The Bozeman, Mont.-based XY Planning Network is dropping its legal challenge to the U.S. Security and Exchange Commission’s Regulation Best Interest.
XY Planning Network (XYPN) co-founders Michael Kitces and Alan Moore announced their decision today as they opened the XYPN Live virtual conference.
After a federal court decided against XYPN, Kitces and Moore were faced with two options: drop their lawsuit or appeal the case to the Supreme Court.
“While we strongly disagree with the conclusion the court came to, at the end of the day, we don’t see a Supreme Court challenge for it,” said Kitces. “If we didn’t convince the judges, there’s not much more that we can do.”
In lieu of their legal challenge against the SEC, Moore and Kitces will focus on state fiduciary regulations.
In recent years, states including Nevada, New Jersey and Massachusetts have sought to impose their own stricter standard for advice from brokers.
“A lot of state regulators don’t think Reg BI is a sufficient standard for advice delivered by a broker,” said Kitces, who mentioned that XYPN, which supports some 1,300 advisors focused on serving younger, middle-market clients via flat-fee structures, is exploring registering as a lobbyist in order to influence state legislation.
The latest announcement comes a little more than a year after the XYPN filed its suit in an attempt to vacate Regulation Best-Interest (Reg-BI), claiming that by placing lower regulatory standards on broker-dealers, the rule placed RIAs at a disadvantage.
Other industry organizations worked in support of the regulation, claiming that it would be harder to serve middle-market investors if the broker standard was strengthened—a claim that Kitces and Moore dispute.
In June, the Court of Appeals for the Second Circuit ruled against XYPN’s challenge. While the three-judge panel recognized that the SEC’s regulation may place RIAs at a disadvantage, it found that the SEC had the authority to interpret its legislative mandate to create a new standard for broker-dealers as it saw fit.
In the course of the announcement, Kitces was asked whether the tide might turn in favor of more stringent fiduciary rulemaking if the upcoming election causes a change of administration.
“Certainly as we’ve seen for the last eight ears, whoever is in the administration has a rather material impact on the shape and contour of federal regulation,” said Kitces. “As we move back towards a fiduciary direction, should [Democratic presidential candidate Joseph] Biden win, there’s still a fundamental challenge: Regulators don’t like to see major regulations change every couple of years. It’s disruptive to everyone. Even under Biden, I don’t think there will be an appetite to necessarily repeal Reg BI for another framework.”