Investment Banking Training Video by tou16202


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									           investment banking - conflicts of interest

You are in a position in which you can see both sides of a Chinese wall and
become aware of information on a deal which may have a negative impact upon
one side of the transaction. What should you do?

You are the head of a division which covers a broad range of investment banking
activities including an M&A business and a separately incorporated private
equity (PE) operation.
You are aware that your M&A team are advising client X on the acquisition of
ABC Ltd which is the subject of an auction process. You are also aware, through
the conflict management escalation process that your PE colleagues are also
participating in the auction process. The potential conflict has been managed on
the basis of Chinese wall and independence policies and you have satisfied
yourself on the reputational issues through disclosure.
You are aware of the current regulatory scrutiny in the area of conflicts of
interest, as evidenced by letters recently disseminated by the FSA to CEOs of
major investment banking operations. Indeed, you have participated in a
training video in which you emphasised the ethical culture of the bank and
reminded colleagues of the need for trust and integrity when dealing with
clients, whose interests must always be of paramount importance.
The M&A director responsible for advising client X comes to see you to provide
an update on the transaction and confirms that his client is through to the final
round of the auction process, together with one other bidder, believed to be the
affiliated PE operation. During the discussion you learn that, following a review
of the information made available to all potential bidders in the data room, the
M&A team conducted its own comprehensive due diligence exercise. This
resulted in an assessment that the value of ABC Ltd is significantly less than
generally believed. The M&A director idly wonders if this will affect the bid
strategy of his PE colleagues.
Once the M&A director has left, your instinctive reaction is to pick up the phone
to the head of the PE operation to ensure that the PE valuation is similar to the
M&A assessment before finalising the PE bid and committing the group and its
fund investors to an investment of several hundred million dollars.

investment banking - conflicts of interest

      You are aware of the bank’s obligations to respect the confidentiality of client
      information, but are equally concerned about the financial impact on the bank if
      your PE colleagues proceed, without being privy to the information known by
      the M&A team.
      In deciding upon the most appropriate course of action, it would be sensible to
      involve a senior member of your compliance department who will provide
      assistance in addressing your various responsibilities.

      It is important that the interests of client X in the bidding process are not
      prejudiced by any actions you take, which means that what you have learned
      cannot be passed to PE colleagues. Given the size of the proposed transaction
      it would not be unusual for you, as division head, to satisfy yourself that
      comprehensive due diligence has been undertaken in respect of the PE
      transaction, but you must avoid the temptation to tip-off your PE colleagues in
      any way and must rely on the effectiveness of their PE due diligence and
      evaluation process.
      You may also wish to consider the following points:
      1. There may be occasions when it is not possible to manage conflicts on a
         disclosure basis, in which case, it is important to ensure that the material
         interest and independence provisions of the corporate finance engagement
         letters address the possibility of conflicts arising, inter alia, in an auction
      2. The role of the division head should be assessed so that he or she is
         sufficiently divorced from the day-to-day activities of the M&A and PE
         operations to ensure that oversight responsibilities can be exercised above
         the Chinese walls in an independent senior management capacity.
      3. If the additional due diligence exercise uncovered, for example, accounting
         irregularities, you would need to consider your responsibilities for
         reporting such issues (eg, to regulatory, legal and/or criminal authorities).

            investment banking - conflicts of interest


What is/would be unethical
You, as head of investment banking division, breach your Chinese wall
arrangements by contacting the head of private equity to ensure that the PE
valuation of the proposed acquisition, ABC, is similar to the M&A valuation. This
would be to ignore the conflict of interest.

Key points summary
As head of investment banking you sit above the Chinese wall.
M&A are advising a client on an acquisition in an auction process.
Private equity are also participating in the auction process.
You learn from M&A that the value of ABC may be less than generally believed.
You consider suggesting that the head of PE checks their own valuation of ABC
which might affect their auction bid strategy if the value turns out to be lower
than presently believed.

Adverse consequences
Suggesting such action to the head of PE would breach your Chinese wall.
The FSA have made clear their interest in proper handling of conflicts of interest
and failure to do so will result in regulatory action.
If PE bid in the auction on an unrealistic valuation, they, fund investors and your
group may suffer adverse financial consequences.

Optimum approach
Pay proper regard to your Chinese wall arrangements and independence policy.
Ensure that any material interests and independence provisions are adequately
addressed in corporate finance engagement letters which should indicate the
possibility of conflicts of interest arising in an auction process.
The role of the investment division head should be structured so that it is
sufficiently divorced from the day to day activities of M&A and PE.

investment banking - conflicts of interest

      If any irregularities in the valuation of ABC were uncovered, you should consider
      the possible need to report them to the appropriate regulatory or criminal

      SII Code of Conduct impact
      Principle 2 – to act with integrity in fulfilling the responsibilities of your
      appointment and seeking to avoid any acts, omissions or business practices
      which damage the reputation of your organisation.
      Principle 5 – to manage fairly and effectively, and to the best of your ability, any
      relevant conflict of interest etc.


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