Setting the stage for the discussion, Knut A. Rostad, chairman, the Committee for the Fiduciary Standard, noted that the SEC’s civil charges of fraud against Goldman Sachs may be the clearest demonstration yet of, “why the fiduciary standard is important,” and the differences between the fiduciary standard under the Investment Advisers Act of 1940 and the suitability standard under which brokers operate.
“Goldman has been clear that it regards this relationship as a caveat emptor situation,” Rostad says. He quoted Goldman Sachs CEO Lloyd Blankfein’s testimony in January before the Financial Crisis Inquiry Commission: “we are not a fiduciary,” Blankfein said, adding in the testimony that Goldman must “fully disclose what an instrument is and be honest in our dealings, but we are not managing somebody else’s money.”
In the same testimony though, Blankfein also expressed that “…we do support the extension of a fiduciary standard to broker/dealer registered representatives who provide advice to retail investors. The fiduciary standard puts the interests of the client first. The advice-giving functions of brokers who work with investors have become similar to that of investment advisers. But, investors may not understand that the person they are getting advice from may be regulated under different rules and regulations. Retail investors should be able expect the same duty of care when they are receiving investment advice.”
At the heart of this case, according to Rostad, is, “What is permitted conduct under the suitability standard? The SEC in its complaint expresses one view that Goldman’s conduct is not permitted. Goldman in its reply thus far expresses another view: that its conduct, based on the facts, is fully and completely within the boundaries permitted in law. Here we have a picture of what Wall Street’s most esteemed banking firm seems to believe is a suitability standard.”
Rostad also noted that commentators have observed that “a clear SEC win in this case will be very difficult,”–that more likely we will see “a draw or a Goldman win.” If that is so, he says that we would view an “unvarnished picture of some of the principles and practices that would appear to be affirmed as meeting the suitability standard requirements.”
The case highlights “the wide gap and opposing roles of a broker who is permitted in law to further his and his firm’s interests at the expense of customers’, and a fiduciary who is required in law to put his clients’ interests first. This is at the core of why the fiduciary standard is important,” Rostad continued.
Rostad moderated the call with three panelists: Tamar Frankel, Professor of Law at Boston University School of Law; James D. Cox, Duke University Brainerd Currie Professor of Law; and Terry Savage, author and personal finance columnist based in Chicago.