On April 16, 2010, the U.S. Securities and Exchange Commission filed a complaint against Goldman Sachs, alleging that Goldman had misled investors by selling toxic vehicles that Goldman devised and sold at the instigation of a hedge fund which proposed to sell short the investment.
Goldman’s position on the charges is that it does not owe a fiduciary duty to its clients. This is consistent with Goldman CEO, Lloyd Blankfein’s testimony in January before the Financial Crisis Inquiry Commission, where he stressed that Goldman must “fully disclose what an instrument is and be honest in our dealings, but we are not managing somebody else’s money”. [emphasis added] In that context, Mr. Blankfein also clearly stated that Goldman is not a fiduciary. But more recently, Mr. Blankfein, pledged to clients that he wants Goldman to “be the leader in things like ethics, in putting clients first”.
The Goldman matter highlights that financial firms and their registered representatives in both the U.S. and Canada are not required by law to put their clients’ best interests first. Firms and advisors are subject to a “suitability” standard, under which an advisor may offer a client investment advice that, while “suitable” for the client, may be more costly and not necessarily in the client’s best interest. But they are under no legal obligation to put their clients’ best interests first.
Time for Firms and Advisors to Put Client Interests First
FAIR Canada and the Hennick Centre for Business and Law recently held a conference to simulate debate in Canada about the fiduciary standard and introducing a requirement for financial firms and advisors to put their clients’ best interests first.
This debate was also discussed in the context of the Goldman allegations during an April 21 conference call, organized by The Committee for the Fiduciary Standard (the Committee) in the U.S. As Knut Rostad, Chairman of the Committee, noted in his remarks:
This case draws attention to what “suitability” actually means, at the very least, in the Goldman case. In so doing, the distinctions between the suitability and fiduciary standards are at center stage. The wide gap and opposing roles of a broker who is generally permitted at law to further his own and his firm’s interests at the expense of customers, versus a fiduciary who is required by law to put his client’s best interests first, are clear. The fiduciary distinction is at its core.
FAIR Canada urges regulators and governments to tackle this issue head-on by considering the introduction of a higher standard for financial firms and their registered representatives. That standard, whether called “fiduciary” or otherwise, should be based on the five core fiduciary principles associated with the Committee’s proposed standard:
- Put the client’s best interests first,
- Act with prudence – that is, with the skill, care, diligence and good judgment of a professional,
- Do not mislead clients – provide conspicuous, full and fair disclosure of all important facts,
- Avoid conflicts of interest, and
- Fully disclose and fairly manage, in the client’s favour, unavoidable conflicts.