Regulation Best Interest could cause financial injury to financial planners and the states in which they reside, according to attorneys representing XY Planning Network and numerous state attorneys general in virtual oral arguments held this morning for their lawsuit against the Securities and Exchange Commission.
Deepak Gupta, of Gupta Wessler PLLC, and Ester Murdukhayeva, an assistant solicitor general with the New York State Attorney General's Office, argued for XYPN and the states, respectively, while Jeffrey Berger represented the SEC in arguments before the 2nd U.S. Circuit Court of Appeals. In their suit, which was first filed last September, XYPN argued that Reg BI would confuse clients about the differences between investment advisors, who were held to a fiduciary standard, and broker/dealers, which are not.
However, Berger argued that XYPN was speaking about the harm that would result from the comparison between a suitability standard and a “hypothetical” fiduciary standard that would apply for broker/dealers, rather than any harm that would actually result from what Reg BI actually requires. He also argued that passing a uniform fiduciary standard might result in more harm to states.
“Imposing fiduciary standards may end up in lower tax revenues,” he said, arguing that requiring everyone to follow a fiduciary rule may cause advisors to raise prices, boxing certain clients out of attaining financial services.
Attorneys general from seven states and the District of Columbia also sued the SEC over Reg BI, arguing the rule did not go far enough to offer sufficient consumer protections (their suit was later folded into XYPN’s). In her arguments, Murdukhayeva said the states had standing to sue, and had also established that states could be “injured,” arguing that losses could be in the billions.
“We think the harm is much higher, but the existence of the injury is not disputed,” she said.
Many arguments and questions from judges focused on the nuances of the language in the Dodd-Frank Act, which was passed in response to the 2008 economic crisis. Particularly, XYPN has argued that Section 913 of the legislation not only granted the SEC the authority to promulgate a rule governing b/d conduct but also set out certain standards of what that rule should be if the SEC decided to move forward.
Berger argued otherwise, saying the Dodd-Frank Act went only so far as to say the SEC could introduce a uniform standard, not that it must. If the intention had been to create uniform standards for b/ds and advisors, he argued, lawmakers could have tried to revoke the 1940 Advisers Act (which mandates a fiduciary responsibility for advisors) or order the commission to adopt a uniform rule.
Numerous organizations and individuals have submitted amicus briefs in support or opposition of the suit; the Financial Services Institute and Securities Industry and Financial Markets Association submitted briefs supporting Reg BI, while others like Financial Planning Association and former Sen. Chris Dodd and Rep. Barney Frank (the bill’s creators) have written in support of XYPN and the states. Dodd and Frank argued the SEC had misinterpreted Section 913(g), which they argued dictated that any rule the SEC produced must “implement a uniform standard of care.”
At the end of the arguments, the court reserved the right to rule on the case at a later date. XYPN co-founder Michael Kitces had previously expressed hope that the court could rule before Reg BI’s June 30 implementation date.
