The lawsuit brought againstthe Securities and Exchange Commission by Attorneys General fromseven states and the District of Columbia may prove not to havestanding in federal court, according to one attorney.

In their complaint, the Attorneys General are asking the U.S.District Court for the Southern District of New York to scrubRegulation Best Interest, the SEC's recently passed standard ofcare rule for broker-dealer recommendations to retailinvestors.

Their complaint alleges that the SEC acted outside theinstructions of Congress established in the Dodd-Frank Wall StreetReform and Consumer Protection Act of 2010.

Harm to states and their residents

The states and the District of Columbia have standing to sue,according to the complaint,  because of the harm they andtheir residents will suffer under Reg BI, which does not go farenough to alleviate consumer confusion over the differentobligations of registered investment advisors and broker-dealers,or reduce brokers' from offering conflicted advice.

"Plaintiffs will lose revenue from the taxable portions ofdistributions from their residents' investment and retirementaccounts that are worth less because of expensive conflicts ofinterest in investment advice," the states argue.

The complaint says $17 billion is lost annually to conflictedadvice in IRAs alone, a figure used by the Obama administration'sCouncil of Economic Advisers when it set out to promulgate theLabor Department's fiduciary rule.

The suing states—New York, California, Connecticut, Delaware,Maine, New Mexico, Oregon, and the District of Columbia—lose $3.6billion annually to conflicted advice on securities recommendationsin IRAs, the complaint alleges.

An "odd complaint"

But a favorable ruling for the States and the District ofColumbia would remove Reg BI, and return broker-dealers to FINRA'ssuitability standard. Presumably, that would expose retailinvestors to more conflicted advice, and lead to further losses tothe states' future coffers.

"It's an odd complaint," said Kevin Walsh, principal and asecurities attorney with The Groom Law Group.

"If the states win, what do they get? They are asking the courtto strike down Reg BI. That would not create a fiduciary standardfor brokers. It would revert them back to the suitability standard,a lower threshold of conduct. There is a disconnect there," saidWalsh.

Determining when a party has standing to sue

In Lujan v. Defenders of Wildlife, the Supreme Court created athree-part test to determine when a party has standing to sue infederal court.

The plaintiff must have suffered an "injury in fact," and theremust be a "causal connection" between the injury and the allegedconduct, according to analysis from Cornell Law School.

The third part of the test: a favorable decision by the courtwill redress the injury.

"It's tough to see how the states really have an interest inseeing Reg BI struck down, or how that would be good for theircitizens," said Walsh. "But at the end of the day, federal judgeshave some latitude."

The Southern District of New York is viewed as a favorable venuefor consumer advocates.

The latest installment of the legal saga over the standard ofcare owed to retail investors by broker-dealers proves onething.

"Any time a rule gets promulgated on the standard of care,someone will sue the regulator," said Walsh, referring to the legalbattle over the Labor Department's fiduciary rule.

"This is a debate we've been having for 80 years," he added.