Corporate & Securities Law

The Specter of Liability: Ribstein and Verret team up on Capitol Hill

I was privileged to testify yesterday with TOTM’s blog neighbor Professor Larry Ribstein on the issue of imposing fiduciary duties on securities brokers.  Senator Specter chaired the hearing, which you can watch in full.  Senator Specter’s proposal was to require not only that securities brokers be held to fiduciary duties to their clients, but that those duties should be enforced criminally.  Ribstein summarizes the events here, as does Gordon Smith.  The real objective, of course, was to help Specter’s embattled re-election prospects by hitching his wagon to the Goldman Sachs headlines (check out the write up on the Specter 2010 site).

Most of the morning was spent discussing the Goldman Sachs case.  I thought it was somewhat inappropriate for the Committee on the Judiciary to rush to judgment, when the complaint has only recently been filed in this highly controversial case, and rush to make legislation in response. Particularly when, if wrongdoing occurred, the securities fraud statutes on the books are already sufficient.  For more check out Prof. Bainbridge’s analysis.

Prof. Jack Coffee was also on the panel, and argued that fiduciary duties will be easy to administer because we can limit the reach of those duties to merely cases where brokers are providing investment advice.  I countered that the courts and the Commission are just as likely to manipulate that language as they have the definition of “offer” under the gun-jumping rules of the 33 Act or the definition of “proxy” under the solicitation rules.  You should watch the hearing if for no other reason than to see Professors Ribstein and Coffee matching wits, particularly when Prof. Ribstein gives a solid one-two punch when he outlined the wide variety of problems with inventing a new fiduciary statute that Professor Coffee ignored (defining remedies, what types of conflicts would be prohibited, whether disclosure of conflicts was sufficient, whether the duty would be used to regulate broker compensation, when fiduciary duty waivers are permitted, whether a materiality limit applied, etc.)  For a fuller analysis of the perils in transplanting fiduciary duties, check out Prof. Ribstein’s article.

Delaware has been in the fiduciary duty business for over a hundred years, it’s not the type of legal concept you can just throw into a statute and hope for the best.  Coffee offered that our arguments were “chicken little, sky is falling” pronouncements.  Cute, but not particularly weighty.  I don’t think he answered how to avoid the vagueness problems with the statute.  I also didn’t hear an answer to how we can expect brokers to have fiduciary duties to every one of their clients when their clients have competing interests.  Let’s not forget that Paulson was a client of Goldman’s as well, and under a criminal fiduciary standard sharing information with purchasers may have violated Goldman’s duty of confidentiality to Paulson.  Even more than that, I don’t understand why we need to capture behavior outside of existing criminal 10b liability.  Coffee argued that 10b might not be effective because of its scienter requirement, but that’s the point I think.  Putting brokers in jail for non-malicious conduct, as Prof. Coffee urges, carries a heavy cost in terms of chilling trades that I don’t think we can afford to ignore.

Full post as published by Truth on the Market on May 06, 2010 (boomark / email).