On Friday, the Second Circuit Court of Appeals rejected a lawsuit challenging the Securities and Exchange Commission’s Regulation Best Interest, which goes into effect today. The court’s three-judge panel upheld the broker advice rule in a unanimous decision.
Michael Kitces, co-founder of XY Planning Network (XYPN), a financial planning platform for fee-based financial advisors and one of the plaintiffs in the case, is weighing his options.
Kitces told reporters on Monday that he is considering requesting the appeals court to hear the case en banc with all of the court judges present, or possibly appealing the case to the Supreme Court.
In its lawsuit, XY Planning claimed that the SEC’s rule ignores Congress’ requirement to delineate between brokerage sales and investment advice, creating a competitive disadvantage for registered investment advisors. Registered investment advisers have traditionally been held to a fiduciary standard, while brokers-dealers were held to the less stringent suitability standard.
The SEC claims that Reg BI goes beyond the suitability standard and requires broker-dealers to act in the best interest of their retail customers when making an investment recommendation of any securities transaction or investment. Under the regulation, brokers are required to provide customers with a document that discloses the types of services offered, the legal standards of conduct, applicable fees, and conflicts of interest that may exist.
Weeks after XY Planning filed its lawsuit in September, the attorneys general of New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon, and the District of Columbia, filed a similar suit challenging Reg BI, arguing that it fails “to meet basic investor protections that were laid out in the historic 2010 Dodd-Frank Act.” Due to their similarity, the two lawsuits were combined, and the court heard oral arguments on June 2nd.
The Second Circuit Court ruled that Dodd-Frank Act authorizes Regulation Best Interest, and that the rule is not arbitrary and capricious.
“[The petitioners] argue that the [Dodd-Frank Act] requires the SEC to adopt a rule holding broker-dealers to the same fiduciary standard as investment advisers,” the court stated in its ruling. “But Section 913(f) of the Dodd-Frank Act grants the SEC broad rulemaking authority, and Regulation Best Interest clearly falls within the discretion granted to the SEC by Congress. Although Regulation Best Interest may not be the policy that petitioners would have preferred, it is what the SEC chose after a reasoned and lawful rulemaking process.”
“We strongly disagree with the court’s permissive interpretation allowing the SEC to alter the substantive consumer protections Congress mandated in both the Investment Advisers Act and Dodd–Frank, will be exploring our options about whether to challenge this ruling further, and will continue to work proactively with the growing number of states and their own securities regulators who understand the business of advice has always only ever been fiduciary …and should remain that way for the protection of consumers,” Kitces said in a statement following the ruling.