Michael Kitces, co-founder of the XY Planning Network, is vowing to fight on after a court rejected his effort to overturn Regulation Best Interest and is considering taking the case to the Supreme Court.

“The short answer is that this isn’t the end of the fiduciary journey for us,” Kitces, who lost his appeal in federal court Friday, told Financial Advisor magazine after a press conference this morning. “We’ll decide over the next two weeks with our legal counsel whether to pursue this case further. At the end of the day we do need a strong legal justification. This was never about grandstanding or tilting at windmills. If we decide we have a real case, we’ll pursue it."

Kitces sued the Securities and Exchange Commission to vacate its new Reg BI regulation, which goes into effect tomorrow, on the grounds that the regulator exceeded its authority by creating a carveout from the Investment Adviser Act to allow hybrid registered reps to use a “best interest” standard instead of the legal mandate that advisors use a fiduciary standard.

A three-judge panel of the U.S. Court of Appeals for the 2nd Circuit disagreed, ruling that 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.”

“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. [We] 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.

The panel left open the door for an appeal from XY Planning Network, but ruled that the seven states and the District of Columbus, whose lawsuit to vacate the SEC rule were combined with Kitces's lawsuit, lacked legal standing to demonstrate damages.

Kitces said he’s hoping to make a determination about pursuing the case “within the next week or two.” If he decides against pursuing an appeal, he said he would be shifting “advocacy to a state level instead.”

Kitces told Financial Advisor that he expects state regulators’ pursuit of their own fiduciary standards to go into overdrive.

“Unfortunately, the court didn’t agree with us," he said, noting that even supporting briefs filed by the former senators who wrote the Dodd-Frank Act failed to sway the panel. "We carried the ball all the way to the end because someone in the industry had to."

Asked if a win by Democrat presidential candidate Joe Biden would lead to the reversal of Reg BI, Kitces said: “Once regulations are set, they’re set. I suppose a Biden chair could take a more activist approach to enforcement and make changes to form CRS. Ultimately, the goal would be is there enough change in Washington where we could solve this with legislation” that directed the SEC to create a uniform fiduciary rule.

Kitces had argued that in not rising to a fiduciary duty standard, Reg BI resulted in a regulatory regime similar to Finra's suitability rule, offering less, not greater, retail investor protection. He also argued that it created unfair trade practices by creating a competitive disadvantage for registered investment advisors.
 

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