A Transaction Cost Assessment of the SEC's Regulation Best Interest
47 Pages Posted: 12 Sep 2018 Last revised: 19 Mar 2019
Date Written: August 31, 2018
The U.S. Securities and Exchange Commission (SEC) is required to provide an economic analysis of proposed regulations and to show that they plausibly meet a cost-benefit test. It recently proposed Regulation Best Interest (RBI) to replace the longstanding suitability rule for securities brokers when providing their retail clients with incidental investment advice. Despite a dearth of empirical support, the proposing release concludes that a best interest standard would better mitigate the conflicts of interest brokers face between providing their clients with impartial advice and maximizing their own compensation. The empirical vacuum is a result of the SEC’s failure to ask the right economic question, which Nobel laureate Ronald Coase raised over half a century ago: why does the rule of liability matter? What transaction costs prevent the parties—who in this setting negotiate face-to-face—from correcting any market failure through private ordering? This essay provides a transaction cost assessment of RBI and concludes that a far more thorough economic analysis is necessary to justify imposing a best interest standard on retail brokers.
Keywords: Coase, Securities and Exchange Commission, cost-benefit analysis, RBI, suitability rule
JEL Classification: G11, G28, K2, K22
Suggested Citation: Suggested Citation