In an attempt to sway new regulations on the fiduciary standard, an advocacy group releases a video of Goldman Sachs execs' worst moments before a Senate committee

July 16, 2010 — 3:27 AM UTC by Elizabeth MacBride

1 Comment

In a day of events that seemed designed to reassure investors that Washington is populated by regulators and legislators there to protect them, Goldman, Sachs & Co. agreed to pay the largest fine ever levied on a Wall Street firm, $550 million, to the SEC over its conduct in selling mortgage-backed securities. Meanwhile, the U.S. Congress passed a huge financial services reform bill designed to prevent another financial collapse.

“I don’t think that it’s a total accident that the settlement was announced on the same day (as the bill passed)” said Ross A. Albert, a partner with Atlanta-based Morris, Manning & Martin LLP. “This was a send-the-message case from the beginning.”

The events of the day brought a combination of symbolism and substance to the fore. The fact that Goldman, the pillar of Wall Street, is being forced to pay a huge fine, is an indication that Wall Street is increasingly coming under pressure to change its business model. That’s critical to RIAs, many of whom are already rapidly abandoning the conflicts of interest inherent in the commission-based model of business.

SEC finds its voice

“The SEC seems to be finding its enforcement voice and it’s getting louder. Regulations could well be tougher and investors would benefit,” said Knut Rostad, chairman of The Committee for the Fiduciary Standard, a group that advocates extending the fiduciary standard that advisors now operate under to broker-dealers.

Yet, yesterday’s events were only the beginning of a long process of reform, and it’s difficult to say for sure whether investors will be better off at the end, or what role advisors and brokers will play in the new regulatory world under construction. The key issue raised by the Goldman case — whether brokers have a fiduciary obligation to their clients, as advisors do — remains unresolved by the settlement.

Goldman agreed to reform its mortgage securities business practices, and admitted its marketing materials for the subprime product in question contained incomplete information. The firm agreed to specific changes only in the area of mortgage securities. In a nod to the ethical issues raised by the firm’s practices, the SEC said that Goldman is conducting a comprehensive, firm-wide review of its business standards.

The financial reform bill gives the SEC the power to write new regulations defining broker-dealer’ obligations (after a six-month study of the two sets of regulations governing advisors and brokers). After that study, and when and if new regulations are issued, the questions raised by the Goldman case may begin to be settled.

Indeed, it was a tacit acknowledgment of the amount of lobbying left to be done that the Committee for the Fiduciary Standard released a video of Goldman Sachs executives squirming under questioning from Senators this spring, as hearings over the SEC lawsuit were held.

Many advisor advocates believe the SEC’s civil lawsuit against Goldman and the ensuring hearings convinced Congresspeople to vote in favor of the fiduciary provision in the financial reform legislation. See: What went right: the story of the fiduciary standard this year.

The Committee said the video highlights the inadequacy of the suitability standard. The video can be seen here.

Crap-selling questions

The video shows Sens. Susan Collins of Maine and Carl Levin of Michigan, among others, pressing executives including Lloyd Blankfein, Goldman CEO, about the difference between the suitability and fiduciary standards, and whether investors know the difference. At one point, Levin asks Blankfein, “Do you think (investors) care that something is a piece of crap when you sell it to them?”

Blankfein’s answer is no. He tells Levin that the firm’s institutional investors are in the market only to buy products that have a certain amount of risk attached to them — a complicated answer that leaves Levin unsatisfied.



Share your thoughts and opinions with the author or other readers.

Gravatar

Jeff Spears said:

July 16, 2010 — 6:17 PM UTC

I know there are a lot of remaining questions to be answered, but the largest positive in my opinion is that “most” OTC derivatives will need to be traded on a public exchange. Public price discovery is a HUGE win and improvement for individual investors!


Submit your comments: