Yesterday, the Securities and Exchange Commission approved Regulation Best Interest.  According to the SEC's announcement, this new regulation will require brokers "to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer".  When I wrote about the SEC's proposed regulation last year, I observed:

"I did not see any mention in the proposal of whether the SEC's best interest standard would preempt either state common law or statutory standards.  Whether the SEC can or should preempt higher state law standards of conduct is, however, a important question that should not be left unaddressed."

In adopting the final rule, the SEC either did not read or did not heed my importuning.  In footnote 1,163, the SEC decidedly leaves the question undecided:

"Whether Regulation Best Interest would have a preemptive effect on any state law would be determined in future judicial proceedings, and would depend on the language and operation of the particular state law at issue.  We considered whether we could determine the economic impact of possible, future state-law preemption on retail customers, but concluded that we cannot analyze the economic effects of the possible preemption of state law at this point because the factors that will shape those judicial determinations are too speculative.  Among the unknown factors are: (1) the final language in any proposed state legislation or regulation adopting a fiduciary or other standard for broker-dealers; (2) whether that language would constitute the type of law, rule, or regulation that is expressly preempted by the securities law or impliedly preempted under principles applied by courts; and (3) whether, if there was preemption, that preclusion of state law would have any positive or negative effects on investors when compared with the economic effects of Regulation Best Interest."

This is no academic question.  Earlier this year, I wrote about the Nevada Secretary of State's proposed fiduciary regulations for broker-dealers.  At the time, I noted the existence of possible preemption by the National Securities Markets Improvement Act and/or the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Nevada has yet to adopt its own final regulations.

Although the lawyers litigating the question of preemption have much to look forward to, the states will undoubtedly be displeased as they had urged the SEC to disavow any attempt to preempt state law.  See Will Regulation "Best Interest" Preempt State Law?