Washington University in St. Louis Legal Studies Research Paper No. 12-12-1
Harvard John M. Olin Center for Law, Economics, and Business Fellows' Discussion Paper No. 37
58 Pages Posted: 17 Apr 2011 Last revised: 17 Jun 2015
Date Written: April 13, 2011
In many areas of regulation, rules require one person to act with loyalty to another person, or at least constrain one person’s pursuit of self-interest by restricting the extent to which that person may act in conflict with the interests of another person. These rules are typically justified on the basis of reducing (economic) agency costs. However, recently-adopted provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which include the so-called Volcker Rule, impose such conflict of interest rules on underwriters selling securities to investors, including sophisticated investors - a context in which agency costs do not arise. This article draws on the extensive literature on gatekeeper liability theory to develop a justification for imposing conflict of interest rules in these arm’s length relationships between underwriters and investors. The article argues that conflict of interest rules provide incentives to underwriters (as gatekeepers) to take greater precautions to deter disclosure errors by their clients, the issuers of the securities sold by underwriters, than underwriters would take otherwise and that these rules thus supplement, or serve as an alternative to, rules of gatekeeper liability. The article assesses whether this justification applies to the Volcker Rule.
The article also uses as a case study a deal involving alleged conflicts of interest by Goldman Sachs in marketing the ABACUS 2007-AC1 collateralized debt obligation. That deal became the subject of highly publicized enforcement action by the SEC in 2010 and provided significant impetus in the adoption of the Volcker Rule. The article shows how the justification developed in this article for imposing conflict of interest rules informs our understanding of the propriety of Goldman Sachs’ conduct in the ABACUS deal and assists in applying and interpreting the Volcker Rule.
Keywords: Financial regulation, Dodd-Frank Act, Investment Banking, Volcker Rule, Conflicts of Interest, Fiduciary Duties, Gatekeeper Liability, Securitization, SEC Enforcement, Securities Fraud, Goldman Sachs
JEL Classification: K22, K23, G21
Suggested Citation: Suggested Citation
Tuch, Andrew F., Conflicted Gatekeepers: The Volcker Rule and Goldman Sachs (April 13, 2011). Virginia Law & Business Review, Vol. 7, No. 2, pp. 365-420, 2012 ; Washington University in St. Louis Legal Studies Research Paper No. 12-12-1 ; Harvard John M. Olin Center for Law, Economics, and Business Fellows' Discussion Paper No. 37. Available at SSRN: https://ssrn.com/abstract=1809271 or http://dx.doi.org/10.2139/ssrn.1809271
By Peter Swire
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