If you were among those who predicted the SEC’s fiduciary duty rule-making would prompt a legal action, count yourself correct. Attorneys general from seven states and Washington, DC have filed a lawsuit claiming the Commission bypassed congressional intent in approving Reg Best Interest.
“Despite its name, the Best Interest Rule is not in the best interest of consumer-investors, like retirees with IRA and 401(k) accounts. This rule provides cover for Wall Street to continue business as usual,” said California attorney general Xavier Becerra.
This “watered-down rule puts brokers first,” said New York state AG Letitia James. The pair were joined by AGs in Connecticut, Delaware, Maine, New Mexico, Oregon and Washington, DC.
The SEC didn’t respond to a request for comment.
Contrary to Dodd-Frank
The lawsuit, filed in New York, claims the Commission violated the federal Administrative Procedure Act in promulgating Reg BI. The legal action cites the Dodd-Frank law and the SEC’s subsequent 913 study as supporting a uniform fiduciary duty standard for IAs and B-Ds. The state AGs claim SEC staff called for a uniform standard in the 2011 study and the Commission ignored the advice.
The “failure to adopt a uniform standard and instead rely on a new and amorphous ‘best interest’ standard will result in continued investor confusion as to the duties applicable to broker-dealers and investment advisers,” the lawsuit reads. The lawsuit was filed September 9, one day before the rule took effect. It asks the court to vacate the new final rule and prevent the Commission from fully implementing Reg BI.
The state AGs contend Reg BI will harm investors and states: “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 quasi-sovereign interest in protecting the economic well-being of their residents.”
Some state AGs had asked the SEC to reject Reg BI before the Commission approved the rule in a 3-1 vote in June. The lawsuit comes as several states have moved toward adopting their own uniform fiduciary duty standard. The Department of Labor’s attempt at a fiduciary duty rule also faced legal action, which ultimately helped to scuttle it.
This article originally appeared in sister publication Regulatory Compliance Watch