professional woman meeting male advisor

A collection of U.S. state attorneys general is suing the U.S. Securities and Exchange Commission (SEC), charging that the regulator is putting brokerage industry interests ahead of investors’ interests by proposing a weak industry conduct rule.

Lawmakers from eight states, led by New York’s AG, Letitia James, filed a lawsuit in federal court alleging that the SEC’s broker conduct rule, known as Regulation Best Interest, fails to meet the standards for investor protection established in the Dodd-Frank Act.

“With this rule, the SEC is choosing Wall Street over Main Street,” said James. “Instead of adopting the investor protections of Dodd-Frank, this watered-down rule puts brokers first.”

The Dodd-Frank Act, which was adopted in 2010 following the financial crisis, called for the SEC to draft rules that would harmonize the standard of conduct for broker-dealers and investment advisors.

Historically, brokers have operated under a suitability standard, whereas investment advisors have faced a higher fiduciary standard.

The lawsuit charges that the SEC’s rule in this area fails to introduce a uniform fiduciary duty for brokers and advisors.

Among other things, it argues that the SEC’s new rule “fails to meaningfully elevate broker-dealer standards beyond their existing suitability requirements.”

It also says that the rule is likely to perpetuate investor confusion by relying on a vague “best interest” standard.

“By enacting this flawed regulation, the SEC ignored Congress’ express direction in the Dodd-Frank Act, making the regulation unauthorized, arbitrary, and unlawful,” the AGs argue, adding that the rule “fails to address the confusion felt by consumers and fails to remedy the conflicting advice that motivated Congress to act in the first place.”

The lawsuit, which was brought in the Southern District of New York, is supported by the AGs of California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia.

In Canada, efforts to introduce a regulatory best interest standard floundered in the face of industry opposition.