Parsing the Prescriptive Prerogative: Fiduciary and Best Interest Obligations in the Regulation of Financial Advice
ABSTRACT
Since the Financial Crisis of 2007-2008, fiduciary and fiduciary-like “best interest” obligations have occupied center stage in competing efforts to regulate the provision of financial advice. These efforts have spanned the United States Department of Labor’s controversial failed attempt to expand the reach of investment adviser fiduciary status with respect to employee retirement plans, the Securities and Exchange Commission’s Regulation Best Interest and Fiduciary Interpretation concerning the standard of conduct required of broker-dealers and registered investment advisors, respectively, and proposed and final rulemakings from multiple states, including Massachusetts, New Jersey, and Nevada. Each such effort to incorporate fiduciary and fiduciary-like “best interest” obligations into regimes for the regulation of financial advice must grapple with a fundamental design issue that besets regulation more generally – the degree of precision and detail with which to articulate legal commands.
This paper examines the implications of the nature and conceptual foundations of fiduciary and fiduciary-like “best interest” obligations for this question of precisional optimality, demonstrating that the efficacy of such obligations requires, or at least traditionally presupposes, a broad, prophylactic approach to the articulation of legal commands. This paper then examines the various recent regulatory initiatives, along with judge-made and international comparators, in order to develop a typology of regulatory design approaches along the twin dimensions of “rule”-like precisional detail and “standard”-like prophylactic breadth. By doing so, regulatory design approaches are identified that may allow statutory and regulatory drafters to better balance the prophylactic benefits of broadly articulated fiduciary and fiduciary-like obligations with the increased certainty and cost benefits of more detailed and precise specifications.