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Oregon, other states sue SEC, claim investors left behind by new rules

NEW YORK (AP) — Seven states, including Oregon, and the District of Columbia have sued the Securities and Exchange Commission, saying the regulatory agency is putting investors in jeopardy by relaxing rules designed to ensure that securities brokers keep the interests of their customers ahead of their own.

The lawsuit, filed Monday in Manhattan federal court, asked a judge to order the agency to scrap a new rule that weakens protections for consumers because it violates the intent of Congress and was approved in an arbitrary and unlawful manner.

A message seeking a response was left Tuesday with the SEC.

The states said they are harmed because bad investment advice leaves consumers with less money to spend, and that therefore they collect less in taxes.

New York Attorney General Letitia James said the SEC was failing to protect investors, favoring "Wall Street over Main Street."

She noted that new rules let broker-dealers consider their own interests when recommending investments.

"This watered-down rule puts brokers first," she said, making it likely that investors will be confused.

James said the SEC was failing to adopt the investor-protections passed by Congress in 2010 when it used the Dodd-Frank financial overhaul law to tighten regulatory loopholes revealed by the 2008 financial crisis.

"The SEC is now promulgating a rule that fails to address the confusion felt by consumers and fails to remedy the conflicting advice that motivated Congress to act in the first place," she said in a release.

Other state plaintiffs include California, Connecticut, Delaware, Maine, New Mexico and Oregon.

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News release from Oregon Attorney General Ellen Rosenblum:

Oregon Joins Lawsuit Against SEC for Putting Brokers Ahead of Investors

Salem, Oregon—Oregon Attorney General Ellen Rosenblum today joined a coalition of eight Attorneys General in filing a lawsuit in the Southern District of New York, challenging the Securities & Exchange Commission's (SEC) new "Regulation Best Interest" for failing to meet basic investor protections that were laid out in the historic 2010 Dodd-Frank Act. Oregon Treasurer Tobias Read, who is responsible for managing millions of Oregon's investment dollars, joined Attorney General Rosenblum in filing this case to protect Oregon investors.

"Congress was very clear when they told the SEC to set standards to require financial advisors to put their client's interests before their own. But, the SEC failed to do so. Investments and retirement accounts can be very confusing, and this SEC rule puts everyone who has a pension or 401K savings account in harm's way. I will not allow the retirement accounts of unsuspecting Oregonians to be compromised because an investor put their profits ahead of their duty to their customers," said Attorney General Rosenblum.

"It is critical that Oregonians who are saving for their retirement know that their financial advisor puts the interest of the client first. Dodd-Frank was intended to protect individual investors, but the SEC is shirking its responsibility by lowering the standards and not protecting consumers trying to prepare for retirement," said State Treasurer Tobias Read.

In June, over an objection made by a coalition of attorneys general, the SEC adopted "Regulation Best Interest", which addresses long-standing investor confusion concerning the standards for broker-dealers providing investment advice to consumers. While many investors mistakenly believe that broker-dealers must place investors' interests first, federal law has generally only required that broker-dealers' recommendations be "suitable" with respect to the investor's objectives. For example, a broker-dealer could sell an investor a lower-quality, higher-cost investment as long as that investment otherwise met the investor's investment objectives.

This investor confusion motivated Congress pass the 2010 Dodd-Frank Act, which authorized the SEC to draft regulations that would align the standard of conduct for broker-dealers and investment advisors. Under the Act, the SEC was authorized to impose a uniform fiduciary duty on broker-dealers and investment advisors, and require that their recommendations be made "without regard" to their own interests. This uniform fiduciary duty would ensure that investors were protected and treated fairly, regardless of the type of financial professional with which they worked. 

While the SEC is claiming the new "Regulation Best Interest" ends the confusion in the industry, the Attorneys General are arguing that the regulation fails to heed Congress' call to action in a number of different ways.

First, the regulation fails to meaningfully elevate broker-dealer standards beyond their existing suitability requirements. In fact, the SEC's own professional staff recommended that the SEC adopt the uniform fiduciary standard articulated in the Dodd-Frank Act, but the regulation expressly rejects imposing a fiduciary standard on broker-dealers and, instead, allows them to consider their own interests when making recommendations. 

Second, Regulation Best Interest is likely to produce continued investor and industry confusion because it relies on a vague "best interest" standard and leaves key terms undefined. Moreover, the SEC's adoption of a supposed "best interest" standard — while failing to actually implement requirements to realize that promise — will exacerbate investors' existing confusion over the duties of broker-dealers. 

By enacting this flawed regulation, the SEC ignored Congress' express direction in the Dodd-Frank Act, making the regulation unauthorized, arbitrary, and unlawful.  

Oregon joins the attorneys general of New York, California, Connecticut, Delaware, Maine, New Mexico, and the District of Columbia in filing the lawsuit.


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