Why Every Investment Banker Needs a Written Engagement Letter
Engagement letters are more than just formalities in investment banking. When advising clients on business sales or capital raises, a written engagement letter is a critical legal, regulatory, and business tool that protects both the banker and the client. Below is a consolidated list of the most important reasons—legal, compliance-related, and commercial—why every engagement should begin with a signed letter.
Key Reasons to Use a Written Engagement Letter
1. Defines Scope and Responsibilities
- Clearly outlines the banker’s services (e.g., M&A advisory, capital raising, or other service).
- Clarifies what is expected from both the banker and the client, preventing misunderstandings or scope creep.
2. Establishes Legal Enforceability
- Converts verbal discussions into a binding contract.
- Provides the foundation for enforceability in court if a client refuses to pay earned fees.
3. Protects Fee Entitlement
- Clearly defines retainers, work fees, and success fees.
- Includes tail provisions to protect the banker’s right to compensation after termination.
4. Enhances Regulatory Compliance
- Supports SEC and FINRA expectations for written agreements.
- Documents supervision under a registered broker-dealer, helping to avoid unlicensed activity violations (e.g., Exchange Act §15(a)).
- Assists with compliance under key FINRA rules, including:
- Rule 2010 (ethical standards),
- Rule 2210 (marketing),
- Rule 3110 (supervision), and
- Rule 17a-4 (recordkeeping).
5. Supports Revenue Recognition (ASC 606)
- Aligns fee structure with accounting standards, enabling proper recognition of earned income.
6. Allocates Risk and Limits Liability
- Includes indemnification and limitation of liability provisions.
- Helps shield the banker from exposure due to client misstatements or unforeseen issues.
7. Strengthens Position in Disputes
- Serves as a key evidentiary document in fee disputes, complaints, or arbitration.
- Reduces vulnerability to misinterpretation or informal claims.
8. Improves Deal Execution and Coordination
- Establishes timeline, workflow, and deliverables.
- Facilitates alignment with legal, accounting, and advisory teams.
- Minimizes delays and confusion during transactions.
9. Builds Credibility and Market Confidence
- Demonstrates a disciplined, professional approach.
- Increases trust from clients, buyers, and investors.
10. Provides a Clear Exit Framework
- Defines termination procedures and surviving obligations.
- Helps manage post-engagement expectations and protects tail period rights.
Conclusion
An engagement letter is not just a document—it’s a foundation. It sets the terms, protects both parties, and enables the banker to operate effectively, ethically, and defensibly. For investment bankers in today’s increasingly regulated and competitive environment, a written engagement letter isn’t optional—it’s essential.
