Trump Embraces "Most Favored Nation" Price Protections State Pensions Long Abandoned

Trump believes MFN price protections will lower drug costs. State pensions never enforced MFNs in their investment contracts and today aren't even asking Wall Street for the lowest rates.

Historically, MFNs in state pension investment contracts never delivered the pricing protection promised because there was no monitoring and enforcement by the states and Wall Street took advantage. Today pensions aren't even asking and Wall Street isn't promising states their best investment advisory rates.

It’s no secret that the United States has long paid significantly more for the same prescription medications than other high-income countries. On May 12, 2025, President Donald Trump signed Executive Order 14,297, directing the adoption of an most favored nation (MFN) pricing model for prescription drugs. Under this policy, drugmakers must match or beat the lowest price paid by countries such as Canada, Germany, or France, or face regulatory penalties.

If properly executed—and that’s a big if— this approach could result in short-term savings for U.S. patients. Historically, MFNs in state pension investment contracts never delivered the pricing protection promised because there was no monitoring and enforcement and Wall Street took advantage, i.e., lied to the pensions. Today, states aren’t even asking and Wall Street isn’t promising states their best investment advisory rates.

• MFNs Were Once Commonplace At State Pensions

There was a time when state pensions, seeking to ensure the fees they paid Wall Street to manage their assets were the lowest these firms offered clients, required the asset managers they hired to agree to “most favored nation” provisions or MFNs in their state advisory contracts. As they invested ever-greater amounts in opaque alternative investments, such as hedge, private equity, venture and real estate funds, MFNs fell out of use. Today, aside from traditional stock and bond investment accounts, states don’t bother to even monitor the fees they pay—much less pretend to negotiate the lowest rates. As we exposed in Rhode Island, North Carolina, Ohio and Minnesota, states dramatically underreport to the public the fees they pay Wall Street.

Where used, MFN provisions are often included in the investment advisory contracts between states and their investment managers. In some states, the advisory contracts may be silent on the issue but the states may require their managers to certify quarterly or annually that they are receiving the lowest price offered.

In brief, an MFN provision states that the manager represents the fee the investor is paying is the lowest fee the manager offers to “similarly situated” clients. At the outset it is important to note: an MFN does not require the investment manager to represent the state is paying the lowest effective fee the manager offers to anyone—only the lowest fee offered to “similarly situated” pensions. More on the meaning of “similarly situated” later.

• MFNs Vary In Complexity

MFNs, when used, vary considerably in length and complexity. For example, one pension I advised required its managers to complete a quarterly questionnaire containing the following simply worded question which served as the pension’s MFN protection:

“Do any accounts of similar size and with similar assets under management pay lower fees than this plan? If yes, please explain.”

Here’s a substantially lengthier MFN of another pension of comparable size. (As you can see, the size of the pension does not dictate the specificity of the MFN.)

“If, at any time from and after the execution date of this Agreement, the Investment Manager enters into an agreement with any other client to provide investment management services comparable to those provided under this Agreement, and if such agreement requires the payment of fees that are in any respect lower than the fee established in this Agreement, the Investment Manager agrees that the fee required under this Agreement shall be reduced to the level specified in the agreement with such other client.

Principal variables which shall be utilized to determine whether the services are comparable include, but are not limited to, size of account, restrictions on the account, aggressiveness of investment objectives and discretionary character of the account. Such reduction in fees shall be effective as of the effective date of the agreement with such other client. The Investment Manager agrees to provide the Board with timely written notice of any event or occurrence that would require a reduction in fees provided under this Agreement. Further, the Investment Manager represents and warrants that the fees provided under this Agreement do not exceed those currently charged to other clients receiving comparable services.”

• MFN Compliance Monitoring By States And Wall Street Investment Managers

Due to the variation in the wording and complexity of MFN provisions, the issue of compliance with these clauses has long been a subject of intense concern among states and money managers. Firms differ in their understandings as to the meaning of MFNs in their clients’ contracts. A single large Wall Street investment advisor might be subject to hundreds of MFNs in their contracts with institutional investors. Larger firms might have internal compliance professionals to review contracts for MFN compliance, however, the size of the firm does not guarantee compliance. Smaller firms, on the other hand, might lack the resources to monitor compliance. According to manager fee surveys, historically one of the four biggest issues of concern to pensions and money managers alike was MFN clauses.

Invariably, the language in MFN clauses is open to tremendous interpretation. A money manager may contend that Client A, who is paying a lower fee, is receiving a different type of asset management service and therefore the manager is free to charge Client B (who has an MFN in its contract) a higher fee. That is, the manager claims it has not violated Client B’s MFN by charging more.

Accounts paying “performance fees” are routinely considered exempt from MFN compliance by states and investment managers since performance fees typically involve low or no minimum fees and higher than usual maximum fees if the manager performs well. And, as we have learned through our investigations, states universally do not fully disclose the outlandish performance fees paid to Wall Street.

Managers may believe “similar accounts” include only other public pension funds and not corporate pensions or endowments and foundations. For example, one manager I interviewed candidly indicated that while he “might have a church account paying a lower fee,” he was still in compliance with my state client’s MFN. “Wrap fee” accounts are also generally not considered “similar” by managers for MFN compliance purposes.

• Wall Street Quickly Became Skilled At Skirting MFNs

In summary, managers became very skilled at distinguishing between clients and accounts in order to justify different fees for “similar accounts,” yet maintain they were in compliance with their clients’ MFN clauses. On the other hand, few pensions have ever attempted to monitor compliance with their MFN clauses. Thus, managers who failed to comply have had little to fear. Managers, when questioned by states, need only to develop plausible explanations for fee differentials.

Another longstanding problem with MFNs is rely upon Wall Street managers coming forward in good faith to notify their clients they were entitled to a fee reduction, perhaps years after the initial fee negotiation. Not surprising, most managers failed to volunteer such information against their financial interests. While states could have contacted other pension clients of their managers to verify the fee they paid was the same or lower, as well as review managers’ regulatory filings for information regarding their advisory businesses, they never did. When I did conduct an investigation into MFN compliance on behalf of a pension two decades ago, the states I contacted told me they had never received such an inquiry.

For decades, Wall Street has lied about, and state pensions have never monitored compliance with, MFNs.

In the investigations I have undertaken involving blatantly excessive investment advisory fees, managers generally respond that the account managed for my client was unique and therefore any comparisons with other accounts of the manager, with lower fees, is inappropriate. In other words, the explanation for unusually high fees is that there is something unique about the investment mandate or account. Such manager explanations are hollow to those experienced in investment management matters. Fortunately for Wall Street, many states are not sophisticated, or even informed, regarding the investment advisory fees funds actually pay.

Pensions that rely upon “most favored nation” provisions to ensure they are paying the lowest possible investment advisory fees are missing the boat. A “most favored nation” provision is no substitute for informed, vigorous fee negotiation.

Money managers charge investors (including supposedly sophisticated state pensions) unusually high fees because they can. In other words, either the pension’s investment consultant or the fund’s board itself has failed to effectively negotiate fees. Pensions that still rely upon “most favored nation” provisions to ensure they are paying the lowest possible investment advisory fees are missing the boat. A “most favored nation” provision is no substitute for informed, vigorous fee negotiation. Finally, states that fail to continuously monitor “most favored nation” compliance are likely to be unaware of fee reductions to which they may be entitled. They’re leaving money on the table, i.e., stakeholder, participant and taxpayer money. Billions.

In conclusion, I’m hopeful that President Trump’s Executive Order directing the adoption of an MFN pricing model for prescription drugs will lower drug prices for Americans. However, state pension experience suggests MFNs, absent vigorous monitoring for compliance, will fail to provide promised pricing protection.