Regulation Best Interest – A Junk Food Diet

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Gary Cohn, former economic advisor to President Trump, told The Wall Street Journal in February 2017 that the DOL Rule was “a bad rule.” His point on fiduciary duties then is as incisive as ever today. Translated to language of our time, with respect to the SEC’s proposed regulation best interest (RBI), ”It’s okay to pig out on junk-food investments.”

The heart of RBI is its compliance and ethics program as required in written policies and procedures. Federal securities regulations were conceived as a code of ethics in 1933 by President Roosevelt to be, ”simple enough for the public to understand.” The Advisers Act of 1940 reflects this vision; the Supreme Court affirmed it in 1963 as a federal fiduciary duty for advisers.

RBI should have required robust due care and loyalty duties. It doesn’t. The Institute does not support RBI as is. Its major shortcomings require reengineering to get to a real best interest fiduciary standard.

First, rigorous language must reflect retail investors’ recognized shortcomings and the debilitating impacts of conflicts. The DOL Rule description of best interest is an excellent model:

Investment advice is in the ‘‘Best Interest’’ of the investor when the Adviser and Financial Institution providing the advice act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity….with out regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.