Photo: Diego M. Radzinschi

Eight attorneys general filed a federal lawsuit challenging the Securities and Exchange Commission's Regulation Best Interest for failing to institute a uniform fiduciary standard and "meet basic investor protections" that were laid out in the Dodd-Frank Act.

"With this rule, the SEC is choosing Wall Street over Main Street," said New York Attorney General Letitia James, who's leading the coalition, in a statement. "Instead of adopting the investor protections of Dodd-Frank, this watered-down rule puts brokers first."

Support for the suit filed Monday in the Southern District of New York also comes from attorneys general in California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia.

The SEC is "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," James said. "Despite the SEC's refusal to do its job, New York will continue to lead the charge to protect the millions of individuals investing in their futures, including the millions of Americans saving for retirement."

The complaint states Reg BI "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."

In Dodd-Frank, the attorneys general stated, "Congress authorized the SEC to draft regulations that would align the standard of conduct for broker-dealers and investment advisers."

The SEC under Dodd-Frank was authorized to impose a uniform fiduciary duty on both, "and require that their recommendations be made 'without regard' to their own interests," the attorneys general argue. "This uniform fiduciary duty would ensure that investors were protected and treated fairly, regardless of the type of financial professional with which they worked."

The coalition of attorneys general argue 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," the attorneys general said.

Reg BI is likely to produce continued investor and industry confusion "because it relies on a vague 'best interest' standard and leaves key terms undefined," the complaint states.