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Fiduciary Lite

We're still waiting to see whether the brokerage industry will be allowed to keep its conflicts of interest and (in the very public case of Goldman, privately throughout the brokerage world) put the customer's interests well behind the interests of the firm's bottom line. But while we wait, perhaps the SEC–whose chairperson reportedly supports the fiduciary standard now, after publicly denigrating it before she took office–can take action in the meantime.

No, I'm not talking about requiring all brokers to register as RIAs, although it is certainly within the SEC's purview to take this step. I'm talking about something much more basic: actually exposing the brokerage industry to its most dreaded consequences: headline risk.

This could be accomplished very simply. In the past, when brokerage firms commit visible malfeasances like telling customers how great IPOs are while their analysts are calling them garbage, or front-running mutual fund shares, or giving out IPO shares as bribes for new business, or deliberately betting against the very instruments that they're selling to their customers, or taking "shelf-space" money to sell certain investments over better alternatives–the SEC would allow the brokerage firms to neither admit nor deny that they had their hands in the pockets of their customers, pay a fine and move on.

This represents an awful precedent, and really doesn't give the brokerage industry any real incentive to clean up its act. If, on the other hand, the SEC were to press Goldman (and a lot of other sellers of garbage CMOs and other instruments) all the way to the mat, and force the company to either publicly admit to its wrongdoings or be convicted of them, then I think we'd finally start to see some progress toward cleaning up these scandals.

Do I think this is going to happen? We'll know if Goldman is suddenly allowed to neither admit nor deny that anything at all happened when Fabulous Fab was cheerfully selling "investment opportunities" that he was describing as "shitty" to his girlfriend, or when the firm was allowing a customer to select the securities that it would then bet against, and then selling this "investment opportunity" that was visibly doomed to fail to some of the largest banks in Europe. My guess is that Mary Schapiro and the SEC are already negotiating a way for Goldman to avoid any headline risk once again.

This "fiduciary lite" approach to regulation wouldn't guarantee that all brokers or all firms would put the interests of their customers first, but it would, I think make the firms more careful about exposing their operations to the headlines that use the word "convicted of" or "admitted to" when they reach into their deep pockets to pay what they probably regard as trivial fines. Congress may dither over whether financial customers have a right to unbiased advice, but the SEC can at least make brokerage firms think twice about committing the worst offenses. It's a low standard, but it's better than what we have now.