The SEC was well within its rights to craft the Regulation Best Interest rule, which will institute changes to broker/dealer conduct with retail investors but does not impose a fiduciary standard akin to the one investment advisors must abide by, according to an amicus brief filed this week by several advocacy organizations in opposition to a legal challenge to the regulation, slated to go into effect in June.
The brief comes one week after the commission submitted its own response to claims by the XY Planning Network, a support platform for investment advisors, and several state attorneys general, who are seeking to invalidate Reg BI in a consolidated suit in federal appeals court. Like the SEC, the brief filed by organizations—including the Financial Services Institute, the Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce—argued the claimants’ disputes with the SEC’s rule were ones of policy, rather than legal standing.
“Dissatisfied with the balance the SEC struck in Regulation BI, petitioners and their amici seek to second-guess the SEC’s policy judgments,” the brief read. “Among other things, they uniformly ignore that Regulation BI will in fact accomplish a significant, durable improvement in retail investor protection, while at the same time preserving the brokerage model as a choice for investors, a result that undoubtedly rebounds to the benefit of investors.”
The brief argued that while the Dodd-Frank legislation, developed in the aftermath of the Great Recession, gave the SEC the authority to create rules that would update and improve the “standard-of-care” for b/ds, it did not mandate a fiduciary standard for advisors and brokers alike. Therefore, the SEC had the authority to mandate a “best interest” standard and stop short of a fiduciary one, the brief claimed.
However, a separate brief filed by Former Sen. Christopher J. Dodd (D-Conn.) and former Rep. Barney Frank (D-Mass.), along with several current elected representatives, argued the commission had misinterpreted part of the legislation, which “dictates that the SEC’s rule implement a uniform fiduciary standard.” Additionally, the lawmakers’ brief argued that Reg BI does not, in fact, raise the standard of care for b/ds.
According to Barbara Roper, the director of investor protection at the Consumer Federation of America, Dodd-Frank was clear in what standards the SEC could propose if it moved forward.
“Congress clearly gave the SEC a choice on whether to do rulemaking or not,” she said. “But they were quite clear on what that standard should look like if they did.”
XY Planning Network, which offers support services for more than 1,000 registered investment advisors, filed suit against the SEC last September, arguing the rule would adversely affect RIAs by allowing broker/dealers and dual registrants to offer similar services without needing to abide by a fiduciary standard. Additionally, state attorneys general from New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia filed a joint suit against the SEC, arguing that Reg BI would generate confusion among retail investors (the suits were later consolidated into a single suit before the 2nd U.S. Circuit Court of Appeals).
The brief filed this week in defense of the rule argued that the SEC had done the right thing by not including a fiduciary standard, asserting the separate standards allowed clients to benefit from having a choice when selecting a financial services firm to work with.
“Retail investors who intend to buy and hold a long-term investment (such as a bond) may conclude that paying a one-time commission to a broker/dealer is more cost effective than paying an ongoing advisory fee to an investment adviser to hold the same investment,” the brief read. “Moreover, many investors would be unable to pay for an ongoing fiduciary advisory model.”
The next step is for a response to the SEC’s responses from the claimants, including XYPN, before the court rules, and XYPN co-founder Michael Kitces expressed hope in a previous interview with WealthManagement.com that the court may rule before Reg BI’s implementation date of June 30.
