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FYI: States Sue to Invalidate Reg BI

FYI: Today, eight jurisdictions – NY, CA, CT, DE, DC, ME, NM and OR – filed suit in the US District Court for the Southern District of New York asking the court (among other things) to vacate Regulation Best Interest and enjoin the SEC from implementing or enforcing it.

The introductory statement in the plaintiffs’ Complaint summarizes their substantive concerns:

“This lawsuit challenges a final regulation [Reg BI] issued by the Securities and Exchange Commission that undermines critical consumer protections for retail investors, increases confusion about the standards of conduct that apply when investors receive recommendations and advice from broker-dealers or investment advisers, makes it easier for brokers to market themselves as trusted advisers (while nonetheless permitting them to engage in harmful conflicts of interest that siphon investors’ hard-earned savings), and contradicts Congress’s express direction.”

The specific legal claims laid out in the Complaint are based on the SEC’s alleged failure to comply with the Administrative Procedures Act in various ways. This includes allegations that the SEC relied on a flawed cost-benefit analysis in adopting the rule, which many commenters had argued, including 11 former SEC chief and deputy chief economists who asserted that the SEC’s economic analysis underlying Reg BI was ‘weak and incomplete.’

It will be interesting to see whether this lawsuit gains traction and/or whether other lawsuits are eventually filed addressing the rule.

In the meantime, it is noteworthy that at least this first lawsuit does not address the rules requiring IAs and BDs to file and deliver Form CRS, nor the related IA fiduciary interpretation, which were adopted by the SEC as part of the same package of releases that contained Reg BI.

Press Release from the NY Attorney General announcing the lawsuit and containing a link to the Complaint as filed in court: https://ag.ny.gov/press-release/ag-james-leads-coalition-suing-sec-putting-brokers-ahead-investors.

February 2019 Comment Letter from 11 Former SEC Chief and Deputy Chief Economists regarding Reg BI: https://www.sec.gov/comments/s7-07-18/s70718-4895197-177769.pdf.

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