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Fiduciary Rules and Practices

What Is ‘Best Interest’?

“Best interest” is a very familiar term after the last decade plus of discussion of fiduciary rules and standards. But its meaning is still a bit fluid and certainly wide-ranging. In a recent blog post, Fred Reish discusses what “best interest” really means.

“‘Best Interest’ has become part of the American lexicon ... as an aspirational goal or a demanding standard — depending on the point of view. But, what does best interest mean?” Reish asks in the ninth in a series of blog posts on best interest and best practices. He observes that best interest “may mean different things to different people ... and perhaps even to different regulators.”

Reish outlines some of the different takes on what it means and what best interest standards require. For instance, he says, “As I read the guidance issued by the Department of Labor (DOL), the Securities and Exchange Commission (SEC), and New York State, there are actually two different best interests: duty of loyalty and standard of care.”

Reish argues that the duty of loyalty “is the easiest to define” because all guidance leads one to that conclusion that it boils down to a requirement that the investor’s interests come first.

But in Reish’s view, the best interest standard of care “is more complicated,” and the SEC and New York state have offered a more narrow take on it, he says. The former, Reish says, “is, to a degree, circular” and the latter is focused on insurance and annuity products. Only the DOL has offered a full definition, he says, and it was contained in the best interest contract exemption — which has been vacated.

Nonetheless, Reish argues that “most people would agree” that best interest standards require engaging in “a thoughtful, professional process to obtain and evaluate the information needed to make a recommendation that is in the best interest of the investor.” He adds, “ERISA calls that a prudent process.”

“In a nutshell,” writes Reish, “the best interest standards are more demanding than the current suitability standards,” and this heightens the responsibility to consider the quality of products and services.