States Sue SEC To Stop Reg Best Interest

Seven states and the District of Columbia are suing the Securities and Exchange Commission, saying it failed to protect consumers in its Regulation Best Interest rule.

The suit, filed in the Southern District of New York Monday, includes New York, California, Oregon, Connecticut, Delaware, Maine and New Mexico.

The 36-page complaint alleges that the final rule, “undermines critical consumer protections for retail investors, increases confusion about the standards of conduct that apply when investors receive recommendations and advice from broker-dealers or investment advisers, makes it easier for brokers to market themselves as trusted advisers (while nonetheless permitting them to engage in harmful conflicts of interest that siphon investors’ hard-earned savings), and contradicts Congress’s express direction.”

The plaintiffs assert that the Commission has failed to act on a 2010 Dodd-Frank directive that required the SEC to write rules establishing a fiduciary standard for broker-dealers to replace the suitability standard.

Much of the complaint references Dodd-Frank rules and regulations. The states argue that “Overall, the Final Rule’s best interest obligations fall short of the standard of conduct contemplated by Dodd-Frank Act Section 913(g).”

The absence of “without regard to” language, disregard in defining terms like “best interest” and the failure to adopt a uniform standard for both broker-dealers and investment advisors are cited as key examples of how the Commission’s Reg BI package have failed to meet federal laws and standards.

“That is a far cry from the fiduciary standard authorized in Section 913(g), where investors’ interests are the only relevant consideration, the complaint says. “Instead, the Final Rule produces a standard of care that is similar in large measure to, and fails to meaningfully elevate, the existing suitability obligation in FINRA Rule 2111 (FINRA’s Suitability Standard).”

Industry groups are already reacting to the lawsuit. American Council of Life Insurers President and CEO Susan Neely responded Tuesday to the legal challenge.

"The attorneys general challenge to SEC Reg BI misses the mark,” Neely said in a statement. “Reg BI is consistent with the Dodd-Frank Act’s mandate requiring the SEC to review investment advice standards and develop better rules, if necessary, to protect consumers.”

She continued, “What’s more, the claim that the SEC did not do a thorough cost-benefit analysis on the regulation is disingenuous. The SEC went beyond official rulemaking requirements to analyze and elicit costs and benefits from all stakeholders as it crafted Reg BI. Today’s legal action is another misguided attempt to reconstitute the Department of Labor’s fiduciary rule that was struck down by a federal court.

"This flawed regulation eliminated choice and access to information that every day consumers need to secure their retirement. Reg BI’s approach is much better suited for Main Street consumers. It provides enhanced protections and preserves access to a variety of retirement products and guidance from professionals acting in consumers’ best interest.”

Reg BI is scheduled to take effect in June 2020.

AdvisorNews Managing Editor Cassie Miller may be reached at [email protected]. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.