Conflicts of Interest and Fiduciary Considerations

Investment banks earn fees from many sides of the market, so conflicts are built in: contingent fees, financing roles for buyers, lending relationships, research and IPO allocations ^[1][3][4]. US rules mostly manage these through disclosure and structural limits, such as FINRA Rules 5150, 5121, 5131 and 2241 ^[2][3][4][5]. Delaware's Supreme Court has held a sell-side adviser liable for aiding and abetting a board's breach of fiduciary duty, while describing the adviser's role as primarily contractual ^[1].

Where conflicts come from

A conflict of interest exists when the bank's own interests, or another client's, could pull against the client it is advising. In investment banking the most common sources are structural. Advisory fees are usually contingent on a deal closing, so the adviser is paid more for a deal than for advice not to do one. Large banks also lend, underwrite and trade, so the sell-side adviser may want to finance the buyer; FINRA's outline expects sell-side bankers to evaluate buyers' financing requirements, including stapled financing, which is a financing package the seller's bank offers to bidders ^[8]. Firms check for these issues at intake: SEC examiners found that all the broker-dealers they reviewed had a system to check a new project against other work the firm and its employees were doing ^[9].

Fiduciary duties: whose, and to whom

In a company sale, the directors are the fiduciaries; the bank is hired to help them. The Delaware Supreme Court's 2015 decision in RBC Capital Markets v. Jervis shows how that distinction works. The court described the role of a financial adviser as primarily contractual, typically negotiated between sophisticated parties and varying with the circumstances, and it declined to adopt the trial court's broader "gatekeeper" description ^[1]. But it affirmed that RBC was liable for aiding and abetting the Rural/Metro board's breaches of fiduciary duty, in the amount of $75,798,550.33, 83% of the class's total damages ^[1].

The facts matter. RBC was the board special committee's primary financial adviser on a sale of Rural/Metro and hoped to provide staple financing to bidders ^[1]. The court found that RBC did not disclose to its client that it continued to seek a buy-side financing role with the eventual buyer, Warburg Pincus, which paid $17.25 per share ^[1]. It also found that the board was unaware of RBC's changes to its valuation analysis and its back-channel communications with Warburg, and that the proxy statement's discussion of RBC's financing role was only a partial disclosure ^[1]. Rural/Metro's board had also retained Moelis & Company as a secondary financial adviser, and Moelis, like RBC, was paid on a contingent basis ^[1]. The court called its holding a narrow one that should not be read to mean any failure by an adviser to prevent directors from breaching their duty of care creates liability ^[1].

The court also spoke to boards. It said directors need to be active and reasonably informed when overseeing a sale, including identifying and responding to actual or potential conflicts of interest, though they need not perform searching, ongoing diligence on their own advisers ^[1]. Faced with a conflicted adviser, a board can, as a contractual matter, insist on protections ensuring conflicts are disclosed at the outset and throughout the process ^[1].

Rules that manage conflicts

• Fairness opinions (Rule 5150): if an opinion will be provided or described to public shareholders, the firm must disclose whether it acted as financial adviser and will receive compensation contingent on completion, any other significant contingent payment, and material relationships with the parties in the past two years that produced or are expected to produce compensation ^[2]. The firm must also have written procedures for when a fairness committee is used, including review by people who do not serve on the deal team ^[2].
• Underwriting with a conflict (Rule 5121): a member with a conflict of interest, which includes cases where at least 5% of net offering proceeds will repay a loan from the member or its affiliates, may participate in a public offering only with prominent disclosure of the conflict plus an additional safeguard, such as a lead manager without a conflict or a qualified independent underwriter that performs due diligence and accepts underwriter liability ^[3].
• IPO allocations (Rule 5131): firms may not offer or threaten to withhold IPO shares in exchange for excessive compensation, and may not allocate new issues to executives or directors of current or recent investment banking clients, a practice known as spinning ^[4].
• Research (Rule 2241): firms may not promise favorable research or ratings as an inducement for business, and must insulate analysts from investment banking pressure ^[5].
• M&A brokers (Exchange Act §15(b)(13)): an unregistered M&A broker loses the exemption if it represents both buyer and seller without clear written disclosure and written consent from both ^[6].
• Future business (Rule 5110): in public offerings, a right of first refusal on a client's future financings may not last more than three years ^[7].

Notice the common design. None of these rules forbids a bank from having more than one relationship with a client; instead they require the conflict to be disclosed to the people relying on the bank, add an independent check where the stakes are highest, or put a time or size limit on the arrangement. That is also why engagement letters usually contain a conflicts section describing the bank's other businesses, and why boards ask advisers to update their relationship disclosures as bidders emerge. Investors are also told to keep conflicts in mind. The SEC's IPO bulletin warns that broker-dealers participating in an offering may face a conflict between their obligation to provide research clients with balanced reports and their desire to facilitate a successful offering for an investment banking client ^[10].

Worked scenario: the staple financing offer

A hypothetical board is selling its company and its preferred adviser offers to provide staple financing to bidders. That could help bidders move faster, but it also means the adviser could earn financing fees from the buyer, which may matter most when the board is deciding between a higher bid and a quicker one. A careful board might: require written disclosure of every role the adviser seeks with any bidder, and updates as they change; set a point after which financing discussions stop or require approval; consider a second adviser without financing interests for the valuation and fairness work; and make sure the proxy describes the adviser's actual incentives, not just its permission to offer financing. None of this is legal advice; it is the kind of structure the Delaware court described as available to boards ^[1].

Key terms

Conflict of interest

A situation in which an adviser's own interests, or another client's, could diverge from those of the client it is advising.

Contingent fee

A fee payable only if a transaction is completed; FINRA requires its disclosure in fairness opinions shared with public shareholders.

Staple financing

A pre-arranged financing package that the seller's adviser offers to potential buyers.

Aiding and abetting

Liability for knowingly participating in another party's breach of duty; the theory under which RBC was held liable in Rural/Metro.

Fairness committee

An internal committee that reviews and approves a firm's fairness opinions, including members outside the deal team.

Qualified independent underwriter (QIU)

Under FINRA Rule 5121, an unconflicted underwriter that performs due diligence and accepts underwriter liability when another participating member has a conflict.

Spinning

Allocating hot IPO shares to executives or directors of investment banking clients to win or reward business; prohibited by FINRA Rule 5131.

Fiduciary duty

A duty of loyalty and care owed by directors to the company and its shareholders; advisers are generally retained by contract to help directors meet it.

Check your understanding

Sources

1. [1]Supreme Court of the State of Delaware (copy hosted by Potter Anderson & Corroon LLP), “RBC Capital Markets, LLC v. Jervis, No. 140, 2015 (Del. Nov. 30, 2015) (slip opinion),” November 30, 2015.
2. [2]FINRA, “5150. Fairness Opinions,” Accessed November 2026.
3. [3]FINRA, “5121. Public Offerings of Securities With Conflicts of Interest,” Accessed November 2026.
4. [4]FINRA, “5131. New Issue Allocations and Distributions,” Accessed November 2026.
5. [5]FINRA, “2241. Research Analysts and Research Reports,” Accessed November 2026.
6. [6]Legal Information Institute, Cornell Law School, “15 U.S. Code § 78o - Registration and regulation of brokers and dealers,” Accessed November 2026.
7. [7]FINRA, “5110. Corporate Financing Rule — Underwriting Terms and Arrangements,” Accessed November 2026.
8. [8]FINRA, “Investment Banking Representative Qualification Exam (Series 79) Content Outline,” 2025.
9. [9]U.S. Securities and Exchange Commission, Office of Compliance Inspections and Examinations, “Staff Summary Report on Examinations of Information Barriers: Broker-Dealer Practices Under Section 15(g) of the Securities Exchange Act of 1934,” September 27, 2012.
10. [10]U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy, “Investor Bulletin: Investing in an IPO,” February 2013.

Educational content only — not legal, tax, or investment advice, or an offer to sell or a solicitation of an offer to buy any security. Rules and data are described as of November 2026 and may change. Securities offered through Umergence LLC, Member FINRA/SIPC.