Verret in WSJ: Brokers Will Shoulder Risk Under Senate Proposal
A Senate proposal to require financial broker-dealers to uphold a fiduciary duty to clients under penalty of criminal action puts all the risk on the broker, says Professor J.W. Verret.
"I worry the cost of doing business will be passed along to investors. [The amendment's sponsor Sen. Arlen] Specter hasn't thought through how this amendment will change how markets function. [Mr. Specter] suffers from a fundamental misunderstanding of how markets function. This could freeze up markets in the middle of a slow recovery," Verret said in an interview in The Wall Street Journal.
"Brokers have an obligation to get clients the best price, like a real-estate agent," Verret says. "But fiduciary duty goes above and beyond. It puts all the risk on the broker."
Verret testified against the proposal at a recent Senate Judiciary Subcommittee on Crime and Drugs hearing. He believes the proposal would hamper a sophisticated investor's freedom of choice in hiring a broker to make trades. "Broker-dealers are going to have to hedge and insure against the risks," he argues. "There are huge transaction costs to making this criminal."
Hidden Onus Of Street Crime, The Wall Street Journal, May 20, 2010. By Michael Corkery.
"DJ: What is another market where brokers don't have a fiduciary responsibility?
"Mr. Verret: In some markets, you buy [assets] on an as-is basis. The onus is on you to do due diligence. What the Specter amendment does is to kill the "as-is market" for products sold by security brokers and puts all the risks onto the broker. In the housing market, foreclosed homes are sold on an as-is basis. If this amendment [were applied to real-estate agents], it would destroy the market for foreclosed homes. If it was enforced for securities brokers, it would destroy the market for some risky assets.
"DJ: A lot of investors were hurt in the financial crisis. Can anything be done to prevent the next one?
"Mr. Verret: We don't need new laws to go after fraud. We haven't seen widespread securities fraud with one exception: Bernie Madoff. We don't need new securities laws to stop this sort of thing."