Conflicts of Interest Disclosure Process
Authors: @JosephKnecht on behalf of the Alternative Governance Workstream
Summary
Index Coop is implementing a process for Conflict of Interest Disclosures (COIDs). The aim is to provide a more consistent and transparent process for COIDs as a foundation for better COI management. The process entails Coop contributors having their COID on file and being able to control the visibility of that COID. The term contributor means specifically ‘Verified Contributor’ throughout. The scope only covers contributors and not external methodologists nor other stakeholders.
Background
Conflicts of Interest (COIs) arise any time an Index Coop member has a competing financial or personal interest that could compromise his/her judgment. Disclosing and managing COIs is helpful to ensure we’re making good decisions and to minimize undue influence on Coop members. The objective of setting up a formal COID process is not to probe and highlight existing conflicts of interest. We know many contributors have gone out of their way to provide this information already. The goal is to create a simple, light-weight and transparent format for contributors to identify potential conflicts and avoid future tensions as we grow as a DAO and continue to build and strengthen ecosystem partnerships
It is very important to emphasize at the outset that the COID process is not asking anyone to publicly disclose their specific holding amounts, or any material that could be personally sensitive. Specifically, we are only looking to disclose, either within IC or confidentially, the existence of COIs and not their magnitude.
In every industry including finance, marketing, and research, COIs come up routinely in the normal course of doing business. COIs are very rarely ill-intended but rather a reflection that you have competing interests, nothing more. As one gains professional connections, influence, and sources of compensation, it is very common to have COIs. The answer is to be transparent and thoughtful about how these everyday conflicts are handled to ensure that they’re transparent and well-managed.
In a traditional finance setting, employees would submit their COID to their HR or Compliance department typically every 6 months. Depending on the industry, there are also legal regulations and professional guidelines on managing COIs. Managing COIDs is a standard process and should not be viewed as exceptional for an organization like the Coop where, in spite of decentralization, individual members can yield enormous financial power. In the absence of either an HR or Compliance department as well as the lack of staff to manage that process we are recommending Coop members manage their own COIDs as a stepping stone to improved COI management.
Benefits
Benefits of having a COID process for the Index Coop include:
- Educate our contributors and partners as to what constitutes a “conflict of interest”
- Clarifying the right steps to take to when a contributor may have a conflict of interest
- Establish a fair process for reviewing COIs
- Understanding our potential biases and interests so we can make the best decisions.
- Reducing the perception of bias, even if there is none.
- Reducing the risk of unethical influence.
- Being transparent about our interests so we can minimize future COIs.
- Conveying to our customers and other stakeholders that we manage our products with transparency and ethics
- Replacing the previous haphazard approach to COIDs.
- Minimizing the collective effort needed to search and update contributors’ COIDs.
- Establishing leadership in the DAO space for transparency, ethics and sound decision-making.
Benefits for you as an Owl include:
- Improving your decision-making by understanding how your COIs can affect your judgment .
- Build a reputation for trustworthiness and transparency.
- Reducing your risk of being manipulated since attackers will know you’re likely to disclose any COIs.
- Becoming more educated about how others in the industry are routinely subjected to COI.
- Setting an example for your colleagues in order to improve our collective decision-making.
Benefits for our customers include:
- Greater confidence that Index Coop is making decisions with the least possible bias
- Confidence that we act transparently and are trustworthy.
- Greater comfort, particularly for tradfi investors that are more accustomed to funds being regulated and having strong COI policies.
Downsides include:
- Some contributors or potential joiners might be discouraged by what they see as an onerous or intrusive process.
- There could be a risk or concern that the information could be used to gain leverage or unfairly impugn others’ trustworthiness.
Past efforts
The Coop has previously and repeatedly recognized the importance of COIDs but previous attempts have been piece-meal and incomplete. For example, there’s an IIP proposal that does not seem to have gone to Snapshot vote, an effort from OA and individual disclosures from oneski, pujimak, mel and others. Given the need for more rigorous COID, in the 11 Apr 2022 meeting minutes, the Index Council instructed the Alt Gov Workstream (via JK) to take a more concerted approach to COIDs.
Principles
The principles for the new COID process are as follows:
- Transparency
- Providing different avenues for disclosure in order to respect confidentiality and sensitivities
- Disclosing the existence of a COI but not the magnitude
- Protecting the identity of those that wish to stay pseudonymous
- Simplicity in order to minimize the disclosure burden and maintenance
- “Truth and reconciliation” so that those that have a serious COI have a safe channel to come forward and resolve their situation
Examples of COIs
Hypothetical examples of COIs are given below. To be absolutely clear, we are not suggesting for a moment that any Coop member is engaged in these activities. Rather, it’s to offer examples of how COIs can emerge in daily DAO business.
- A methodologist has a significant position in a token he’s about to add to an index he designed. His judgment could be clouded by his potential for financial gain once the token is added and the price pumps. Even if his judgment is not compromised, the perception of compromise could be an issue.
- A dev contributor is providing unpaid consultancy to another protocol. He’s under a Non-Disclosure Agreement (NDA) with that protocol. He’s aware that the protocol has a major exploit vulnerability which is not known to the public. IC is considering adding that protocol to a product and the developer cannot inform us of the vulnerability because he’s under confidentiality.
- A contributor has significant equity investment in a project that competes with an IC product about to be launched. She’s not inclined to give her best efforts to the IC product because doing so could harm her investment.
- A contributor in the liquidity pod has a paid agreement with an external party to lobby within IC to give liquidity mining incentives to that party’s product. The agreement has an NDA which specifies that even the existence of the NDA cannot be disclosed.
- A growth team member is employed at a central listing exchange. She’s strongly advocating for IC to list on that exchange but her recommendation could be seen as biased.
Disclosures
The COID document will be owned by the contributor. The file will be placed in one of two Google folders depending on the desired degree of visibility. The first folder is visible only to Index Coop contributors and the second folder is only visible to a newly-formed COI Group but not other contributors. The COIG was formed to handle a situation where, for perfectly valid reasons, contributors do not want to disclose their COIs to other contributors.
The COIG will consist of @JosephKnecht , @lee0007 , and another individual to be named. If there is an objection and a second to the COIG composition we’ll hold a contributor vote to reconstitute the COI Group membership. The COI Group will only disclose the existence of an issue if there is a deemed conflict and evidence of ill intent. In that scenario, in order to preserve confidentiality, only the existence of a potential issue but not the content itself would be shared with the Council and only the Council. Council could then address the issue with the individual to give them an opportunity to be forthcoming.
It is very important to emphasize that the COIDs will only include the existence of the conflict and not the magnitude. Also, the COID can be vague enough to not identify pseudonymous contributors. At this stage, we are only presenting the process for COID and not COI management and resolution. We hope the Coop will address that more fully in a subsequent stage.
Your COID may include COIs related to the following, for example:
- Employment
- Directorships
- Paid DAO contributor
- Consultancies
- Financial arrangements
- INDEX token holdings
- Significant token holdings
- Significant token equity holdings
- Non-Disclosure Agreements
- Management Fee arrangements
- Token voting delegations (optional links to Boardroom or Tally)
- Donations/Gifts
- Wallet disclosures (optional)
- Connected parties, eg, LLCs, LTDs, Companies, Trusts, Foundations, etc.
- Any of the above disclosures for family or connected parties
- Other
Significant can be defined as >$5k per year, >5% of one’s liquid net worth, or >1% of the fully-diluted equity capital or token supply. For example, a consultancy agreement for $4k per year would not be considered significant. Neither would a token holding that was only 4% of one’s liquid net worth. There is no universal standard for COI thresholds but these levels are used widely (link, link, link).
We appreciate that some contributors work at multiple DAOs or off bounty boards. Please feel free to list only those DAOs that pose a potential conflict, for example, “I’m a paid DAO contributor at several DAOs. None are in the structured products space”
Example COID #1
I’m a director at XRPro LLC which is a service provider to IndexCoop. I receive a management fee as a methodologist for ABC.
Example COID #2
I have significant equity in a project that competes with Index Coop. I receive bounties from ABC DAO and XYZ DAO. I have an LLC with a significant position in DEF.
Example COID #3
I have no conflicts to disclose
Example COID #4
I have a significant position in INDEX. From time to time, I have significant positions in ABC and DEF.
Example COID #5
I am employed by a financial institution which is currently conducting business with Index Coop
Example COID #6
I have a non-disclosure agreement, paid consultancy and significant equity in token ABC.
Next steps
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Please post your questions and concerns here and I will edit the FAQ below to respond. Please number your comments so I can be certain to address each point. Let me please ask that if you have a critique but you still agree with the aim, to please offer some constructive alternatives.
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Place your COID in one of two folders:
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See example COIDs here
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For any IT support questions please contact @Hammad1412 or @bradwmorris
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Community Nest will follow-up with individuals to see how their profile updates are coming along.
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New onboarders will have their COIDs completed as part of their onboarding process, and community nest will check that COIDs are updated every 6 months.
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We’re aiming to have the COIDs submissions largely completed by May 31.
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The COI Group will be formed and handle any questions about managing COIDs.
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For any questions, comments, concerns, or feedback, please send those to me or Renee or post them here.
We appreciate COID can be a personally sensitive topic but it doesn’t need to be. It’s something we’ve done in the past but just not well or consistently. The aim is to get better at that so we can exercise good judgment when designing the best crypto structured products on the planet.
FAQ
1. Why do we need a COID process?
We need a COID process to better ensure that we’re not biased by our conflicts when making decisions, and to reduce the risk of unethical influence
2. What’s the purpose of a COID process if there’s no enforcement of it?
The purpose is not to police people’s COIs or behavior but rather to create a framework so that we can understand our biases and risk for potential undue influence.
3. What’s to stop someone from sidestepping the COID by lying or creative accounting?
As in any industry, motivated individuals can always find ways to sidestep COID. Our aim is to create an environment where they don’t need to because we can work together to manage their conflicts as long as everyone acts in good faith.
4. I’m not comfortable disclosing my details. Is there an alternative?
You don’t need to publicly disclose anything that you are not comfortable with. Alternatively, you can make your COID visible to the COI Group only. Please discuss with us directly if that solution is still not acceptable for whatever reason. We’re confident we can come up with a good solution.
5. I don’t want people to know what bags I’m holding.
You should only disclose if the holding is significant and could be a conflict. You don’t need to disclose the magnitude of any holdings.
6. It doesn’t make sense to roll-out a COID process without a comprehensive COI management policy. You should have an overarching COI policy and then implement COID as part of that.
We see the COID process as a stepping stone to more rigorous COI management generally. Aiming for a comprehensive policy from the beginning risks significant implementation failure and the more pressing needs to sort our COIDs in the near term.
7. I’m anon. I’m concerned my disclosure could doxx me.
We intentionally want to protect anon contributors. Feel free to be vague with your conflict if you feel like it’s potentially doxxing, or submit it as a confidential note on file with no doxxing information.
8. Why was it decided to give access to the notes on file to a COI Group instead of to council?
The Alt Gov Workstream was concerned that the Council was too large and had too high turnover to protect confidentiality.
9. I have an NDA which stipulates that its mere existence can’t be disclosed. How should I report that?
We’d recommend reporting this as “I cannot disclose whether or not I have an NDA that can’t be disclosed”. It sounds tortuous but this is the conventional approach for reporting such NDAs. We appreciate that that makes it difficult to report who the other party to the NDA is.
10. Is Index Coop going to start policing our decisions?
No, actually the aim is the opposite. By being transparent about our COIs we can hopefully engage others without having to worry about violating an unclear policy.
11. I’m concerned that putting information could make me a hacking target.
Don’t publicly disclose anything that you think would increase your surface area for a hack. Please consider using the highest level of confidentiality if you feel like you have a disclosure that could increase the risk of an exploit.
12. Shouldn’t our external methodologists/investors also have to do COIDs?
So far the scope only covers IC Verified Contributors. We recognize this is a gap since external methodologists could also be conflicted and most customers will not make the distinction between internally and externally developed projects. We’ll consider recommending a COID policy to our external methodologists and investors in the future.
13. I stumbled into a major COI but I’m concerned revealing it this late could be awkward or compromise my standing at the DAO.
We want to create a safe environment so that people can come forward in the spirit of ‘truth and reconciliation’. Consider speaking with your Nest leader, a member of Council or a member of the COI Group about how to best handle your situation.
14. Why the current composition [of the COI Group] instead of people from the HC&C pod?
The current COI Group composition was based purely on volunteers. We didn’t receive any volunteers from HC&C.
15. What safeguards are in place to ensure confidentiality of disclosures made to this group?
The disclosures which are visible only to the COIG group are in a folder which only the COI Group members have the password to. For further security, I can suggest that the contributor also password protect the doc file and give the password to a COIG member. I’m open to other means of additional security.
16. I think [the COI Group members] should also sign a disclosure (post on the forum to commit to confidentiality).
We’ll require that the COI Group members post on the forum their strongest assurance that they will not disclose any confidential information. We hope that’s sufficient instead of having Coop members sign legal NDAs.
17. What are the responsibilities of the COI Group members?
The sole responsibility of the COI Group members will be to disclose the existence of an issue if there is a deemed conflict and evidence of ill intent based on material in the COIG-only folder. In that scenario, in order to preserve confidentiality, only the existence of a potential issue but not the content itself would be shared with the Council and only the Council. Council could then address the issue with the person in question to give them an opportunity to be forthcoming.
