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Conflicts of interests in investment banking

On Behalf of | Jan 7, 2022 | Business Litigation |

Investment bankers know that a potential conflict of interest can have many negative effects. Even if a conflict of interest is ultimately found not to exist, the appearance of one may damage a business or professional reputation. In addition, the legalities involved in determining if there is a conflict can quickly become complex.

Defining a conflict of interest

One of the biggest challenges is simply identifying if a conflict of interest exists. In some cases, the conflict is clear, but in others, there are many gray areas. Most investment bankers know that a conflict of interest, in its simplest form, involves having more than one interest in a transaction. The overlapping interests may result in the bank being unable to provide neutral financial advice or fairly meet its legal obligations.

Avoid a conflict of interest

There are several simple things an investment banker can do to help reduce the chance of a conflict of interest. Providing advice to a current client on a proposal or related matter from a new client should be avoided, as should being involved in a financing transaction involving both a new and current client.

Investment bankers should also refrain from transactions involving making investments in two interests competing against each other. Even providing basic advice to a client with an interest that may compete with another client should be avoided. The risks are simply too high.

A conflict exists. What now?

If a conflict of interest is found, there are many things that can be done to solve the issue. It is crucial to make both clients aware that a conflict exists. Both clients may then choose to sign written documents saying they know of the conflict and consent to the transaction anyway.

Every conflict of interest should be carefully scrutinized. If the potential risks are deemed to be too great, even with full disclosure and written consents, the best course of action may be for the bank to remove itself from the transaction.

Investment bankers often find themselves involved in a complex web of financial transactions, where conflicts of interest may not always be apparent. Having access to accurate advice and guidance is imperative.




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