The civil suit filed against Goldman Sachs by the Securities & Exchange Commission alleging securities fraud could strengthen the argument to establish a universal fiduciary standard, according to legal experts.
The case against Goldman adds a “new dimension” to the debate over whether legislators should establish a fiduciary standard for everyone dispensing financial advice, Knut Rostad, chairman of the Committee for the Fiduciary Standard, said during a conference call Wednesday.
“It is concrete and specific as to what it is, as opposed to the pitchfork-storming-Wall Street view of this,” he said.
Rostad said the case could provide a clear contrast between the fiduciary standard and the suitability standard — something that has been confusing the industry thus far. He said that based on Goldman’s declaration to defend its principles and practices and fight the charges, we have an unvarnished view of what the world’s leading investment banking firm believes, in part, is required of the suitability or fair dealing standard. Going forward, if Goldman wins outright these practices will be affirmed in law.
The SEC sued Goldman Sachs on April 16, alleging the investment bank made “materially misleading statements and omissions” about a structured product sold to investors. The SEC says Goldman did not tell investors that hedge fund Paulson & Co. had input in the selection of residential mortgages that were part of the structured product. Paulson later made a $1 billion profit from this product by betting that the housing market would fall.
For its part, Goldman maintains it isn’t a fiduciary. In testimony before the Financial Crisis Inquiry Commission on Jan. 13, Goldman Sachs CEO and chairman Lloyd Blankfein said the investment firm was instead a “market maker” that sells products as a principal. In other words, as Rostad said, Goldman sees its position as that of caveat emptor, rather than advisor.
But James Cox, Duke University Brainerd Currie professor of law, said the fiduciary standard “would roll away some of the mist of what Goldman and others are hiding behind.” Looking at the case from a broader perspective, Cox wondered whether the Goldman case raises questions about “the peril of too big to manage,” in a similar way that recent government bailouts called into question the peril of banks and insurance companies becoming too big to fail.
“Why not have a fiduciary standard where you have to have cards turned up on the table when selling a product?” Cox asked.
If the court of public opinion factors into the case, Goldman appears to be losing some ground. A survey released by Argyle Executive Forum on Wednesday found that 55.2% of business leaders feel Goldman is guilty, 20.7% feel the firm is innocent, and 24.1% of business leaders are currently unsure.
Tamar Frankel, a professor of law and Boston University’s Michaels Faculty Research Scholar, believes that if the law doesn’t change the nature of Goldman’s responsibility then investors can do it themselves.
“There comes a point when the investors have to make a decision and exercise some pressure,” he said.
This means moving the focus away from the product and over to the sales person.
Investors, Frankel said, need to ask whether their broker is a registered investment advisor. If he isn’t, investors can make the decision to find someone who is.
But Terry Savage, an author and personal finance columnist, doesn’t believe empowering investors to ask the right questions is enough. She said that she doesn’t understand why there isn’t more demand on Congress to write a law that at the very least creates a fiduciary standard.
“It shouldn’t be such a tough thing to pass,” Savage said. “If you are trying to sell a product you should disclose what’s in the product and your interests in that product.”
Savage added that “there’s never going to be a law to legislate against stupidity, greed and emotion.” She said the point of legislation is not to wipe out all mistakes; that would be impossible since markets by nature go to extremes and people will lose money. Instead, the point is to legislate the right to equal access over vital information so that investors can make their own decisions, good or bad. Savage said that she believes there is an even greater responsibility to have a fiduciary standard because so many Americans have been exposed to the markets through the financial services world telling them they need to invest for their retirement futures.
“But people are saying the game is rigged and Wall Street is dealing us from the bottom of the deck and giving their friends the best cards,” she said.