Less than a month before the SEC's’s sweeping Regulation Best-Interest rule goes live, a federal appeals court is considering whether the new regulation should be vacated.
The SEC’s rule package, which compels registered reps to put clients “best interests” before their own to avoid selling costlier products, doesn’t go far enough to protect investors, the attorney for the XY Planning Network (XYPN) told a three-judge panel of the 2nd U.S. Circuit Court of Appeals in New York during a hearing conducted over the phone yesterday.
"Reg BI makes it more difficult for customers to differentiate between financial planners who are bound by fiduciary obligations and for broker-dealers who may consider their own financial interests," attorney Deepak Gupta argued.
XYPN, a Bozeman, Mo.-based financial planning network for fee-based financial advisers seeking to serve Generation X and millennial clients, filed the lawsuit challenging the SEC rule in September. Seven state attorneys general are also suing the SEC to overturn Reg BI because they contend it doesn’t sufficiently protect investors under Dodd-Frank. The lawsuits were combined by the 2nd Circuit since they're all challenging the rule on similar grounds.
Gupta also argued that the SEC's new rule abrogates the Investment Adviser’s Act, which mandates that anyone selling fee-based advice or charging a fee for advice must register as a fiduciary. Gupta argued that the SEC exceeded its regulatory authority by permitting reps and brokers to deliver comprehensive advisory services without requiring them to register as an investment advisor or subjecting them to an RIA’s fiduciary duty.
The SEC’s senior litigator, Jeffrey A. Berger, opened his oral arguments by spelling out the intent of the act. "If Congress had wanted to treat brokers and advisors the same, it could've eliminated the broker-dealer exclusion from the Adviser's Act, something it absolutely did not do. It could've directly itself proposed a fiduciary duty on broker-dealers ... or it could've mandated a rule-making where the commission adopt a fiduciary standard that Congress envisioned," he said. "It did none of those things."
Berger argued that Reg BI "enhances the conduct that broker-dealers must provide to retail customers when making recommendations."
He also maintained that the SEC protected investors by improving the quality of investment recommendations and reducing the risk of harm from conflicted advice, while also preserving investors' ability to choose among firms that offer different services and fee structures.
Gupta argued, however, that the SEC was required by the Dodd-Frank financial reform act to harmonize broker-dealer and investment advisor regulation. But instead the agency "adopted a contrary policy choice, doubling down on the existing regulatory confusion," he said.
The authors of Dodd-Frank agreed with XYPN and Gupta in an amicus brief they filed with the court, arguing that Congress directed the SEC to study the effects of the different standards of conduct for broker-dealers and investment advisors, and to make relevant recommendations to address any inconsistency between the standards.