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Retirement Planning > Social Security

Erosion of Trust

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That’s why I was surprised to see in Goldman Sachs’s (GS) reply to the SEC’s charges of alleged fraud that “As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.” I understand that market makers don’t have to give up the two sides of a trade. I may not be the brightest bulb as an observer I was surprised to read that securities origination was now a market-making function. Also surprised to learn that rather than the parties disclosing the facts it is now important for the investor to ascertain who is not disclosed as a party to selecting underlying securities for a portfolio and whether those who have a hand in selecting those underpinning securities backing an investment could actually select securities that are most likely to benefit them in an opposing trade that they are structuring with that in mind, whether by going long, short or both. (For the multitude of readers who are smarter than I am, please enlighten me as to how investors should be reading minds here, for I am at a loss.) That the additional conflicts no longer have to be disclosed–again, I totally missed that memo. I must also have missed the announcement that omitting facts was not a big deal under business as usual now on Wall Street.

To me the entity that picks the underlying securities and whether they have an axe to grind in that selection is a fundamental piece of information. As a party to the creation of the security in question, it would seem reasonable that Paulson & Co.’s hidden agenda, selecting securities that would back the investment while at the same time constructing with GS a way to short those securities…well, if that’s not material, what is?

This, needless to say, does not help bring trust back to Wall Street firms. There is, anecdotally, the sense that there may be loads more securities like this one originated by different Wall Street firms or banks.

The reasoning that this was a single individual at GS who allegedly didn’t disclose Paulson & Co.’s “role” in selecting the underlying securities and at the same time shorting those and that it’s okay because the buyers were sophisticated, institutional investors is disingenuous. Even the best due diligence could fail to discover something about something or some party that is undisclosed.

As an “intermediary,” in the creation and sale of the securities, as well as, allegedly for Paulson & Co., the creation of the short part of the deal, GS seems to have been in a position to know that there was enormous conflict in this endeavor. This would stretch the suitability standard’s “fair dealing” and “not misleading” tenets, not to mention the obligation to disclose material facts.

Is this now business as usual on Wall Street? Certainly, this is not simply taking two sides in market-making function. If it has become de rigueur for Wall Street to not disclose material facts, I must have missed the memo. But if that is the sad case, then it does not bode well for the future of Wall Street, investors of all stripes or retirement for most Americans. Caveat emptor becomes empty when facts are obfuscated or perhaps deliberately not revealed.

Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

Read more Wealth Manager: Viewpoint blog posts: Class Action Lawsuits on 401(k)s April 12, 2010 Investors in 401(k) plans who are frustrated by proprietary funds, opaque high fees, revenue sharing and sub-par performance are starting to get overtures from lawyers who are gathering investors for class action suits against 401(k) providers…. Six Choice Pieces of Fiduciary Misinformation March 18, 2010 There is a great deal of chatter surrounding the fiduciary movement that is just plain incorrect–as in, not fact–whether from ignorance or deliberate obfuscation. Why Shouldn’t Investors’ Best Interests Come First? February 25, 2010 Are Senators strong enough–and do they have enough integrity–to stand up on behalf of retail investors and insist on extending the fiduciary standard to cover those who provide advice to retail investors?… Greater Good: The Unintended Consequences of Repaying TARP January 29, 2010 Did the requirement to repay TARP funds in order to pay bonuses for 2009 prompt some banks to repay the bailout funds too early? … Smart Money January 19, 2010 Goldman Sachs Chairman and CEO Lloyd C. Blankfein testified that at Goldman Sachs, “…we do support the extension of a fiduciary standard to broker/dealer registered representatives who provide advice to retail investors.” … Ever Hopeful December 29, 2009 As we emerge from a challenging economic crisis, there is reason to hope that changes and opportunities we will see in this new year–some as a direct result of the economic crisis–will be positive…. Schapiro’s Call for Fiduciary Standard Reflects SEC’s Original Mandate December 07, 2009 “I believe that all securities professionals should be subject to the same fiduciary duty,” says SEC Chair Mary L. Schapiro…. Mr. Dodd’s Message from Washington November 16, 2009 Now that we have heard from both the House and Senate committees on finance and banking about investor protection, let’s not misinterpret what they are saying. Can the DJIA at 10,000 Inspire “Animal Spirits?” October 16, 2009 The Dow Jones Industrial Average hit a year-to-date high and jumped above 10,000 on Oct. 14, and the next day hit another high of 10,062.94. Unless you are short, this is good news for you and for your clients. “Federal” versus “Authentic” Fiduciary Duty October 08, 2009 Both investment advisors and broker/dealer registered representatives routinely give financial and investment advice to clients. What is still different is the rules that protect those investors…. Are you Ready? September 22, 2009 Financial reform is around the corner. How will it affect you and your clients? The Capital is abuzz with discussions regarding re-regulation of financial services, something that the Administration wants to see passed by year-end…. “Trust Doesn’t Come and Go”

Once an advisor has that trusted relationship with a client, how can the advisor “go back” to a non-fiduciary relationship? The answer is they can’t.


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