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Regulatory Wire: How Goldman Sachs' fraud case will redirect the regulatory debate

Two Senators to offer amendment; plus, how many arbitration cases are filed because of breach of fiduciary duty? It's a lot.

Author By Sara Hansard April 23, 2010 at 6:01 AM
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Goldman Sachs' Lloyd Blankfein has said the investment bank is not a fiduciary. What is at issue, then, is what the suitability standard really is.

Tamar Frankel


Daniel Akaka


Robert Menendez


Knut Rostad

Stephen Winks

Stephen Winks

April 23, 2010 — 2:34 PM

The FINRA Arbitration Proceeding Table establishing the nature of arbitration proceedings tells the story.

Over 70% (16,336) of the 22,141 arbitration cases related to breach of fiduciary duty, unsuitability of investments, breach of contract, omission of facts and misrepresentation are resolved by a fiduciary construct in support of fiduciary standing. Accountability, transparency, disclosure and the advisor’s descretion over client affairs in the best interests of the consumer cures a lot of ills.

If you add in negligence, lack of supervision, churning, margin calls and unauthorized trading which are effectively delt with through either an outsourced expert CIO function through which small advisors leverage their poerfolio construction capabilities or through large advisors housing their own CIO function in their practice. This is faster, better and cheaper than selling retail products as a series of disjointed unrelated transactions.

Most of the industries compliance issues can be eliminated by an audited prudent investment process utilizing advances in (a) prudent process tied to statutory documentation assuring fiduciary standing, (b) new technology that affords accountability, disclosure and transparency that supports continuous comprehensive counsel required for fiduciary standing, (c) a functional division of labor (Advisor, CIO, CAO)which simplifies the routine execution of an extremely high level of counsel,(d)conflict of interest management, and (e) advisory services support for each of the ten major market segments advisors are active. Approximately 12% of industry revenues are attributable to compliance and can be redirected to more productive endeavors.

None of this innovation is possible unless the idustry acknowledges and supports fiduciary standing of its brokers. The majority of SEC Commissioners support “the” fiduciary standard of care for brokers, it is up to Congress to provide the SEC with the necessary legislative authority to require fiduciary standing for brokers.

It is time for the brokerage industry to embrace Modernity after 70 years of maintaining brokers do not render advice (subject of the Goldman suit), thus requiring the consumer to determine investment merit on their own regardless of how limited their investment knowledge and experience may be. This is untenable from both the perspective of the consumer and the advisor.

The enabling resources must be provided to the terribly under resources brokerand advisor so they can unambiguously act in thre consumer’s best interest. This is the public policy Congress should be supporting and as a by product the “too big to fail” issue will resolve itself in the best interest of the consumer.


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