Proposed Bill Would Include Criminal Penalties for Broker-Dealers Who Violate Fiduciary Standards

Currently pending before the U.S. Senate is a proposed amendment, Specter Amendment SA 3806, to the Wall Street reform legislation to extend punishment to broker-dealers who violate the standard of care to retail and institutional clients to include incarceration. The duty imposed on broker-dealers, their agents and employees, who provide investment advice regarding the purchase or sale of securities, would require that such entities place their clients’ interests before their own in order to end the conflicts of interest that are so inherent in the financial industry. The amendment would call for criminal sanctions, along with civil penalties, for intentional violation of these standards.

The proposal has gained support from both democrats and republicans following the recent Goldman Sachs hearings. Goldman Sachs is alleged to have misled its clients by selling them collateralized debt obligations based on shaky mortgages, while purportedly shorting the housing market for its own accounts. While Goldman Sachs denies these allegations, the SEC has filed suit against the firm for their failure to inform investors that a third party was involved in creating an investment vehicle that was essentially designed to lose money for investors.

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