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Attorney General William Tong

09/10/2019

ATTORNEY GENERAL TONG SUES SEC FOR PUTTING BROKERS AHEAD OF INVESTORS

‘Regulation Best Interest’ Fails to Protect Investors or Meet Standards Laid Out in Landmark Dodd-Frank Law

(Hartford, CT) -- Attorney General William Tong today joined a coalition of eight attorneys general from around the nation in filing a federal lawsuit in the Southern District of New York, challenging the Securities & Exchange Commission’s (SEC) “Regulation Best Interest” for failing to meet basic investor protections that were laid out in the historic 2010 Dodd-Frank Act.

“The SEC has ignored Congressional intent and broken faith with American families— violating the law with its weak and insufficient 'Regulation Best Interest.' Congress passed Dodd-Frank to ensure that brokers were providing advice and guidance that were in the best interest of their clients, rather than furthering the brokers' own personal interests. We aren’t talking about millionaires and billionaires here, we are talking about families saving for retirement and planning for their future. They must be protected from those who would take advantage of an honest need for guidance and assistance. This lawsuit seeks to compel reversal of this arbitrary and unlawful rule that undermines critical consumer protections and puts investors' savings at risk," said Attorney General Tong.

In June, over an earlier objection made by a coalition of attorneys general, led by New York Attorney General Letitia James, the SEC adopted Regulation Best Interest, which purports to address long-standing investor confusion concerning the standards of care applicable to broker-dealers providing investment advice. While many retail investors mistakenly believe that broker-dealers must place investors’ interests first, that has historically not been the case. In fact, federal law has generally only required that broker-dealers’ recommendations be “suitable” with respect to the investor’s objectives, meaning that a broker-dealer could sell an investor a lower-quality, higher-cost investment as long as that investment otherwise met the investor’s investment objectives. Alternatively, investment advisors owe their clients a fiduciary duty.

This investor confusion motivated Congress to take action in 2010. With the passing of the 2010 Dodd-Frank Act, Congress authorized the SEC to draft regulations that would align the standard of conduct for broker-dealers and investment advisors. Under the Act, the SEC was authorized to impose a uniform fiduciary duty on broker-dealers and investment advisors, and require that their recommendations be made “without regard” to their own interests. This uniform fiduciary duty would ensure that investors were protected and treated fairly, regardless of the type of financial professional with which they worked.

While the SEC is claiming 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.

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.

Because the SEC claimed authority to issue Regulation Best Interest under such a broad set of statutory authority, it was necessary to file for relief in both the Southern District of New York and U.S. Court of Appeals for the Second Circuit, which has original jurisdiction over rules promulgated pursuant to the Securities Exchange Act of 1934.

Attorney General Tong joins the attorneys general of New York, California, Delaware, Maine, New Mexico, Oregon, and the District of Columbia in filing the lawsuit.
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