The states of New York, California, Connecticut, Delaware, Maine, New Mexico and Oregon plus the District of Columbia have filed a civil action against the Securities and Exchange Commission (SEC).
According to the states, the ‘Regulation Best Interest’ introduced by the financial regulator in June 2019, still poses harm to retail investors.
The set of rules is supposed to make advisers and broker-dealers fully disclose the variety of costs of their services and products.
While financial adviser conduct is held at a ‘fiduciary’ level, binding them to act in their clients’ interests, the wording in Best Interest does not make it the same for broker-dealers, the lawsuit said.
“Broker-dealers, by contrast, have generally been subject under federal law only to a duty of fair dealing, which requires merely that recommendations be ‘suitable’ for a customer,” the states argued.
Lack of uniformity
The SEC’s regulation says that a broker-dealer, “when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the [broker or dealer] ahead of the interest of the retail customer”.
But the states are challenging the regulation as it does not fully require broker-dealers to act “without regards to” their own financial interests.
The regulator said that the definition would be “inappropriately construed” for setting out broker-dealer transparency guidelines.
The states, however, argued that the regulation still allows broker-dealers to benefit financially, as it does not require them to act without regards to their own interest, but only expects them to put the client’s interests first, leaving room for personal gains.
