisions of the rules on conflicts laid down by the Code in the medium term might well include guidance on clients’ consent in conflict situations, although there is no active debate on the matter. Assuming that this matter is likely to be addressed soon in greater detail by decisions of the CNF would probably be imprudent. However, consolidated business practices having wide international recognition and conforming to the ethical conscience of the financial and business community (as well as model rules available from the ethical systems of other jurisdictions) could well form the basis for a revision of the conflict rules reflected by the Code on this point.
5. Principal institutions
The monitoring and enforcement of ethical rules are the responsibility of the local Bar Councils and the CNF being the governing bodies of the lawyers registered in the Rolls which are vested with rulemaking and other powers under the LPF, including judicial powers (CNF).
Pursuant to the LPF (Section 14) local Bar Councils, amongst others, are required to monitor the reputation of the lawyers registered in the Rolls they administer and to enforce the application of ethical rules by starting discipline proceedings when these appear to have been breached. Proceedings are started by Bar Councils on their own initiative (following clients’ solicitation or otherwise), or at the request of the Public Prosecutor or of the lawyer concerned. If a lawyer is indicted for a criminal offence, he is also subject to discipline proceedings for the facts covered by the indictment.
Discipline measures which may be imposed by the Bar Councils include warnings, censure, suspension from the profession for a period from two months to one year and cancellation from the Rolls.
Determinations of local Bar Councils in discipline proceedings may be appealed to the CNF by the lawyer found guilty and by the Public Prosecutor. If a determination is appealed by the lawyer only, the CNF may not reverse the determination to the lawyer’s detriment. The CNF may reassess the merits of the case as well as the proper application of ethical rules.
Decisions of the CNF may be appealed to the Supreme Court (Corte Suprema di Cassazione) by the lawyer found guilty and by the Public Prosecutor at the Supreme Court on grounds which do not include a reassessment of the merits of the case (in practice, significant grounds for an appeal to the Supreme Court are any erroneous application of ethical rules and any missing or contradictory reasoning).
If the Supreme Court annuls a decision of the CNF by establishing the principles of law to be applied by a new decision, proceedings are resumed before the CNF. The merits of the case may then be reassessed by the CNF, which, however, is bound to issue a decision conforming to the principles of law stated by the Supreme Court.
6. Useful references
Consiglio Nazionale Forense Via Arenula, 71 00186 Roma Tel: +39 06 6840961 Fax: +39 06 68897460 E-mail: cnfsegreteria@consiglionazionaleforense.it Website: http://www.consiglionazionaleforense.it
Ministry of Justice
Via Arenula, 70 00186 Roma Tel: +39 06 68851 Website: http://www.giustizia.it
Corte Suprema di Cassazione Palazzo di Giustizia Piazza Cavour 00193 Roma Tel: +39 06 68831 Website: http://www.cortedicassazione.it
Council of the Bars and Law Societies of Europe (CCBE) Avenue de la Joyeuse Entrée, 1–5 B-1040 Brussels Tel: +32 02 2346510 Fax: +32 02 2346511 Website: http://www.ccbe.org
AIGA Via Tacito, 50 00193 Roma Tel: +39 06 6832427 E-mail: aiga@aiga.it Website: http://www.aiga.it
