Could a spate of lawsuits from eight attorneys general and the owners of a nationwide network of financial planners put a fatal bullet in the Securities and Exchange Commission’s new broker conduct rules, known as Regulation Best Interest?
Chances are better than many may think, according to pundits and policy experts who have been around long enough to have lived through other legal challenges the SEC lost.
“The SEC has a poor track record of successfully defending its rules in court,” said Duane Thompson, a senior policy analyst with Fi360. Thompson was a director at the Financial Planning Association when the group successfully sued to overturn a similar SEC reg, called “the Merrill Lynch rule,” on grounds the agency overstepped its authority to exempt brokers from the advice law.
“This rulemaking process was highly controversial and it’s not surprising that legal challenges have been filed to overturn Reg BI,” Thompson said.
“The whole exercise begs the question: why fight the marketplace, which years ago established a clear preference for fiduciary-managed portfolios? Had the SEC crafted a uniform fiduciary standard for brokers and investment advisers…consistent with the Advisers Act fiduciary standard, it could have probably avoided this whole problem in the first place,” Thompson added.
Many pundits and legal experts believe that the SEC’s chances of prevailing against the Reg BI lawsuits are diminished precisely because it lacks the authority to circumvent Congress’ explicit requirement in the Investment Advisers Act of 1940. That law requires brokers to register as fiduciary investment advisors if they are offering and being compensated for advice.
XY Planning Network (XYPN), the coalition of fee-only financial planners founded by Michael Kitces and Alan Moore, filed a lawsuit last week in the Southern District of New York to hold the SEC’s feet to the fire.
That follows a similar suit filed last Monday by seven states and the District of Columbia against the SEC and agency chairman Jay Clayton, claiming the investment-advice rule, meant to enhance the standard for how brokers work with clients, is too weak to be meaningful.
Like the states, XYPN says the SEC ignores a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that says regulations for broker-dealers should be no less stringent than those for registered investment advisers when it comes to delivering financial advice.
But XYPN is also arguing that Reg BI fails to meet rules laid out in the Investment Advisers Act, which require anyone delivering financial advice for compensation to register as an investment advisor and be subject to the fiduciary standard. Under Reg BI, neither brokers nor dual registrants who market and deliver financial planning services are required to register as an investment advisor.