it explains the difference between ethics and compliance and includes a case study on Goldman Sachs

2. CIBIS- Consortium of Investment
Banking and Institution Standard

3.  Any organisation in world has to follow some
rules and regulations so as to develop a
systematical environment for its customers.
 Being a part of capital market, Investment
Banks play major role in prime activities.
 It acts as an intermediary between investor
and companies.

4.  Rules of conduct recognized in respect to a
particular class investment banking
 It is that branch of philosophy dealing with
values relating to human conduct and
interest of all, with respect to rightness and
wrongness of certain actions and to the
goodness and badness of the motives and
ends of such actions.

5.  In general, compliance means conforming to
a rule, such as a
specification, policy, standard or
law. Regulatory compliance describes the
goal that corporations or public agencies
aspire to achieve in their efforts to ensure
that personnel are aware of and take steps
to comply with
relevant laws and regulations.

6. Rule 1 – Independence & Objectivity
 Members shall maintain independence and
objectivity in undertaking all transactions and
providing all investment banking and advisory
services.
 Members shall not allow themselves to be
placed in a position of pressure to approve any
documents, structures or transactions that do
not meet compliance requirements.
 Services contracts signed by such members shall
either not limit, or proactively provide for, such
independent expert discretion of conclusions
based solely upon demonstrated objective
facts, regardless of any payment for services.

7. Rule 2 – Anti-Fraud
 Economic Security – Members shall not disclose
a level of general information that would enable
or permit any person to design, improve, perfect
or commit any fraud or other unlawful activity in
any transaction.
 To best support legitimate transactions without
violating this rule, any reports given
or advisory statements made should be limited
to practical recommendations for correcting
defects of documentation or structures, or
suggestions for obtaining verifiable documents to
replace defective documents, strictly on a case-
by-case basis.

8. Rule 3 – Sharing for Collective Capabilities –
 Members shall share information on
developing trends and practices in
investment banking, compliance procedures,
anti-fraud measures and transaction controls
with CIBIS, for analysis and processing for the
collective benefit of members.
 Members shall also provide assistance to
other members in an unofficial advisory
capacity, to maintain a network of collegial
professional support, and to facilitate access
to external institutional capabilities.

9. Factors Legal Ethical
Ethos Regards ethics as a set of
limits and something that
has to be done
Defines ethics as a set of
principles to guide choices
Objectives Geared toward preventing
unlawful conduct
Geared toward achieving
responsible conduct
Method
Emphasizes rules and uses
increased monitoring and
penalties to enforce these
Rules
Treats ethics as infused in
business practice
(leadership, core systems,
decision-
making processes,
etc)
Behavioral Assumptions Rooted in deterrence theor
y(how to prevent people
from doing bad things by
manipulating the costs of
misconduct)
Rooted in individual and
communal values (both
material and spiritual)

10.  Conflicts of Interest- a type of moral hazard problem that occurs when a person
or institution has multiple objectives (interests) and as a result has conflicts
between them.
 Conflicts of interest usually take the form of misleading information.
 Financial institutions can benefit off of giving out misleading information, hurting
the public, while giving the financial institutions greater profits.
 Conflicts of interest lead to unethical behavior.
 Conflicts of interest occur when an institution or employee serves his interests at
the expense of others.
 Combinations of services that bring together any group of depository
intermediaries, non-depository intermediaries, and brokers, or that allow any of
these groups to invest directly in a business, are most likely to lead to conflicts of
interest.

11.  Conflicts of interest can substantially reduce the quality of
information in financial markets, thereby increasing
asymmetric information problems.
 In turn, asymmetric information prevents financial markets
from channeling funds into the most productive investment
opportunities and causes financial markets and the economy
to become less efficient.
 The growing economies of scope have led to financial
institutions to offer many services under one roof, increasing
conflicts of interest and in turn increasing unethical behavior.

12. •Conflicts of interest become a problem for the
financial system when they lead to a decrease in the
flow of reliable information, either because
information is concealed or because misleading
information is spread.
•The decline in the flow of reliable information makes
it harder for the financial system to solve adverse
selection and moral hazard problems, which can slow
the flow of credit to parties with productive
investment opportunities

13. • Inappropriately designed compensation plans, for
example may produce conflicts of interest that not
only reduce the flow of reliable information to credit
markets but also end up destroying the firm.
• The conflict of interest problem can become even
more hazardous when several lines of business are
combined and the returns from one the activities,
such as underwriting and consulting, are very high for
only a brief amount of time. Also, a compensation
scheme that works reasonably well in the short term
might become poorly aligned in the long run.

14.  Threats to truthful reporting in an audit arise
from several potential conflicts of interest.
 The conflict of interest that has received the
most attention in the media occurs when an
accounting firm provides its client with
auditing services and non-audit consulting
services, commonly known as Management
Advisory Services, such as advice on taxes,
accounting or management information
systems, and business strategies

15. • Conflicts of Interest can substantially reduce the
quality of information in financial markets, thereby
increasing asymmetric information problems.
• These asymmetric information problems prevent
financial markets from channeling funds into the
most productive investment opportunities and
causes financial markets and the economy to
become less efficient.

16. Analysts in investment banks are persuaded
to distort their research to please the
underwriting department of their bank and
the corporations issuing the securities which
undermines the reliability of information
investors use for financial decisions and
diminishes the efficiency of securities
markets.

17.  Spinning occurs when investment banks allocate
underpriced shares of newly issued stock to
executives of other companies in order to lure
them to use that investment bank
 When the executives company plans to issue its
own securities it uses that investment bank as
an underwriter.
 This causes a rise in the cost of capital for the
firm and hinders the efficiency of the capital
market.

18.  A bank may make loans to a firm on overly
favorable terms to obtain fees from it for
performing activities such as underwriting the firms
securities
 A bank with an outstanding loan to a firm whose
credit or bankruptcy risk has increased has private
knowledge that may encourage the bank to use its
under-writing department to sell bonds to the
unsuspecting public, thereby paying off the loan
and earning a fee.
 These conflicts of interest decrease the amount of
accurate information and hinders the banks ability
to promote efficient credit allocation

19. Probably conflicts of interest can arise by
investment banks like:
 Goldman Sachs
 Kotak Finance
 SBI

20. Goldman Sachs Group Inc. is under
investigation by the Securities &
Exchange Commission for fraud in a
mortgage securities transaction.
Was there a conflict of interest in this
transaction?

21.  Goldman Sachs purchased many mortgages
from the US housing market.
 They then converted them into mortgage
backed securities.
 They advised clients to buy these mortgages.
 At the same time they sold these mortgage
securities short as either a hedge against their
portfolio to reduce risk or as a major position
anticipating a drop in value in the US housing
market.

22.  Goldman Sachs has an obligation to offer
investments that it believe are in the clients
best interest.
 They are also legally obligated to know their
client, as well as what is a suitable investment
for their client.
 In this case the clients of Goldman Sachs were
knowledgeable investors (i.e. International banks
and hedge funds)
 Did Goldman Sachs disclose, to the clients
purchasing these mortgage products, that they
were also shorting these same securities?
 If they did not, Goldman Sachs was acting in
their own best interest as opposed to that of
their clients. This is a conflict of interest.

23.  Shorting Its Own Securities
 Failing to Disclose Key Information to
Investors.
 Failing to Disclose Client Involvement
 Selling Securities Designed to Fail.
 Misrepresenting Assets.
 Using Poor Quality Loans in Securitizations.
 Concealing Its Net Short Position.

24.  Goldman Sachs, a premier investment
banking firm, may be heavily fined, broken
up and/or lose their clients trust, which is
Goldman Sachs Group Inc. most valuable
asset.

25.  Sarbanes-Oxley Act of 2002
 Global Legal Settlement of 2002

26. Sarbanes-Oxley Act of 2002 Global Legal Settlement of 2002
 Increased supervisor
oversight to monitor and
prevent conflicts of interest
 Directly reduced conflicts of
interest
 Produced incentives for
investment banks not to
exploit conflicts of interest
 Instituted measures to
improve the quality of
information in financial
markets
 Directly reduced
conflicts of interest
 Produced incentives
for investment banks
not to exploit
conflicts of interest
 Instituted measures
to improve the
quality of information
in financial markets

27. Leave It To The Market Regulate for Transparency
 The market may punish
the firm exploiting
conflicts of interest by
causing them to have
higher funding costs or
decreased demand for
services
 Open market forces can
create means to contain
conflicts of interest
through information
demanded from non
conflicted organizations
 Mandatory information
disclosure decreases
information
asymmetries
 This in turn reveals if
conflicts of interest are
being exploited
 Could be bad because of
free-loader effect
 If regulated too much can
cause loss in information
production and
profitability for the firm

28. Supervisory Oversight Separation Of Functions
 Supervisors can review
financial information
without revealing it to
competitors
 This maintains profitability
& information production
 Supervisors can then take
actions to control the
exploitation of conflicts of
interest and enforce
ethical standards
 Poor supervisors allow for
exploitation to continue
 Reduces economies of
scope through regulation
 Information sharing
between departments is
regulated
 Separates departments and
adds firewalls to ensure
that the firms agents are
not responding to multiple
principals
 Results in a trade off
between information
production and reducing
conflicts of interest

29.  The existence of a conflict of interest does not mean
that it will have serious adverse consequence.
 Even if incentives to exploit conflicts of interest
remain strong, eliminating the economies of scope that
create the conflicts of interest may be harmful because
it will reduce the flow of reliable information.