Special Topics in Business Institutions

The impact debt offerings have on the company’s credit ratings are very important as credit ratings determine borrowing costs, which indirectly impacts the leverage of the company. If issuing more debt negatively impacts the credit ratings of a company, the cost of borrowing increases through higher coupons and cheaper prices. 6. Why might an investment bank place higher priority on sell-side m&a engagements over buy-side engagements? Sell-side M&A engagements have a higher probability of completion. As fees a typically paid to M&A bankers only upon successful completion of a transaction, there is greater incentive alignment with sell-side engagements compared to the buy-side. 7. Many investment banks have a principal investment group that invests directly in public and private companies. What conflicts of interest might arise from operating this type of business? The principal investment group may compete with a private equity group for an acquistion. This is a conflict of interest because the investment bank reaps fees from underwriting and M&A advisory from private equity firms but can also reap rewards from their own principal investment group. 8. What conflicts might exist between the proprietary trading division and the rest of the investment bank? They can use internal information to make trades, though this is prohibited. Internalization of trade orders also can occur. Bank can also exploit inherent conflicts of interest in their trades 9. What conflicts might exist as a result of having both an asset management business and a private wealth management business? PWM clients may be encouraged to invest in funds managed by the own bank’s AM. The bank also can co-invest in the funds that are managed by AM Chapter 2 Regulation of the Securities Industry (Devlin): 1. Following the 1929 stock market crash, Congress passed a series of Acts to regulate the securities industries. Name 4 of the Acts and briefly describe their purpose. Glass-Steagall Act 1933 - separated commercial and investment banks, created the Federal Deposit Insurance Corporation (FDIC) which insured depositors assets in the event of a bank default. Securities Exchange Act of 1934 - supervision of new security offerings, ongoing reporting requirements for these offerings, and the conduct of exchanges. Changed secondary market for securities by requiring minimal reporting standards and codifying rules for transactions. Public Utility Holding Company Act 1935 - allowed the SEC to supervise the relationship between utility holding companies and investment banks. The Act restricted investment banks from owning these utility companies on the belief that the banks would limit competition and engage in monopolistic behavior. The Chandler Act 1938 - added chapter X bankruptcies to the National Bankruptcy Act. Before this act, corporate bankruptcies had limited government involvement and were largely run by private companies. The Chandler Act gave the SEC the authority to be a party to all corporate restructuring activity, giving investors additional protection against inequitable restructuring plans. 2. A goal of many parts of U.S. regulatory legislation has been to eliminate or minimize conflicts of interest between issuers, investment banks, and investors. Provide examples of conflicts of interest in the U.S. investment banking industry and the corresponding regulations that attempted to resolve those issues. -investment banking division and equity research groups within the same bank, resolved by the Global Research Settlement in 2003 -fraudulent information about sale of securities between investment banks and issuers and investors, Securities Act of 1933 required information be released about securities offered for public sale -banks incentive to be involved in bankruptcy proceedings, suspicion that banks were using bankruptcy accesses to rake in excessive profits, resolved by the Chandler Act in 1938 3. Disclosure of information to investors is another recurring theme in U.S. regulation of the securities industry. Provide examples of disclosure required by U.S. regulations. Companies must give regulators and prospective investors through a filing with the SEC called the Registration Statement. Companies are also required to provide investors with a prospectus, which contains certain elements of the information included in the registration statement. The prospectus cannot be distributed until after the issue has been registered with the SEC. 4. What is the role of U.S. states in regulating the investment banks? There was limited federal regulation of the investment banks before the Great Depression but banks had to adhere to state securities laws called Blue Sky

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