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States Sue SEC Over Broker Advice Rule

A group of eight attorneys general filed a federal lawsuit on Monday in the Southern District of New York, challenging the Securities & Exchange Commission’s broker advice rule, Regulation Best Interest, arguing that it fails “to meet basic investor protections that were laid out in the historic 2010 Dodd-Frank Act.”

A group of eight attorneys general filed a federal lawsuit on Monday in the Southern District of New York, challenging the Securities & Exchange Commission’s broker advice rule, Regulation Best Interest, arguing that it fails “to meet basic investor protections that were laid out in the historic 2010 Dodd-Frank Act.”

The lawsuit includes the attorneys general of New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon, and the District of Columbia.

“With this rule, the SEC is choosing Wall Street over Main Street,” said New York Attorney General Letitia James. “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.”

The attorneys general claim that Regulation Best Interest fails to elevate broker-dealer standards beyond their existing suitability requirements and will lead to investor and industry confusion because it relies on a “vague best interest standard” and leaves key terms undefined.

The complaint states that the 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 attorneys general argue that many retail investors believe that broker-dealers are held to the same fiduciary standard as registered investment advisors. Specifically, under a fiduciary duty standard, an investment advisor is required to put their client’s interests ahead of their own, to recommend suitable investments, to monitor client investments and accounts, and to avoid or disclose conflicts of interest.

The SEC adopted Regulation Best Interest in June, which claims to go beyond the current suitability standard, and requires broker-dealers to act in the best interest of their retail customers when making an investment recommendation of any securities transaction or investment.

Brokers will also be required to provide customers with Form CRS, a standardized, short-form disclosure document, intended to address the nature of the investor/investment professional relationship.

The document would highlight key differences in the principal types of services offered, the legal standards of conduct that apply to each, the fees a customer might pay, and certain conflicts of interest that may exist.

The compliance date for both Regulation Best Interest (Regulation BI) and Form CRS is June 30, 2020.

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