New York Attorney General Letitia James and several other state attorneys general (the "Plaintiffs") sued the SEC, alleging that Regulation "Best Interest" ("Reg. BI") is contrary to the intent of Congress and undermines critical consumer protections concerning retail investors.

In the Complaint, filed in the United States District Court for the Southern District of New York, the Plaintiffs contend that Reg. BI increases confusion about the standard of conduct that investors should expect when being advised by broker-dealers. As a result, they argue, broker-dealers are allowed to market themselves as trusted advisers despite harmful conflicts of interest. The plaintiffs also allege that the Reg. BI rulemaking contradicted Congressional directives under the Dodd-Frank Act to adopt rules that (i) "harmonize" standards of conduct and (ii) create a standard of conduct for broker-dealers to act in the best interests of their retail customers. Specifically, the Plaintiffs argue that Reg. BI falls short of the standard of conduct required by Section 913(g) of the Dodd-Frank Act.

The attorneys general allege that Reg. BI harms their states and respective residents, causing:

  • a loss of revenue from the taxable portions of distributions from investment and retirement accounts compromised by the high cost of conflicts of interest in investment advice;

  • a greater financial burden to assist retirees who lack sufficient savings due to conflicted investment advice; and

  • disruption of the strong quasi-sovereign interest a state has in maintaining the economic well-being of their residents.


Steven Lofchie

Section 913(g)(1) of Dodd-Frank provides that the "Commission MAY promulgate rules" to conform the standard of conduct applicable to investment advisers and broker-dealers. Section 913(g)(2) says that the "Commission MAY promulgate rules" also for the standard of conduct for broker-dealers and investment advisers. (Emphasis supplied.) According to a search on the Cabinet, the word "shall" appears in 432 of Dodd-Frank's 557 sections, so it is clear that Congress knew how to use a word indicating that a direction was mandatory.

Further, as the the Plaintiffs themselves recount, an earlier version of Dodd-Frank used language more to the liking of the Plaintiffs. That language was NOT the language used in the final statute. Accordingly, the Plaintiffs' discussion of legislative history is contrary to the point that they aspire to make.

In addition, a Rand Study, cited by the Plaintiffs, must set some records for the extent to which its conclusions are misused for political purposes. Here, for example, is a selection from the Rand Study: "Account minimums, industry certification, and costs make brokers appealing [to investors; i.e., more appealing than advisers]. . . . Many of those who do not currently receive investment advice expressed a desire to receive these services, but are concerned that their relatively low amount of investable assets makes it difficult to find [i.e., pay for] these valuable services." (Page 113)

Put differently, investment advisers are not going to service clients who have limited assets. Or, if these customers do wish to pay for an investment adviser, the fees are likely to be very substantial in relation to the value of their assets and the possible returns on those assets.

To sum up, the Plaintiffs have no case as a matter of law, and their policy argument is at best questionable, and, at worst, will either deprive investors with limited assets from receiving any investment recommendations or force them to pay advisory fees that are disproportionate to the value of the assets.

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