Tuesday, May 4, 2010
The Goldman hearings raised, front and center, the question whether broker-dealers should owe fiduciary duties to sophisticated investors. In his talk to Berkshire Hathaway over the weekend, Warren Buffett gave a robust defense of Goldman Sachs and expressed his own lack of sympathy with the investors on the other side of the deal. CNBC, Warren Buffett Defends Goldman Sachs At Berkshire Shareholders. In contrast, SEC Commissioner Aguilar recently gave a talk in which he asserts that all advice-givers should be fiduciaries, whatever the sophistication of the customer they are dealing with. Aguilar, Protecting Investors by Requiring that Advice-Givers Stay True to the Fiduciary Framework.
I confess, as a diehard advocate for retail investors, that I don't have much concern for sophisticated investors either. But the debate about whether Goldman was a fiduciary provides another illustration of overbroad, and unnecessary, misuse of the fiduciary duty standard. As I read the SEC's allegations against Goldman, the SEC is alleging that Goldman made material misrepresentations to the counterparties because it misrepresented that the portfolio was selected by ACA Management when in fact it was selected by Paulson. The SEC has serious obstacles in proving its case, as others have pointed out, principally materiality, but this is a straight-forward misrepresentation case and if the SEC can prove its allegations, it should win. If Goldman had made no representations about who assembled the portfolio and the counterparties asked no questions about it, then only a fiduciary standard would impose liability on Goldman; to win this hypothetical case, the SEC would have to establish that Goldman was acting as an investment adviser to the investors. But that is not the theory of its case.
Moreover, going back to Commissioner Agular's premise, there are good reasons not to extend a fiduciary duty to broker-dealers when they are not acting as investment advisers to sophisticated investors. Broker-dealers interact with sophisticated investors as underwriters and market dealers, and in those roles they are likely to provide some sales talk and advice. But, unless the investor and broker-dealer agree that the broker-dealer is acting as an investment adviser, sophisticated investors should be able to understand the self-interested nature of the broker-dealer's role, ask the appropriate questions, and negotiate the terms and conditions of their relationship. Retail investors, in contrast, need greater legal protection because they are likely to be confused and are not able to bargain for better protection.