The lawsuit brought by XY Planning Network and several states to stop the implementation of the SEC’s Regulation Best Interest rule is misguided, attorneys for the commission argued in a brief submitted Tuesday to federal court.
In the brief, attorneys representing the SEC argued that the commission was justified in creating the rule, which proposes that broker/dealers should follow a best interest standard in lieu of a fiduciary duty akin to the one investment advisors must follow. Some have argued that the SEC’s rule is invalid because it does not follow Congress’ mandate to harmonize the standards of conduct required by Section 913 in the Dodd-Frank Act (former U.S. Sens. Chris Dodd and Barney Frank submitted an amicus brief to the court in support of the suit and arguing that point).
However, attorneys for the SEC asserted that XYPN and the states who sued the SEC were arguing policy disagreements, rather than legal precedent.
“They believe that Congress should have subjected broker-dealers and investment advisers to the same standard—by applying to broker-dealers the fiduciary standard that has been tailored to investment advisers; by creating a new uniform standard, despite the differences in services or compensation structures; or by requiring that all financial professional that provide advice register as investment advisers,” the brief read. “But Congress chose none of those paths.”
Instead, the commission argued Congress gave the SEC “broad authority” to balance the needs for investor protection with the ability to be able to access different services.
Last September, XYPN, which offers support services to more than 1,000 registered investment advisors, filed suit against the SEC over Reg BI, arguing that the new rule will enable broker/dealers and dual registrants to offer advice and services similar to what RIAs can offer without having to follow a fiduciary standard, putting RIAs at a competitive disadvantage.
Nearly simultaneously, state attorneys general from New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia filed a joint suit in an attempt to stop Reg BI’s implementation, arguing that it failed to protect investors by not going further than the previously established “suitability” standard and by inviting confusion among clients (the two suits were later consolidated into one lawsuit in the 2nd U.S. Circuit Court of Appeals).
Lawyers for the SEC argued the states nor XYPN had standing to challenge Reg BI, nor did the court have jurisdiction to hear it, stating that since neither the states nor XYPN were the object of Reg BI, it would be more difficult for them to argue they are being adversely affected.
“(The) petitioners also fail to substantiate their assumption that Regulation Best Interest is less protective than the investment-adviser fiduciary standard,” the brief read. “Indeed, they barely engage with the rule text itself, generally ignoring the rule’s enhancements over suitability and the extent to which it aligns with the fiduciary standard at the time a recommendation is made.”
With the submission of the SEC’s brief, the next step will be a response from the parties that brought the suit, including XYPN, according to Michael Kitces, the organization’s co-founder. In an earlier email to WealthManagement.com, he said he expected that if the SEC submitted a brief in early March, XYPN would have a response to the SEC’s brief by the end of the month, after which the parties would wait for a ruling. With Reg BI’s imminent implementation date of June 30, Kitces said it was possible that the appeals court would come to a decision prior to that date.
“If it appears that the Appeals Court ruling is dragging out, XYPN may also try to file an injunction to delay Reg BI implementation date to allow more time for the court to rule,” he said. “But frankly, we hope that’s not necessary. It’s better for everyone in the industry, whether pro-Reg BI or against it, to get a court resolution as expeditiously as possible so we can all move on.”
