investment banking: compliance and regulatory issues ... · investment banking: compliance and...

Investment Banking: Compliance and Regulatory Issues Thursday, May 28 11:15 a.m. – 12:15 p.m. Topics:

• Advise, establish compliance procedures and surveil for:

o Investment Banking Conflicts of Interest o Interactions between Research Department personnel and investment banking

clients o Private Placement procedures o Filings with FINRA related to public offerings and private placements o Understand New and Pending Regulatory Developments in the area

Speakers:

Robert Mendelson (moderator) FINRA Fellow FINRA Member Regulation, Office of Risk Oversight and Operational Regulation Kevin Genirs Managing Director Barclays Paul Mathews Vice President FINRA Corporate Financing Gil Mogavero Managing Director JMP Securities, LLC

© 2015 Financial Industry Regulatory Authority, Inc. All rights reserved.

Investment Banking: Compliance and Regulatory Issues

FINRA Annual ConferenceMay 28, 2015 • Washington, DC

2015 FINRA Annual Conference © 2015 FINRA. All rights reserved.

Panelists

ModeratorRobert Mendelson, FINRA Fellow, FINRA Member

Regulation, Office of Risk Oversight and Operational Regulation

PanelistsKevin Genirs, Managing Director, BarclaysPaul Mathews, Vice President, FINRA Corporate

FinancingGil Mogavero, Managing Director, JMP Securities, LLC

1


Introduction

C is the founder and CEO of a small technology company that he believes has a disruptive technology that will be a game changer. NuTech has clever ideas and patents on short-range, 3-D pulse radar imaging. NuTech has limited revenues (50 million or so) but there are many commercial applications from self-driving cars to accident avoidance. C wants NuTech to raise significantly more capital so he can take the next step in development. C’s background is as an electrical engineer. He is

highly intelligent but doesn’t know the financial markets in the detail needed and hasn’t yet got a CFO familiar with the capital raising process.

2


Pre-IPO (Initial Public Offering)

C is approached by Bill, an investment banker with Techbanker & Co., who follows all the companies in the sector which NuTech belongs to, both public and private. Bill tells C that NuTech’s first step should be to raise more equity capital through an institutional private placement in the United States. C agrees, the put together a teaser and send it to qualified institutional buyers (QIBs). C asks whether they can reach out to his old college

buddies who live in the United States. He assures Techbanker’s diligence team that they have all had an income of at least $200,000 for the past two years.

3


Pre-IPO (cont.)

Before the deal launches, Techbanker asks C to set up an electronic data-room for the investors; C agrees, but does not want to include a couple of his key contracts, which are very commercially sensitive and include some fairly punitive terms. Techbanker is concerned whether that is acceptable in a private placement.What answer do you provide?

4


On-Going Reporting

The private placement is a huge success, and Techbanker & Co. is able to find hundreds of interested investors.C remembers reading that Google was forced to

conduct its initial public offering (IPO) because it had so many investors. He wonders whether he is in the same position since in addition to the QIBs there are a largish number of investors through Techbanker’sprivate wealth management group.

5


On-Going Reporting (cont.)

Techbanker explains to C that NuTech will need to file if it has more than 500 equity holders of record, excluding AI’s. He gives you the closing set from the private placement, which includes AI certificates from each investor.

6


IPO on the Horizon

After a year, NuTech’s CFO starts to think about whether an IPO might be the correct next step. C and his CFO ask Bill to come in for a meeting and tell him they have made no decision, but that NuTech’s Board has decided that they like being private for now. C is hoping that Bill could provide an explanation of the IPO process and a market update, as C is interested in an IPO and trying to convince the Board to reconsider.Techbanker has recently hired a new research analyst,

Sally, who is trying to learn about the imaging space and build her reputation. Sally calls C and asks to get together to introduce herself and learn about the company.

7


IPO on the Horizon (cont.)

Following her firm’s procedures, Sally seek clearance for the meeting with C. Should Sally be allowed to take the meeting? What diligence would you do before clearing it. Would it affect your decision if you read in a trade journal that C has been quoted as saying he hopes to complete an IPO within 18 months.

8



During your diligence, you seek out Bill, who is the IB (investment banker) for this space. Bill tells you that C told him that his company has hired Alice, a well-known banker at Through the Looking Glass, LLC, a boutique bank that often functions as an IPO adviser. C did not elaborate on her role.

9



What if Bill had heard from C that he is going to kick off the IPO process? Must he report that to Techbanker’s control room?In the meantime, Sally is planning to convene her

firm’s first annual imaging tech conference. She asks whether she can include a panel on private companies.She calls C and invites him to the conference, and has

a pleasant conversation about her views on the industry and why she is excited about the conference.

10



Sally is disappointed that you do not permit her to invite C to the conference, but then receives a call from C telling her about the IPO process and asking her to come to a meeting with him and his CFO.

11



Alice, who it turns out is acting as IPO advisor to NuTech, then calls Bill and tells him that they are close to a decision on banks. In making the decision, they would like to get a valuation view from Techbanker. Bill sends the IB department’s model and valuation.Alice reviews it and calls asking for confirmation that

this is a “firm valuation” that reflects research’s view. What response?

12



Bill and his team are so impressive in his meeting with C, the CFO and key board members that Techbanker is hired. Bill tells them that Techbanker is going to be one of five banks to participate in the IPO, and that actual roles and economics will be decided later. The IPO process proceeds and marketing is planned to commence next week. C calls Sally and asks for her research model. What

Response?

13



Techbanker gets the “left lead” role, and Bill is invited to present to NuTech’s board before launch. At the end of the meeting, Director approaches Bill to chat and mentions that his venture capital fund has a number of other potential IPO candidates, and that he would love to catch up over the next few weeks. Bill sets up a lunch and then takes the train to Philadelphia to help his bank’s recruiting effort at Penn.When at Penn, he meets Johnny Director, a slightly

disheveled business school student, and quickly surmises that he is the son of Director. While Johnny’s grades are mediocre and he is less than impressive in the interview, Bill decides that he should be hired.

14


IPO Completed

Fast forward six months and the IPO has closed! The market has been difficult, so the stock has declined 20% but no lawsuits have been filed.Bill has had a hectic schedule and is exhausted. Piled

high on his desk are diligence documents and notes from his calls with every supplier, customer and auditor of NuTech. Having never been much of a hoarder, he thinks “I can’t stand to look at these piles of diligence notes for one second longer” and goes to find a recycling bin.What result if he doesn’t have second thoughts on the

way?15

EXTRACT OF CONFLICTS POLICY Compliance Conflicts of Interest Policy – [Company] Table of Contents

1. STATEMENT OF PRINCIPLE 3

2. INTRODUCTION 3

3. OBJECTIVE 3 4. SCOPE 3 5. RULES AND REGULATIONS 5 6. GENERAL GUIDANCE 5 7. EXAMPLES OF POTENTIAL CONFLICTS OF INTEREST 5 8. IDENTIFYING AND MANAGING CONFLICTS OF INTEREST 6

8.1 Information Barriers 7 8.2 Identification and Management of Potential Conflicts of Interest 7 8.3 Measures of Control for Identification and Management of Conflicts of Interests 8

9. DISCLOSURE OF CONFLICTS OF INTEREST AND CLIENT CONSENT 8

10. REGISTER 9

© 2015 Financial Industry Regulatory Authority, Inc. All rights reserved. 1

1. Statement of Principle

_________ (the “Company”) conducts its business according to the principle that it must manage conflicts of interest fairly, both between itself and its Clients and between one Client and another.

2. Introduction As a financial services provider, the Company faces actual and potential Conflicts of Interest periodically. The Company’s policy is to take all reasonable steps to maintain and operate effective organisational and administrative arrangements to identify and manage relevant conflicts. Senior management within the Company is responsible for ensuring that its systems, controls and procedures are adequate to identify and manage Conflicts of Interest. The Compliance and Legal Departments assist in the identification and monitoring of actual and potential Conflicts of Interest. The Company has in place business-specific procedures that address the identification and management of actual and potential Conflicts of Interest that may arise in the course of the Company’s business.

3. Objective

The Company is required to take all reasonable steps to identify and adequately manage Conflict of Interests that give rise to a material risk of damage to a Client’s interest. This policy specifies the requirement for the Company, its affiliates and divisions to have in place appropriate procedures and measures in order to identify and manage any such material Conflicts of Interest.

4. Scope

a) Conflict of Interests -- For the purposes of this document this policy applies to those Conflicts of Interest that may give rise to a material risk of damage to the interests of a Client. Conflicts of Interest may arise between: the Company and a Client;

a Relevant Person and a Client;

two or more Clients of the Company in the context of the provision of services by the Company Company to those Clients;

a Company Vendor and a Client.

…..

__. General Guidance In identifying Conflicts of Interest, the Company will consider all of the factual circumstances and the Company will take into account, inter alia, whether the Company, Vendor or a Relevant Person:

• is likely to make a financial gain, or avoid a financial loss, at the expense of the Client; • has an interest in the outcome of a service provided to the Client or of a transaction carried out on

behalf of the Client, which is distinct from the Client’s interest in that outcome; • has a financial or other incentive to favour the interest of a Client or group of Clients over the

interests of another Client; • carries on the same business as the Client; and/or


• receives or will receive from a person other than the Client an inducement in relation to a service provided to the Client, in the form of monies, goods or services, other than the standard commission or fee for that service.

__. Examples of Potential Conflicts of Interest Within a multi-service financial institution, Conflicts of Interest may arise in a variety of situations. Areas of concern include:

• the provision of investment research • proprietary trading • portfolio management • corporate finance • personal account dealing • ownership interest

Below are non-exhaustive examples of what may be considered typical conflicts of interest that may arise in relation to investment services provided by the Company:

• The Company may engage in business and trading activities for its own account and/or Client accounts whilst other Clients are active in relevant markets at the same time.

• The Company may provide investment advice or discretionary portfolio management services to

its Clients and the Company may also recommend or sell products issued by itself or affiliated companies.

• The Company or Relevant Person receives or provides substantial gifts or entertainment (including non-monetary inducements) that may influence behaviour in a way that conflicts with the interests of the Clients of the Company. The Company has in place appropriate procedures should the Company or Relevant Person provide a substantial gift or entertainment to a Client that may be considered an inducement.

• The Company provides investment research in relation to an entity or group to which it also provides investment advisory services.

• The Company is the discretionary portfolio manager for more than one Client or fund – in particular in respect of issues related to allocation.

• The Company or relevant person may have a revenue-sharing arrangement and other similar relationship with a swap execution facility (“SEF”), designated contract market (“DCM”), or derivatives clearing organisation (“DCO”) that would affect the Company’s or the relevant person’s incentives to use that particular SEF, DCM, or DCO.

__. Identifying and Managing Conflicts of Interest Should a Conflict of Interest arise, it must be managed promptly and fairly. As a minimum standard the Company has in place arrangements designed to ensure that:

• divisions and legal entities operate with appropriate independence from one another; • there are effective procedures in place to control the flow of information where, otherwise, the risk

of a Conflict of Interest may harm the interests of a Client; • Supervisory arrangements provide for separate supervision of staff where necessary for the fair

management of Conflicts of Interest; • there are appropriate controls in place to identify and manage cross-board memberships and

outside business interests of Relevant Persons; • relevant information is recorded promptly in a secure environment to enable identification and

management of Conflicts of Interest; • in certain jurisdictions appropriate disclosure may be made to the Client in a clear, fair and not

misleading manner to enable the Client to make an informed decision;


• appropriate inter- and intra-divisional escalation processes are in place and complied with where a Conflict of Interest has been identified or may be identified;

• adequate records are maintained of the services and activities of the Company where a Conflict of Interest has been identified;

• where necessary, Relevant Persons may be asked to step aside from working on a specific transaction or participating in the management of a potential Conflict of Interest;

• where necessary, Relevant Persons are subject to personal account transaction rules; and • there is a periodic review of the adequacy of the Company’s systems and controls.

. . . . __.1 Identification and Management of Potential Conflicts of Interest The Company requires that potential business be logged at the earliest possible time and prior to signing a confidentiality letter or mandate; receiving any non-public information or making a commitment, verbal or written, to act for a Client. This is to assist in the identification and management of potential Conflicts of Interest. In order for the Company to be in a position to identify potential conflicts, material transactions involving Clients, Relevant Persons or the Company are logged internally and analysed against existing Company relationships and transactions. __.2 Measures of Control for Identification and Management of Conflicts of Interests In managing a Conflict of Interest it may be appropriate to use additional measures in the event that existing ongoing conflicts management measures are not sufficient to adequately manage the potential conflict, such as the following:

• implementation of ad hoc transaction specific Chinese Walls or other additional information segregation methods following consideration of all of the facts available to relevant management;

• escalation to senior management who have responsibility for the strategy of the Company and an appreciation of the relationship and reputation risks that may arise;

• declining to act. __. Disclosure of Conflicts of Interest and Client Consent As a global financial services organization, the Company engages in many activities that may conflict with the interests of its Clients. The Company has procedures to protect the Client’s interests from conflicts that might arise from a firm’s own activities. In certain circumstances, if some Conflict of Interest remains and, where permissible by local regulations, disclosure to an affected Client may be made in order to seek Client consent to act. Disclosure will be made of the general nature and / or sources of conflict to enable the Client to make an informed decision. __. Register The Company keeps and regularly updates a record of the types of Regulated Business activities carried out by or on behalf of the Company in which Conflicts of Interest entailing a material risk of damage to the interests of one or more Clients has arisen or, in the case of an ongoing Regulated Business service or activity, may arise. The information contained within the register facilitates the effective identification and management of any potential Conflicts of Interest.


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