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July 29, 2020

The Second Circuit Rejects Challenge to the SEC’s Mislabeled “Regulation Best Interest”

On June 26, 2020, investor protection advocates were disappointed to see the decision of the Second Circuit rejecting a well-founded legal challenge to the SEC’s weak and misleading rule that will do little to protect investors from conflicted investment advice. 

In June last year, the SEC adopted its so-called “Regulation Best Interest,” proclaiming that it would protect investors from the rampant conflicts of interest among broker-dealer advisers that cost everyday American investors tens of billions of dollars a year in lost savings. In reality, it maintains the status quo under the weak “suitability” standard, relies primarily on ineffective disclosures, and preserves two different and confusing standards for advisers delivering essentially the same type of advice.

A group of financial planners and a group of states challenged the rule in the U.S. Court of Appeals for the Second Circuit. The court rejected the challenge. First, it held that only the financial planners had standing to sue, not the states, even though their citizens and tax revenues will be harmed by the rule. On the merits, the court found that the SEC had the discretion under the Dodd-Frank Act not to impose a uniform fiduciary standard on all types of advisers.

The court added salt to the wound by adding that, “At bottom, Petitioners’ preference for a uniform fiduciary standard instead of a best-interest obligation is a policy quarrel dressed up as an APA claim.”

Better Markets looks forward to the day when new leadership at the SEC can adopt a true fiduciary duty rule that protects investors from adviser conflicts of interest.

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