States Sue SEC Over Regulation Best Interest

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Seven U.S. states and the District of Columbia are suing the Securities and Exchange Commission over the agency’s Regulation Best Interest, its new rule package that establishes a standard of conduct for broker/dealers.

Attorneys general from New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia filed the complaint Monday in federal court in the Southern District of New York, arguing that the rule package fails to protect investors and puts brokers ahead of their clients.  

“Instead of adopting the investor protections of Dodd-Frank, this watered-down rule puts brokers first,” New York Attorney General Letitia James said in a statement. “The SEC is now promulgating a rule that fails to address the confusion felt by consumers and fails to remedy the conflicting advice that motivated Congress to act in the first place.”

READ THE COMPLAINT

The SEC was not immediately available for comment.

In 2010, the Dodd-Frank Act gave the SEC the authority to create a standard of conduct for broker/dealers and investment advisors, but the states claim the SEC didn’t go far enough with Reg BI. The Act said the SEC should impose a uniform fiduciary standard on b/ds and investment advisors, under which investment decisions would have to be made “without regard” to the broker’s interests.

Reg BI, the states argue, doesn’t go beyond the existing suitability standard imposed by FINRA, since it allows advisors to consider their own interests when making recommendations. It also invites confusion, leaving key terms, such as “best interest,” undefined.

“Moreover, the SEC’s adoption of a supposed ‘best interest’ standard—while failing to actually implement requirements to realize that promise—will exacerbate investors’ existing confusion over the duties of broker-dealers,” the states said.

Several states have taken broker standards of conduct into their own hands, with several moving to enact a stronger fiduciary standard that the one passed by the SEC; New Jersey and Nevada are two examples.

Reg BI takes effect in June 2020.

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