That Didn’t Take Very Long! Just as Reg BI Goes into Effect, Seven States and DC Sue To Block It
Posted on Categories Broker-Dealer, Federal, News, Professional Conduct, Regulation, Securities/Commodities RegulationTags , , , ,

By George H. Friedman, SAA Editor-in-Chief

Just as the SEC’s Regulation Best Interest was about to go into effect September 10, several states and the District of Columbia sued to stop it.

As we reminded readers in SAA 2019-34 (Sep. 4), Regulation Best Interest (84 FR 33318) and Final Rule - Form CRS Relationship Summary and Form ADV Amendments (84 FR 33492) were set to go into effect September 10. Just a day before effectiveness, seven states and the District of Columbia sued the SEC and Chairman Jay Clayton to enjoin Reg BI’s implementation. State of New York et al v. SEC, No. 1:19-cv-08365-VM (S.D.N.Y. Sep. 9, 2019), was filed by the Attorneys General of California, Connecticut, Delaware, Maine, New Mexico, New York, Oregon, and the District of Columbia on September 9. The 36-page Complaint seeks declaratory and permanent injunctive relief. Say the AGs: “This lawsuit challenges a final regulation issued by the Securities and Exchange Commission that 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.” 

Deviation from Dodd-Frank

The Complaint also alleges that the Commission exceeded its authority under Administrative Procedure Act, 5 U.S.C. § 706(2)(C), by not following Dodd-Frank Act § 913(g). Say the Plaintiffs: “Congress … in a section expressly entitled ‘Authority to Establish a Fiduciary Duty for Brokers and Dealers,’ authorized the Commission to promulgate rules (a) harmonizing the standards of conduct that apply to broker-dealers and investment advisers, and (b) providing that ‘the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers. . . , shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.’ Contrary to this delegation of authority, however -- and despite the published recommendations of the Commission’s own expert staff -- the Final Rule neither harmonizes the standards of conduct between broker-dealers and investment advisers, nor requires broker-dealers to act in their customers’ best interests ‘without regard to’ the broker’s own financial interests” (citations omitted; second ellipse in original). 

Potential Harm

As for possible harm caused by Reg BI implantation, the Complaint says: “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 quasi-sovereign interest in protecting the economic well-being of their residents.”

(ed: *Well, then! We can’t wait to see the Answer. **We were a bit surprised there was no prayer for temporary injunctive relief. ***We found somewhat weak and speculative the potential harm arguments. ****Two Reg BI-related items were effective immediately on Federal Register publication in July: Commission Interpretation Regarding Standard of Conduct for Investment Advisers (84 FR 33669) and Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion From the Definition of Investment Adviser (84 FR 33681). *****We will certainly keep our eye on this one!) (SAC Ref. No. 2019-35-01)

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