The Goldman Sachs Group, Inc. (GS) has prohibited its investment bankers and other employees from trading individual stocks and bonds on their own accounts. The move came as the company is changing its conflicts of interest policy. The change is an effort to address the potential conflicts of interest between the company and its clients while protecting the reputation of the former.
Per the news, first published by Bloomberg, employees are also restricted from investing in activist or event-driven hedge funds. The employees were informed about the change on Friday. Prior to the change, employees were required to get necessary approval before making personal investments.
What Prompted the Move?
In Feb 2012, Delaware judge Chancellor Leo Strine criticized Goldman’s role in the acquisition of energy firm El Paso Corporation by Kinder Morgan, Inc. (KMI). The judge rebuked Goldman for not disclosing that Stephen Daniel – Goldman’s banker and the lead adviser of the deal – owned stock worth around $340,000 of Kinder Morgan. It is likely that this undermined the integrity of the banker’s advice on the deal.
Following the ruling, Goldman started reviewing its policies regarding its bankers’ investments and related disclosures.
Secret Tapes
The latest news came on the same day, when Carmen Segarra – ex Federal Reserve Bank of New York investigator – released tapes, which covered 46 hours of recordings of meetings and conversations between the Federal Reserve and Goldman officials.
In 2011, New York Federal Reserve had hired Segarra, as part of its team looking into regulatory approach on the banking sector following the financial meltdown in 2008.However, Segarra was fired within seven months of her hiring.
In Oct 2013, Segarra sued the Fed claiming she was fired after she criticized Goldman in its management of conflict of interest issues. She alleged that her firing was a consequence of her refusal to make any changes to her findings that showed Goldman lacked conflict-of-interest policy. However, in April, the lawsuit was dismissed. Currently, Segarra is appealing against the ruling.
The tapes released were featured in a combined report by a radio show – “This American Life” of National Public Radio – and ProPublica a non-profit organization in investigative journalism.
Bottom Line
The step taken by the Wall Street banking giant before any forced imposition by the regulators looks impressive. This reflects the bank’s effort towards tightening its internal polices which is set to benefit the company in the long run.
Goldman currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance space include Arlington Asset Investment Corp. (AI) and Moelis & Company (MC). Both the companies sport a Zacks Rank #1 (Strong Buy).
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