Jay Clayton came out punching for the SEC’s new Best Interest Rule this week. The rule has faced a lot of criticism from all sides, but was finally approved internally. Now, Clayton is combatting critics. In particular, the SEC chairman is defending the harshest criticism of the rule—that it does not define “best interest”. Clayton argues that using a principles-based framework, which relies on a contextual definition of best interest depending on the situation in question, is a well-trod regulatory path and one that is superior to creating a definition for every scenario.
FINSUM: We don’t love this rule, but we agree with Clayton on this point. Having a highly defined rule leaves it more vulnerable to loopholes. With the current contextual structure, one has to worry whether their behavior could be considered “best interest” depending on an amorphous standard. It seems like a better way to keep bad actors in line.