Today I bought a book from Amazon. I think I'll sue it for breach of fiduciary duty. You see, Amazon had a conflict of interest: while it was charging me for the book, it was planning to send some of the price to shareholders who collectively control the company. The more it charges me, the bigger the detriment to me, but the bigger the benefit to its shareholders.
Of course, I could always refuse to buy, and maybe I knew about the conflict all along, but still – it's a conflict isn't it? And therefore a breach of fiduciary duty?
Does this sound absurd? What about Goldman, which Senator Susan Collins suggested a couple of weeks ago had a duty to act in its clients', rather than its own, best interests. Of course Goldman has clients rather than customers. And we know the difference, don't we?
The L.A. Times' Michael Hiltzik writes that "one of the major problems with the state of our financial rules and regulations" is that "investment bankers and their professional cousins, broker-dealers, don't generally owe what's known as a "fiduciary duty" to their clients under federal or state laws." He seems to like a bill to fix this that was debated at a Senate hearing at which I testified two weeks ago.
Hiltzik is concerned that Goldman has been making so much lately from trading. But how is Goldman different from Amazon in my example? According to Hiltzik, the problem is that Goldman, in the infamous Abacus deal,
yoked its fortunes to one client at the expense of another. The firm's conflict of interest might have been evident to the buyers if they had been dealing in plain-vanilla securities, an SEC official said, rather than the tutti-frutti mishmash Goldman helped concoct.
Now, when you're a fiduciary, as Hiltzik notes, you're supposed to owe a duty which Justice Cardozo described as "not honesty alone, but the punctilio of an honor the most sensitive." Then you should have no conflicts.
So who's a fiduciary? I would say it's someone who delegates the kind of control to another that necessitates some judicial supervision, not a bank that is buying securities at arm's length from another bank.
Hiltzik and others, apparently including Jack Coffee who testified at the Senate hearing, seem to think that a fiduciary is anybody with a conflict of interest. That reasoning is rather circular: you owe a duty not to have a conflict ("punctilio of an honor") if you're a fiduciary, and you're a fiduciary if you have a conflict.
Hiltzik notes that
[n]ot everybody thinks a fiduciary standard will work. "Fiduciary rules are much too vague to have a deterrent effect," says Larry Ribstein, a law professor at the University of Illinois, who testified at the same hearing as Coffee. "They're too nebulous to apply across the board in a statute that applies to the spectrum of relationships" in the financial industry. He says that's particularly true if, as Congress is contemplating, you're going to impose criminal penalties for violations. "There you have a special need to be clear." Ribstein also contends that applying fiduciary standards to investment bankers would be solving a problem that doesn't exist. If Goldman Sachs withheld from its Abacus clients information it should have disclosed (as the SEC contends), that's fraud, and laws exist to punish it.
Coffee scoffs at my craven fear, telling Hiltzik that "any time you come up with a new statutory scheme you can imagine problems." Coffee gets the last word in Hiltzik's column: "[T]his is a way for the SEC to get a handle on the growing problem of conflicts of interest."
Well, call me a "chicken little" (as Coffee did at the Senate hearing), but when every "conflict of interest" becomes a fiduciary duty whether or not there's fraud I do see a growing problem – the loosening of anarchy upon the world.
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