Managing Conflicts of Interest in Investment Banking

Implications, and why to avoid them if possible

Guide to Managing Conflicts of Interest in Investment Banking

Conflicts of interest pose significant reputation and legal risks to corporate finance professionals. In investment banking, and M&A in particular, there is a higher risk of bad press and civil litigation than is the case with other areas of corporate finance. This guide will offer some advice on managing conflicts of interest in investment banking and how to avoid compromising situations for yourself and the bank.

Because of the higher risk of conflict problems arising, investment bankers must be particularly careful in identifying, assessing, and managing conflicts of interest in connection with such transactions.

Identifying Conflicts of Interest

In many cases, investment banks can easily identify conflicts. In other cases, important conflicts may not be as readily identifiable. It is not possible to provide a comprehensive definition of what constitutes a “conflict of interest,” but the phrase generally refers to circumstances in which:

A firm has more than one interest in a transaction
The existence of those multiple interests may compromise, or have the appearance of compromising, the bank’s ability to provide independent financial advice to its clients or impair the bank’s ability to satisfy the legitimate expectations of those clients

These are the two most common tests for identifying and managing conflicts of interest in investment banking.

Examples of Conflicts of Interest

Here is a list of common examples of conflicts of interest in investment banking:

The bank or an affiliate has more than one client who is interested in the outcome of a transaction or potential transaction
The bank or an affiliate is a lender to, or investor in, one of the parties to a transaction or potential transaction
The bank knows material non-public information about a party or potential party to a transaction that it is unable to share with its client

M&A transactions expose the bank to a variety of potential real and perceived conflicts of interest. The bank will not knowingly put itself in a conflict of interest situation that cannot be managed appropriately.

How to Avoid Conflicts of Interest

To mitigate reputation and legal risks associated with transactional conflicts of interest, it is a good idea to avoid:

Providing financial advisory services for any transaction to two competing interests
Making equity investments in any transaction with two competing interests
Providing or arranging financing in connection with a take-over of a client
Advising a client in connection with an unsolicited bid from another client

Some conflicts of interest may be mitigated through disclosure, some require client consents, and others require the implementation of formal information barriers or similar procedures. Some conflicts of interest may be sufficiently difficult to manage that the bank has to recuse itself from acting on behalf of one or more clients. Investment bankers are urged to consult with the legal department of the bank as early as possible when conflicts or potential conflicts of interest arise.

Transparency, full disclosure, and being proactive in handling potentially problematic situations are the keys to successfully managing conflicts of interest in investment banking.

More Investment Banking Resources

We hope this has been a helpful guide to managing conflicts of interest in investment banking. To learn more about investment banking, see the following free CFI resources: