Why Mutual Indemnification Is Not Industry Standard in Investment Banking
In the world of investment banking, legal protections and risk allocation are fundamental to the structuring of advisory agreements. One provision that frequently raises questions—especially among clients unfamiliar with industry norms—is indemnification. Specifically, clients may request mutual indemnification provisions. However, mutual indemnification is not standard in investment banking engagement letters, and for good reason.
Understanding Indemnification
Indemnification provisions are designed to protect one party (typically the investment banker) from legal liability arising from claims related to the services provided—so long as the banker has not engaged in gross negligence or willful misconduct. This reflects the principle that the banker, acting as an advisor and not a principal or issuer, should not be exposed to litigation risks stemming from decisions or disclosures made by the client.
Why Mutual Indemnification Is Problematic
Mutual indemnification implies that the investment banker would also indemnify the client, which may seem equitable at first glance. However, this would represent a significant deviation from market practice and poses several issues:
Asymmetry of Control – The client controls disclosures, business practices, and deal terms. The banker’s role is to advise and assist, not direct. Indemnifying a client for claims arising from such activities—most of which are outside the banker's control—introduces a misalignment of risk and responsibility.
Insurance Limitations – Most professional liability insurance policies for investment bankers do not cover mutual indemnification obligations. Agreeing to such terms could void coverage or create personal liability exposure.
Regulatory and Legal Precedent – FINRA, the SEC, and prevailing case law have consistently supported the standard indemnification structure: one-way, limited to gross negligence or willful misconduct. Deviating from this norm can raise red flags in compliance reviews or create enforcement risk.
Industry Practice – Mutual indemnification is rarely, if ever, accepted by reputable investment banks or broker-dealers. Doing so may set a precedent that erodes industry norms and places smaller firms at disproportionate risk.
Conclusion
While clients may propose mutual indemnification in the spirit of fairness, it’s important to understand that in the advisory context, such provisions are inappropriate, unnecessary, and not supported by prevailing legal or regulatory standards. A well-structured one-way indemnity clause—narrowly tailored to cover the advisor’s actual role and potential liabilities—remains the industry standard and best practice.
