The U.S. Court of Appeals for the Second Circuit denied a petition filed by several state attorneys general and various investment advisers (collectively, the "Petitioners") challenging the legality of the SEC's adoption of Regulation Best Interest ("Reg. BI").
As previously covered, New York Attorney General Letitia James and several other state attorneys general sued the SEC in 2019, alleging that Reg. BI is contrary to the intent of Congress, and undermines critical consumer protections concerning retail investors. That complaint, consolidated with others, later evolved into a rulemaking challenge under SEA Section 25(b) (i.e., direct proceedings at the appellate level).
The Second Circuit denied the petition for review, finding that (i) Reg. BI is authorized under Section 913(f) of Dodd-Frank and (ii) its adoption was not "arbitrary and capricious" for purposes of the Administrative Procedure Act. The Court said that while Reg. BI "may not be the policy that Petitioners would have preferred," the SEC followed a lawful rulemaking process.
Reg. BI went into effect on June 30, 2020.
Commentary
This was not a particularly hard case on the merits, and whatever problems one might have with Reg. BI, the SEC authority seems fairly clear under the Exchange Act (see original post with Lofchie Commentary). The only issue raised in the Appellate Court's ruling was over standing. Judge Richard J. Sullivan dissented, in part, to note that he would have found that none of the petitioners had standing, while Judge Michael H. Park, writing for the majority, found that one of the investment advisers, but none of the states, had standing to bring the petition.
Commentary
This was not a suit that could be in any way justified on the basis of the statute. As the Court stated, "The key language in each of the provisions at issue [in Dodd-Frank] is 'may,' which is permissive and reflects Congress's grant of discretionary rulemaking authority to the SEC." In short, there is simply no plausible argument that the SEC was required to adopt any rule that had the specific requirements that the plaintiffs favored.
Private litigants may be granted some leeway in their willingness to bring frivolous lawsuits as they spend their own money. When government officials do the same, they expend money and resources of persons to whom they are supposed to serve as fiduciaries.
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