Seven states asked a federal court yesterday to invalidate a regulation that requires stockbrokers to disclose more about conflicts of interest that could influence their financial advice, claiming that the rule is weak, the Wall Street Journal reported. The lawsuit, filed in Manhattan federal court by the states’ Democratic attorneys general, illustrates how a rule intended to protect mom-and-pop investors has become a political lightning rod for the Securities and Exchange Commission. The states and consumer advocates generally insist the rule is too weak to help clients; the SEC says that it improves investor protections while preserving the broker-dealer industry’s business model. The plaintiffs argue the SEC exceeded its authority to craft the rule by taking an approach that deviates from a model authorized by the 2010 Dodd-Frank financial overhaul law. The statute said that brokers could be required to follow the same standard of conduct that constrains investment advisers. Investment advisers must continually monitor their clients’ best interest, while the brokers’ duty is tied only to specific recommendations. The SEC wound up not requiring brokers to follow the stricter standard, although regulators say the rules for brokers and advisers are now closer than they have ever been. While brokers and advisers are governed by two different standards, the industries have significant overlap and many households are confused by the difference between them. Most Wall Street firms offer both account types.
