Securities and Exchange Commission Chairman Jay Clayton on Monday rebuked criticisms that the agency’s recently approved Regulation Best Interest for brokers should have defined the term “best interest.”
In comments to investors at a Monday roundtable in Boston, Clayton defended Reg BI and argued that the rule is not “deficient” because it fails to define “best interest.”
During the run-up to the rule’s passage, “differing views were expressed regarding whether the standard should be more principles-based or more prescriptive — and in particular, whether to provide a detailed, specific, situation-by-situation definition of ‘best interest’ in the rule text,” Clayton said.
While the securities regulator “considered this issue very carefully,” he continued, “our view was that the best approach would be to apply the specific component obligations of Reg BI, including the ‘best interest’ requirement in the Care Obligation, in a principles-based manner.”
Under Reg BI, Clayton said, “whether a broker-dealer has acted in the retail customer’s best interest will turn on an objective assessment of the facts and circumstances of how the specific components of the rule are satisfied.”
This principles-based approach “is a common and effective approach to addressing issues of duty under law, particularly where the facts and circumstances of individual relationships can vary widely and change over time, including as a result of innovation,” he stated.
Determining what is in the “best interest” of a retail customer “is similar to an investment advisor’s fiduciary duty, which has worked well for advisors’ retail clients and our markets,” Clayton maintained.
“Indeed, there is no definition of ‘best interest’ under the Advisers Act.”