Pension Risk Matters

Law scholar, author and derivatives pundit Frank Partnoy had an interesting piece in the Financial Times on April 19, 2010. In "Wall Street beware: the lawyers are coming," Mr. Partnoy warns that the floodgates of litigation are about to open with the SEC's filing of a fraud lawsuit against Goldman, Sachs & Co. He asserts that the regulatory enforcement takes complex financial alchemy and spins a "morality tale." A second take is that litigation picks up where regulations stop with Wall Street heretofore having interpreted "detailed rules as a shield from liability."

Leaving the Goldman case aside (as only those involved can opine with the clarity of full information), Professor Partnoy provides food for thought. Indeed, as I have written lo these last four years since the inception of this blog, Main Street pain invites legal and regulatory action. Investment losses are vote killers for elected officials who turn a deaf ear to calls for change.

I agree emphatically with the notion that regulations can only do so much.Worse yet, regulations could lull market participants into having a false sense of security. Post implementation of new rules and regulations, investors might think that all is good with the world when the truth could be the polar opposite, i.e. "compliance" having masked a host of bad practice nasties. I've often made the point in print and at the podium that onerous mandates induce the Law of Unintended Consequences, leading to a costly and counterproductive outcome that is antithetical to the original problem. Pick any accounting rule or regulation and it's possible to show the costs and benefits in terms of changed behavior.

There are noble-minded regulators and attorneys alike who really want to make a difference on behalf of the ultimate beneficiaries - retirees, shareholders, taxpayers, working families and so on. They are going to be beyond busy in the coming months and years unless, and until, investment stewards in need of improvement snap to. The wagons are circling. Count on luck or hunker down and get a good fiduciary risk management process in place ASAP. Otherwise, start preparing for deposition.

Editor's Note: Click here to read "Tips From the Experts: Working Effectively With A Financial Expert Witness" by Susan Mangiero (Expert Alert, Summer 2008, American Bar Association). While we prefer by far to help asset owners and their advisors before the fact, call us if you need help with "after the fact" analysis.