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April 20, 2010 8:10 AM Age: 7 yrs

The Goldman Sachs Board and the SEC History

Category: AC GAI Billboard, AC RSS Feeds, AC RSS, AC Whats New, CM Commentary & Opinion, CG Commentary & Opinion, Ethics Commentary & Opinion, GPG Commentary & Opinion, Eleanor Bloxham
Source:  Eleanor Bloxham, The Value Alliance

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This is my first blog post from The Bloxham Voice.

I’ve been reading the coverage of the new SEC fraud case. Clearly, this is a case of importance from a corporate governance and board perspective. 

What I haven’t seen specifically mentioned in the recent press is that this is not the first time Goldman has been sued by the SEC in a matter related to the information provided to investors. This fact could be important to this case — and for the Goldman Sachs board’s deliberations. (It may also be important to other companies if it turns out other cases are brought against them when they have settled previous SEC suits in matters that are broadly related.)

In April 2003 the SEC settled with Goldman over conflict of interest charges. The settlement stated that the ”final judgment orders Goldman Sachs to implement structural reforms and provide enhanced disclosure to investors“.

It also stated that Goldman was permanently enjoined “from violations of NASD and NYSE rules pertaining to just and equitable principles of trade (NASD Rule 2110; NYSE Rules 401 and 476), advertising (NASD Rule 2210; NYSE Rule 472), and supervisory procedures (NASD Rule 3010; NYSE Rule 342)”.  

One of the rules Goldman is enjoined from permanently violating is NYSE Rule 472 which begins: “Each advertisement, market letter, sales literature or other similar type of communication which is generally distributed or made available by a member organization to customers or the public must be approved in advance by an allied member, supervisory analyst, or qualified person designated under the provisions of Rule 342(b)(1).”

What was the level of supervision in the most recent example? This is a question the Goldman Sachs board will need to address. 

In a speech in 2005 entitled “Rebuilding Ethics and Compliance in the Securities Industry Mary Ann Gadziala, Associate Director, Office of Compliance Inspections and Examinations at the US SEC, explains some of the other rules Goldman was permanently enjoined from violating:

“With respect to broker-dealers, NASD Rule 2110 requires members, in the conduct of business, to observe high standards of commercial honor and just and equitable principles of trade.”

“NASD Rule 3010(a) requires member firms to establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with NASD rules.”

“NYSE Rule 401 generally requires NYSE members to adhere to the principles of good business practice in the conduct of their business affairs.”

“NYSE Rule 342 requires that each office, department, or business activity of a member or member organization (including foreign incorporated branch offices) must be under the supervision and control of the member or member organization establishing it and of the personnel delegated such authority and responsibility. NYSE Rule 342.23 requires members and member organizations to develop and maintain adequate internal controls over each of their business activities and to include procedures for independent verification and testing of those controls. And NYSE Rule 342.30 requires member firms to prepare and submit to its top management a report on the organization’s supervision and compliance efforts over the last year.”

She goes on to explain: ”In general, the broad basis for actions involving conflicts of interests is the antifraud laws found in Sections 17(a) of the Securities Act of 1933, 10(b) and 15(c) of the Securities Exchange Act of 1934, 206 of the Investment Advisers Act, and 34(b) of the Investment Company Act of 1940.” 

Sections 17(a) of the Securities Act of 1933 and 10(b)  of the Securities Exchange Act of 1934 are the two rules mentioned in the claims in the case filed last week. 

Her speech also discusses the importance of SEC compliance exams: “The primary purpose of an SEC comprehensive compliance examination is not to identify violations and make enforcement referrals. Rather the primary purpose is to identify control weaknesses and areas where improvements might be made, in order to prevent violations from occurring.”  What control weaknesses have internal reviews and SEC reviews shown? The Goldman Sachs board will want to re-review its internal reviews and the SEC’s reviews, if any, in addition to engaging in any other reviews that may be necessary.

“One set of issues that has in recent times exposed financial firms to compliance and ethics risks are situations where a firm or its employees are faced with conflicts of interests. Conflicts of interests typically involve competing interests or responsibilities,” she states. Two areas where conflicts may arise include “use of nonpublic material information for trading”  and the “firm playing multiple roles in a transaction” (did certain parties to the transaction understand something material about the transaction that customers in general didn’t?; did certain parties engage in multiple roles?).

Also, of note according to a recent story by Joshua Gallu and David Scheer at Bloomberg, Goldman had information about the SEC matter nine months ago but did not specifically reveal it in its filings.

The board of Goldman Sachs will want to review the supervisory control structure, cultural and disclosure issues related to this case — and issues more generally. The reporters covering the issues today as well as those who have been covering Goldman Sachs diligently over the years from the many articles on disclosures in filings (example: Christine Harper at Bloomberg) and client conflicts (example: Gretchen Morgenson and Louise Story at the New York Times and Greg Zuckerman at the Wall Street Journal) provide another potential source of sign-posts for such a review.

Author: Eleanor Bloxham, a governance and valuation authority, is CEO of The Value Alliance and Corporate Governance Alliance (, a board education and advisory firm,  and the author of the books Economic Value Management and Value-led Organizations. You can register for a complimentary subscription to her Digest publication at

Copyright 2010. The Value Alliance Company. All Rights Reserved.


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