If the recent lawsuit filed by seven states and the District of Columbia attempting to put the kibosh on the Securities and Exchange Commission's controversial broker-conduct rule feels familiar, it's because we've been down this road before. Hopefully, we will heed the lessons learned the first time around.
Like the lawsuits filed by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Roundtable in 2016 in an attempt to thwart the Labor Department's fiduciary rule, the lawsuit against the SEC will only serve to introduce more uncertainty to the process of strengthening consumer protection and encourage broker-dealers to delay preparation for the rule's implementation, which is slated for the end of June 2020.
A better course of action in the case of the DOL rule would have been to allow the final rule to take effect as planned and assemble an industry task force to work with the SEC on ways the rule might be tweaked to offer more clarity around the broker standard of care. The existing rule could then be modified through the normal rule-making process.
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Attorneys general for New York, California, Connecticut, Delaware, Maine, New Mexico and Oregon, filed a lawsuit Sept. 10 in the U.S. District Court for the Southern District of New York. The lawsuit seeks to vacate the final SEC rule, which was issued in June after a 3-1 vote by commissioners, on the grounds that the SEC exceeded its statutory authority in violation of the Administrative Procedure Act by issuing the final rule.
Brokers currently must adhere to a suitability standard of care with clients, while RIAs adhere to a fiduciary standard of care.
Plaintiffs claim the SEC rule, known as Regulation Best Interest, "undermines critical consumer protections for retail investors" and increases investor confusion around the standards of conduct that apply when they get an investment recommendation from a broker versus a registered investment adviser.
They also claim that the rule makes it easier for brokers to market themselves as "trusted advisers" while still being able to give conflicted advice, and that the SEC contradicted "Congress' express direction" under the Dodd-Frank Wall Street Reform and Consumer Protection Act to harmonize the standard of conduct between brokers and RIAs.
XY Planning Network, a coalition of fee-only financial planners, filed suit against the SEC a few days after the states' lawsuit. Like the states, XYPN maintains the SEC is ignoring its mandate under Dodd-Frank. The coalition also argues that Reg BI fails to meet the rules laid out in the Investment Advisers Act of 1940 that require anyone delivering financial advice for compensation to register as an investment adviser and be subject to the fiduciary standard.
While the claims in the lawsuits are not entirely without merit, investors cannot wait for the lawsuits to work their way through the courts before they receive the additional protections afforded under the current rule. Every day, tens of thousands of individuals are joining the ranks of the retired, and the need for trustworthy financial advisers is greater than ever.
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While Reg BI falls short of making sure brokers put their clients' interests first, it is far better than the status quo and should be allowed to move forward.