The Center on New Fin Reg Duties

Talk on financial regulation reform debates the wisdom of new federal legislation that may impose new duties on financial professionals.   This appears to have gained momentum in light of Congressional hearings yesterday probing whether top players at Goldman Sachs thought they owed any special duties to their customers.  

Focusing on the possibility of imposing fiduciary duties on securities brokers, Erik Gerding rightly notes how this would be a “sea change” on Wall Street.  Firms like Goldman Sachs make markets in securities and generally do not owe such duties to the respective buyers and sellers.  Larry Ribstein worries that imposing fiduciary duties on securities brokers would entail high costs for little gain.

There are at least two other ideas that could be considered as an alternative to imposing fiduciary duties on brokers: heightened disclosure and business conduct standards.  

Disclosure is the more standard federal response in securities regulation.  New federal legislation could require securities brokers and dealers to disclose information about: (A) material risks and characteristics of a security; (B) the source and amount of the broker/dealer’s fee or incentives in the deal; and (C) any conflicts of interest the broker/dealer faces.

Another alternative to fiduciary duties or disclosure would impose business conduct standards on securities broker/dealers.  These could be established by the Securities and Exchange Commission in rules or regulations relating to: (A) fraud, manipulation and other abusive practices and (B) diligent supervision of the broker/dealer’s business. 

Securities broker-dealers are not alone in facing this kind of new duties in financial regulation reform.   A similar set of alternative new standards will be proposed to apply to swap dealers and major swap market participants.  

In the political process, one suspects that proponents of serious reform will urge adoption of all three of these ideas–fiduciary duties, business conduct standards, and heightened disclosure obligations–on both categories of participants.   Opponents will resist all three. 

The likely middle ground will almost certainly include disclosure.   The concept of a fiduciary duty may be both too vague and scary to carry the day.  Business conduct standards would become the fighting issue.  As long as they are tied to the specific contexts suggested–fraud and diligent supervision–they could help provide the centrist compromise too.

Hat Tip: Lynn Turner

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