The political melee surrounding Regulation Best Interest (“Reg BI”) escalated yesterday with the filing of a lawsuit against the SEC by several state attorneys general (the “State Plaintiffs”). In their complaint, the State Plaintiffs asked the Southern District of New York to vacate and set aside Reg BI on the grounds that:
- the SEC exceeded authority granted to it under Section 913(g) of the Dodd Frank Act in passing Reg BI;
- Reg BI is not in accordance with the law because it does not hold broker-dealers to the same fiduciary standard as investment advisers in accordance with Section 913(g); and
- Reg BI is “arbitrary and capricious” because, among other things, it ignores evidence that investors are confused and harmed by the differing standard for broker-dealers and investment advisers.
Further, the State Plaintiffs allege harm from Reg BI (and thus allege they have standing to bring the action) because, among other things, they will purportedly lose tax revenue as a result of retail investors seeing lesser returns on their investments as a result of conflicted investment advice.
Essential Argument: 913(f) v. 913(g)
The crux of the State Plaintiffs’ case against the SEC centers on their allegation that the SEC improperly passed Reg BI under Section 913(f) of the Dodd Frank Act rather than Section 913(g). Section 913(f) authorizes the SEC to promulgate rules “for the protection of retail customers” and “to address the legal or regulatory standards of care” for registered persons, including broker-dealers. Section 913(g), in contrast, authorizes the SEC to promulgate rules that specifically provide for a standard of conduct for broker-dealers that is “the same as the standard of conduct applicable to an investment adviser.” The State Plaintiffs argue that these two provisions operate to require that any SEC rulemaking regarding the standard of conduct for broker-dealers must adhere to Section 913(g) and set forth a uniform standard for broker-dealers and investment advisers, which standard should be the higher standard applied to investment advisers. Under this reasoning, Reg BI exceeds the SEC’s authority and is unlawful because it does not hold broker-dealers to a fiduciary standard equal to that of investment advisers.
Broker-dealers should not view the State Plaintiffs’ case against the SEC as a reason to stall efforts to comply with Reg BI by June 30, 2020. Regardless of its eventual outcome, the lawsuit shows the determination of Reg BI opponents to supersede Reg BI with a more strenuous, uniform fiduciary standard. Further, as we have discussed in previous blog posts and legal alerts, Reg BI has been met with significant skepticism from consumer groups and state regulators, and several states continue to develop their own stringent fiduciary standards for broker-dealers. Thus, broker-dealers should not only carefully monitor updates to the State Plaintiffs’ case against the SEC, but also carefully monitor state-level fiduciary changes to ensure that their practices, though Reg BI-compliant, do not violate state-level rules and regulations.
If you have any questions about the status of or complying with Reg BI and state fiduciary standards, or the regulation of broker-dealers and investment advisers generally, please feel free to contact us.
By the Investment Management and Broker-Dealer Team at Kilpatrick Townsend & Stockton
 Specifically, the action was filed by the respective attorneys general of New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon, and the District of Columbia. Complaint, New York v. SEC, Case 1:19-cv-08365, (S.D.N.Y., filed Sept. 9, 2019), available at https://www.law360.com/articles/1197199/attachments/0.
 Id. at 31-34.
 Id. at 3, 28-30.
 See id. at 22-27.
 Id. at 22.
 See, e.g., Industry Groups and State Federal Securities Regulators Grapple with Fiduciary Standards for BDs and Private Fund Advisers (March 25, 2019), https://www.kilpatricktownsend.com/Insights/Alert/2019/3/Industry-Groups-and-State-and-Federal-Securities-Regulators-Grapple-with-Fiduciary-Standards-for-BDs-and-Private-Fund-Advisers; New Jersey Releases Proposed Fiduciary Rule for Broker-Dealers and Investment Advisers (April 19, 2019), https://www.kilpatricktownsend.com/en/Insights/Alert/2019/4/New-Jersey-Releases-Proposed-Fiduciary-Rule-for-Broker-Dealers-and-Investment-Advisers?pdf=1.
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