“Our Nation is facing a savings crisis.”
And in the midst of this savings crisis, commentators have speculated whether federal securities regulators are taking a step back from their usual level of oversight.
States, on the other hand, have been willing to fill the apparent enforcement vacuum.
In certain areas of securities law, the division between federal and state jurisdiction is clear; but in others, the blurred lines of federalism give rise to concurrent jurisdiction, allowing one enforcer to pick up the slack when the other’s enthusiasm recedes.
In recent years, no division between federal agencies, state regulators, and other organizations within securities law has been more debated—and more politically heated—than the law surrounding broker-dealers.
Broker-dealers execute trades for clients and occasionally offer advice, serving a crucial role in American financial markets for main street investors.
In 2017 alone, the Financial Industry Regulatory Authority (FINRA), an important regulator of broker-dealers nationwide, oversaw an average of $168 billion in value of trade executions each day,
conducted more than 7,800 regulatory exams, and returned “$66.8 million in restitution to harmed investors.”
Specifically, the current controversy surrounds the nature of a broker-dealer’s duty to clients: whether it is a fiduciary relationship, similar to investment advisers under the Investment Advisers Act of 1940; a nonheightened duty typical of arm’s-length transactions, as some state courts have found; a standard mandating that the suggested investment merely be “suitable,” as required by FINRA; or somewhere in between.
In June 2019, the SEC used the authority that Congress had delegated in Section 913 of the Dodd–Frank Wall Street Reform and Protection Act to issue Regulation Best Interest (Reg BI).
Broadly, Reg BI defined the duty of broker-dealers to retail customers as one of “best interest” but provided little guidance regarding what that duty entails.
What is clear is that the SEC implemented an obligation less demanding than fiduciary duty,
in turn confusing the broker-dealer industry
and threatening the validity of state laws or proposed regulations that require fiduciary duty.
The SEC also failed to clarify Reg BI’s intended preemptive effect and left the question to the courts.
This Note addresses the preemption question that the SEC left open, arguing that Reg BI likely preempts only those state laws that implement a duty lower than that of “best interest.” But even state laws that clear the preemption floor—those that require fiduciary duty—must cohere with the objectives and methods of execution that undergirded Congress’s enactment of Section 913 of the Dodd–Frank Act. Accordingly, Part I introduces the broker-dealer regulatory framework and the origins of Reg BI. Part II then provides an overview of preemption doctrine, argues that Reg BI sets a regulatory floor, and identifies an area of potential conflict between congressional intent and state fiduciary rules. Part III suggests two arguments—one based in empirical evidence, another in federalism—to reconcile the conflict, strengthening the states’ defense against a federal regulation that seeks to diminish investor protection.