The SEC building in Washington PHOTO: ANDREW HARNIK/ASSOCIATED PRESS

WASHINGTON—If there is one big mystery about the tough new rule for stockbrokers who give retirement advice, it is this: Why on earth is it coming out of the Labor Department?

That sort of financial service is typically regulated by the Securities and Exchange Commission. But the SEC, weakened by a partisan divide among its commissioners and weighed down by requirements to write an abundance of new postcrisis rules, has fumbled a rare chance to set the regulatory tone for a generation.

The implications go beyond Beltway bragging rights. Brokerage firms and insurers had hoped the SEC would keep at bay the sort of stricter requirements imposed by the Labor Department, which takes a more skeptical view of Wall Street business models.

Instead, it is consumer activists who will be celebrating Wednesday saying it brings the strongest protections in decades for Americans saving for retirement. Meanwhile, the SEC is coming under fire for not moving faster.

“We are disappointed that the SEC hasn’t published something for people to react to and comment on and tried to move the ball forward,” said Ira Hammerman, general counsel of the Securities Industry and Financial Markets Association, a trade group supported by big Wall Street firms.

SEC spokeswoman Gina Talamona said her agency’s work remains relevant because it oversees all investors—not just the retirement savers covered by the Labor Department rule. “The staff has done extensive work and continues to make progress on its recommendation” for a rule, she said.

The industry complains the Labor Department rule will saddle it with billions of dollars in compliance costs and limit its communications with investors. It could also accelerate a shift to cheaper index funds at the expense of more complex products such as variable annuities, which resemble mutual funds but offer features that operate like insurance contracts. Supporters say it will protect them from products that produce high fees for brokers but relatively poorer results for investors.

The sidelining of the SEC is an unexpected twist in this debate. The 2010 Dodd-Frank financial overhaul law explicitly authorized the commission to give brokers a legal duty to put their clients’ interest first, to act as “fiduciaries.”

The Labor Department wasn’t even mentioned. The agency says it has the authority to oversee tax-preferred retirement savings accounts under a 1974 law known as the Employee Retirement Income Security Act, or Erisa.

Under current SEC rules, brokers operate under a weaker standard that only requires their advice be “suitable,” meaning their recommendations must merely fit a client’s general needs and risk tolerance. That looser standard allows brokers to recommend mutual funds and other products that carry higher fees than alternatives that could save money for clients.

Barney Frank, the former chairman of the House Financial Services Committee and the Frank in Dodd-Frank, said he would have preferred that the SEC, acting by itself or jointly with the Labor Department, write tougher rules to cover all transactions between a broker and a retail client. The SEC has a longer history of regulating brokers and understands the business better than the Labor Department, he said.

“I’m disappointed that the SEC has not acted,” Mr. Frank said in an interview.

The Labor Department published a first version of its rule in 2010. While it was forced to junk it under pressure from industry, it scored an important endorsement from President Barack Obama in February 2015.

A month later, SEC Chairman Mary Jo White announced that she, too, wanted to change the rules governing financial advice, drawing applause from the industry’s lobbyists.

At the SEC, however, most of the rest of the commission wasn’t as motivated to act. Commissioner Luis Aguilar, a Democrat, had spoken forcefully in favor of stiffer rules for brokers but was preparing to leave the commission at the end of 2015. CommissionerKara Stein, another Democrat, who has pushed for stricter Dodd-Frank safeguards, didn’t speak publicly about the subject. She feared any SEC proposal could be weak and only hand banks and brokers another club to fight off the Labor Department, which had good reason to bolster oversight of retirement accounts, said people familiar with her thinking. Ms. Stein declined to comment.

Meanwhile, Republican SEC commissioner Michael Piwowar said the potential benefits of stricter broker regulation were “elusive” while the costs were “sky-high.” Daniel Gallagher, a Republican who stepped down from the commission last year, said in a letter to the Labor Department that its new rule would “harm investors and the U.S. capital markets.”

“I have reached my own personal conclusion,” Ms. White told Congress in November, referring to her intention to pursue a new rule. But, she said, “I am one of five votes.”

As a technical matter, the SEC continues to work on a draft and could still propose its own rule later this year. The SEC’s authority wouldn’t be superseded by the Labor Department’s.

Industry groups aren’t counting on it. David Bellaire, general counsel of the Financial Services Institute, a trade group of independent financial advisers, said SEC intervention at this point wouldn’t even be helpful and could be harmful.

Barbara Roper, director of investor protection at the Consumer Federation of America, said her organization had urged the SEC to impose stricter rules on brokers since well before Dodd-Frank.

“All the SEC had to do in this area was to lead,” Ms. Roper said. “They had the authority, and in our view, obligation to act.”