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8 attorneys general sue SEC over broker rule concerns

Eight attorneys general from across the U.S. are suing Wall Street's top regulator over recently passed rules designed to reform conflicts of interest in the brokerage industry.

Led by New York Attorney General Letitia James, the group claims the SEC's Regulation Best Interest represents a "failing to meet basic investor protections that were laid out in the historic 2010 Dodd-Frank Act." The federal lawsuit, which was filed Sept. 10 in the Southern District of New York, also included the attorneys general from California, Connecticut, Delaware, Maine, New Mexico, Oregon and Washington, D.C., as plaintiffs.

"With this rule, the SEC is choosing Wall Street over Main Street," James said in a statement. "Instead of adopting the investor protections of Dodd-Frank, this watered-down rule puts brokers first."

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New York Attorney General Letitia James is one of eight attorneys general who are suing the SEC over what they say is a "failing to meet basic investor protections" with its Regulation Best Interest.
Source: Associated Press

Under Regulation Best Interest, broker/dealers will have to satisfy a "best-interest" standard of care when advising their clients on where to invest their money. The SEC has said that the reforms represented a slightly higher threshold for brokers to operate under, as they previously had to recommend investments that are at least suitable to their clients.

But the eight attorneys general said the SEC did not go far enough.

Specifically, the plaintiffs argue the SEC did not satisfy its requirement under the Dodd-Frank Act to establish a uniform fiduciary duty for both broker/dealers and investment advisers. That standard of care requires investment advisers to put their clients' interests ahead of their own by avoiding and disclosing conflicts of interest, making suitable investment recommendations and monitoring their accounts.

The lawsuit marks the latest critique of Regulation Best Interest, which the SEC passed in June. Commissioner Robert Jackson Jr., the sole Democratic representative on the agency's commission at the time, was the only dissenting vote. While casting his vote, Jackson expressed concern that the new rule establishes a "muddled standard" that will only lead to more investor confusion.

SEC Chairman Jay Clayton, a political independent appointed by President Donald Trump, has been dismissive of what he called the "clearly misguided" criticisms that have arisen around Regulation Best Interest since its introduction in 2018.

While speaking at the Economic Club of New York on Sept. 9, Clayton said Regulation Best Interest "brings the standards of conduct and required disclosures of financial professionals in line with what a reasonable investor would expect," according to The Wall Street Journal.

An SEC spokesperson did not immediately respond to a request for comment on the lawsuit.