A high-profile challenge to the SEC’s Regulation Best Interest was denied by the Second Circuit Court of Appeals on Friday, and implementation of the rule will move forward as planned on June 30.
XY Planning Network, Ford Financial Solutions, a group of states and the District of Columbia filed suit last year, claiming Reg BI is unlawful under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
Former Congressman Barney Frank, D-MA, and Former Senator Chris Dodd, D-CT, added their names to an amicus brief filed in support of the lawsuit.
Reg BI requires broker-dealer registered representatives to put clients’ interests ahead of their own, yet critics contend it’s ineffective in its current form, confusing to consumers and too friendly to the industry’s interests.
In a statement on June 16 in the runup to its expected implementation, SEC Chairman Jay Clayton specifically emphasized the need for “increased care” under the rule when recommending 401k/IRA rollovers and withdrawals.
According to court documents, XY alleged that Regulation Best Interest “would injure investment advisors by making it more difficult for them to differentiate their standard of care from that of broker-dealers in advertising to attract customers.”
See the court’s full ruling here
Julie Ford, owner of Ford Financial Solutions argued that Ford “currently attract[s] and retain[s] clients by, in part, highlighting [the] firm’s fiduciary duty to clients,” in contrast to the less stringent suitability standard governing broker-dealers. Ford claimed that broker-dealers will be able to advertise that they must act in their clients’ “best interests” just as Ford does, even though they will face “comparatively fewer regulatory obligations, lower compliance costs, and less legal exposure.”
Arbitrary and capricious
The court denied a central claim that the SEC violated Dodd-Frank, noting that Section 913(f) of the act grants “permissive rulemaking authority,” which encompasses the best-interest rule, and it was, therefore “lawfully promulgated.”
The petitioners also argued that Reg BI is arbitrary and capricious in part because the SEC supposedly failed to adequately consider evidence of investor confusion over differences in the standards of care owed by broker-dealers and investment advisors, even when relevant disclosure is provided.
“But the SEC considered evidence of consumer confusion and found that the benefits of decreased costs and consumer choice favored adopting the best-interest obligation,” the court found, adding, “This decision was not arbitrary and capricious.”
Kitces responds
“Ultimately, financial advice always has been, and always should be, fiduciary,” XYPN co-founder Michael Kitces said in a statement on Sunday. “It’s the very definition of the word ‘advice’ that it be delivered wholly and entirely in the interest of the advice recipient.”
In upholding Reg BI, he argued, “the court has upheld the SEC’s efforts to turn the very definition of advice on its head, creating a double-standard for the delivery of financial planning advice, ironically allowing brokers to take advantage of a lower standard of care as long as their advice is conflicted by a connection to the sale of products, and flying in the face of 80 years of federal law that honors the fundamental difference between the activities of broker-dealers and registered investment advisers.”
XYPN said it’s deciding whether to challenge the court’s ruling further, in light of its interpretation of Dodd-Frank “that defies even the stated intent of Messrs Dodd and Frank themselves.” It will continue to support and advocate “for maintaining a separation between brokers and advisors, and applying a fiduciary duty to all advice …”
Reg BI advocates were pleased with the outcome.
“The court made the right call,” ACLI President and CEO Susan Neely said in a statement. “It affirmed enhanced consumer protections. The result is continued progress in safeguarding access for all consumers and securing harmonized standards across the country.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
