It was only a matter of time before a lawsuit would be filed against the Securities and Exchange Commission (SEC) for its controversial Regulation Best Interest (Reg BI), which was approved after a 3-1 vote by commissioners back on June 5.
Just a little more than three months later, eight attorneys general (all Democrats), led by New York Attorney General Letitia James, have filed a federal lawsuit in the Southern District of New York Sept. 9 against the SEC, saying Reg BI fails to meet basic investor protections that were laid out in the 2010 Dodd-Frank Act.
“With this rule, the SEC is choosing Wall Street over Main Street,” James said in a Monday statement announcing the lawsuit. “Instead of adopting the investor protections of Dodd-Frank, this watered-down rule puts brokers first. 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.”
Joining New York in filing the Reg BI lawsuit are the attorneys general of California, Connecticut, Delaware, Maine, New Mexico, Oregon, and the District of Columbia.
Large consumer advocates AARP and the Consumer Federation of America have expressed opposition to Reg BI, and a handful of states (Nevada, New Jersey, New York and Massachusetts) have approved, proposed or are considering fiduciary rules that resemble the vacated Department of Labor fiduciary rule’s heightened standards of conduct.
The new lawsuit seeks to vacate the final Reg BI rule and permanently prevent its implementation, which is scheduled for June 30, 2020.
AGs say investor confusion will persist
The rule’s centerpiece best-interest standard that requires brokers to put clients’ financial interests ahead of their own and mitigate financial conflicts, is intended to address long-standing investor confusion concerning the standards of care applicable to broker-dealers providing investment advice.
The plaintiffs claim it falls short in several areas.
While the SEC argues that Regulation Best Interest ends the confusion in the industry, the coalition of attorneys general are arguing that the regulation fails to heed Congress’ call to action in a number of different ways. Per James’ statement:
- First, the regulation fails to meaningfully elevate broker-dealer standards beyond their existing suitability requirements. In fact, the SEC’s own professional staff recommended that the SEC adopt the uniform fiduciary standard articulated in the Dodd-Frank Act, but the regulation expressly rejects imposing a fiduciary standard on broker-dealers and, instead, allows them to consider their own interests when making recommendations.
- Second, Regulation Best Interest is likely to produce continued investor and industry confusion because it relies on a vague “best interest” standard and leaves key terms 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.
By enacting this flawed regulation, the SEC ignored Congress’ express direction in the Dodd-Frank Act, making the regulation unauthorized, arbitrary, and unlawful.
States say they’ll suffer under Reg BI
The lawsuit states that the “Commission’s disregard for Congress’s directives in the Dodd-Frank Act will harm Plaintiffs and their residents. Among the harms they will suffer, Plaintiffs will lose revenue from the taxable portions of distributions from their residents’ investment and retirement accounts that are worth less because of expensive conflicts of interest in investment advice; Plaintiffs will bear a greater financial burden to assist retirees and others whose savings are insufficient to meet their needs due to conflicted investment advice; and the regulation will harm Plaintiffs’ strong quasisovereign interest in protecting the economic well-being of their residents.”
When the SEC commissioners passed Reg BI on June 5, Rick Fleming, Investor Advocate at the SEC, released a detailed statement expressing his concerns over its potential impact on investors.
“I believe Regulation Best Interest, while not as strong as it could be, is a step in the right direction because it is an improvement over the existing suitability standard for broker-dealers,” Fleming said in his statement. “However, what investors have gained in Reg BI has been undermined by what investors have lost in the Commission’s interpretation of the fiduciary duty that applies to investment advisers.”
You can read his entire statement here.
Further goals of the lawsuit
In addition to its request the court vacate the final Reg BI rule and permanently prevent its implementation, Plaintiffs are also asking the court to:
- Declare that the Final Rule is in excess of the SEC’s statutory jurisdiction, authority, or limitations, or short of statutory right;
- Declare that the Final Rule is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
- Enjoin the SEC and all its officers, employees, and agents, and anyone acting in concert with them, from implementing, applying, or taking any action under the Final Rule;
- Award Plaintiffs their reasonable fees, costs, and expenses, including attorneys’ fees; and
- Grant other such relief as this Court may deem proper
If the suit fails and barring other challenges, investment advisers and brokers have until June 30, 2020, to, 1) put in place policies and procedures for compliance with Reg BI, in the case of brokers, and the interpretive guidance on conduct standards for investment advisers, and, 2) prepare and file relationship summaries in compliance with Form CRS.
MORE 401K SPECIALIST COVERAGE OF REG BI:
- SEC Reg BI’s Limited Retirement Plan Impact
- Reg BI Cometh!
- Reg BI Bedlam: House Denies SEC Enforcement Funding
- Concerned About Reg BI? Here’s Marcia Wagner’s Breakdown for Broker-Dealers
- SEC Votes to Adopt Controversial ‘Reg BI’
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
