37. Andrew F. Tuch, Conflicted Gatekeepers: The Volcker Rule and Goldman Sachs, 4/2011.
Abstract: Among the most forceful and controversial provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act is the Volcker Rule. With the objective of reducing conflicts of interest, its provisions purport to ban conflicts involving banks, including in their arm’s length relationships with sophisticated counterparties. This article asks what justification exists for banning conflicts in this context, one in which fiduciary duties are rarely – if ever – imposed; and how can such regulation be reconciled with the recent Congressional decision not to impose fiduciary duties on broker-dealers for the protection of sophisticated investors. In addressing these questions, the article proposes a novel basis for the regulation of conflicts of interest, one grounded in the information cost-economizing role of banks as gatekeepers.
The article also considers the 2010 enforcement action by the SEC against Goldman Sachs alleging securities fraud in the marketing of the ABACUS 2007-AC1 collateralized debt obligation, a deal which provided significant impetus in the adoption of the Volcker Rule provisions. The article addresses whether provisions of the Dodd-Frank Act intended to address Goldman’s alleged misconduct would have succeeded in deterring it in the first place. In considering this question, this article draws on material about the ABACUS deal uncovered by the Senate Permanent Subcommittee on Investigations, discusses the significant constraints facing structured products in future, and provides guidance to regulators as they stand tasked in coming months with interpreting the Volcker Rule provisions.