Lower Court Says 2nd Circuit Should Decide Regulation Best Interest Lawsuits

Due to a self-declared lack of subject matter jurisdiction, the U.S. District Court for the Southern District of New York has dismissed a consolidated lawsuit seeking to halt the implementation of the SEC’s Regulation Best Interest rulemaking package.

The ruling notes that motions have already been filed by the parties in the appropriate appellate court—in this case the 2nd U.S. Circuit Court of Appeals.

Explaining its reasoning, the District Court notes that, “in the absence of a statute bestowing judicial review, the only federal court with jurisdiction to review an agency decision is the district court.” Here, however, the relevant statute (15 U.S.C. Section 78y.b.1) does “bestow” judicial review, by providing that an adversely-affected person “may obtain review” in the court of appeals for the circuit of residence, or in the United States Court of Appeals for the District of Columbia Circuit.”

“Although Congress’s use of the permissive ‘may’ might seem on its face to imply a non-exclusive grant of jurisdiction in the court of appeals, it is well-established that clauses containing a specific statutory grant of jurisdiction to the court of appeals should be construed in favor of review by the court of appeals,” the decision states.

Claims in the consolidated lawsuit, which includes as plaintiffs both private fiduciary advisers as well as a group of prominent State Attorneys General, suggest Reg BI fails to meet the clear demands established by Congress in the Dodd-Frank Act.

“One of the gaps that the Dodd-Frank Act sought to close concerned the standard of conduct applicable when individuals receive recommendations and advice on how to invest their money in markets,” the plaintiffs contend. “Investment advisers have traditionally been subject to a fiduciary standard, while brokers and dealers have not. Over time, the line between advisers and broker/dealers [B/Ds] has blurred, with an increasing number of broker/dealers performing many of the same services as investment advisers, without having to satisfy the same regulatory requirements in doing so.”

According to the plaintiffs, at first, the SEC heeded Congress’ mandate. Its staff studied the problem and prepared a report recommending the adoption of a universal standard of conduct, known as the “without regard to” standard.

“But last year, the SEC broke from Dodd-Frank’s requirements … by proposing a rule adopting neither a universal standard nor a ‘without regard to’ standard,” the plaintiffs allege. “Under the SEC’s so-called ‘best interest’ rule … a broker/dealer is permitted to take into account its own personal interests in providing recommendations and advice to investors on how to invest their life savings. This new rule means that broker/dealers may maintain harmful conflicts of interests while marketing themselves as trusted advisers acting in their client’s best interests.”

The full text of the New York District Court decision is available here.