Regulation Best Interest and the State–Agency Conflict
40 Pages Posted: 17 Mar 2020 Last revised: 3 Nov 2020
Date Written: January 21, 2020
Once it became apparent that the SEC would not impose a broker-dealer fiduciary duty to retail customers, a number of states proposed regulations that would rectify the perceived shortcomings of Regulation Best Interest (Reg BI). The new SEC rule brought into question the validity of these state fiduciary rules, as well as the common law broker-dealer fiduciary rules in other states. This Note is the first attempt to frame and resolve Reg BI’s preemption problem. This Note begins by documenting the three sources of authority in the broker-dealer regulatory framework before and after the issuance of Reg BI. It then frames the preemption problem, identifying obstacle preemption as the appropriate theory, and ultimately relies on congressional intent in the Dodd–Frank Act to argue that Reg BI likely sets only a regulatory floor. But even those state laws that impose more rigorous duties than Reg BI may still be vulnerable to preemption challenges. States would then do well, this Note concludes, to justify their fiduciary rules using arguments grounded in empirical evidence and federalism.
Keywords: Regulation Best Interest, Preemption, Broker-Dealers, Regulation, States, Federalism, SEC
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