The XY Planning Network and its co-founder, financial advisor Michael Kitces, are among the plaintiffs in a federal lawsuit that is attempting to block the the SEC's new broker conduct rules.

The lawsuit claims the set of rules, called Regulation Best Interest, or Reg BI for short, does not meet the standards of the Investment Advisers Act of 1940, which requires anyone offering financial advice to register with regulators and become subject to a fiduciary standard if they are compensated for financial planning.

Kitces told Financial Advisor he announced the lawsuit at his network’s annual conference in St. Louis to a "ovation” from hundreds of advisors, many of them standing. “Any advisor who does financial planning has experienced the frustration of seeing a client who has a mediocre financial plan delivered only to facilitate the sale of products by a broker who is held to a lower standard. Now the SEC is trying to memorialize the lack of accountability,” Kitces said. “So, yes, the lawsuit has been well-received by our planners, who are glad that we would stand up for the network and planners.”

Kitces, chief strategist of XY Planning Network, filed the lawsuit yesterday in U.S. District Court in the Southern District of New York along with XYPN CEO and co-founder Alan Moore. The lawsuit asks that Reg BI be immediately overturned as unlawful.

It is the second lawsuit to be filed against the new SEC regulations this week. On Monday, attorneys general from New York and six other states, as well as the District of Columbia, sued the SEC in the same District Court, arguing that Reg BI should be abolished because it waters down the standard of conduct for brokers who offer financial advice.

Kitces said he had “some indication” the state attorneys general were going to file their lawsuit against the SEC in New York, “so we decided to line up with states filing there as well. Hopefully our case will be expedited if all the lawsuits are bundled together."

"It is our hope that the courts will recognize that when Congress created the Investment Advisers Act of 1940, they created a clear and bright-line delineation between brokerage salespeople in the business of selling products, and investment advisors in the business of providing financial advice, and that the SEC's Reg BI has inappropriately attempted to redefine this bright-line separation," said Kitces, who is also a prominent author, speaker and commentator on issues pertaining to the advisory industry.

XYPN is claiming the rule harms its network of more than 1,000 independent advisors by putting fiduciary planners at a competitive disadvantage. XYPN also claims the regulation violates securities fiduciary law and congressional intent.

Kitces and Moore also assert in the lawsuit that “a broker-dealer is permitted to take into account its own personal interests in providing recommendations and advice to investors on how to invest their life savings. This new rule means that broker-dealers may maintain harmful conflicts of interests while being able to market themselves as trusted advisers acting in their client’s best interests.”

The rule “thus circumvents a key goal of Dodd-Frank—leveling the playing field—and increases investor confusion,” the lawsuit states.

"When a consumer hires a financial planner, they expect that the advice they receive will be in their best interests at all times, which is the very essence of a fiduciary rule and the definition of 'advice' itself," Moore said in a statement. "By allowing brokers to hold out as financial planners and provide financial planning advice up front, and then switch to non-advisory services selling brokerage products during the implementation phase, the SEC amplifies the very consumer confusion they claimed they were seeking to fix with Regulation Best Interest."

Kitces added, "In the end, there is a place for both the sale of brokerage products and services, and financial planning and other investment advice, but reducing consumer confusion requires a clear separation between the two."

XYPN is asserting in its lawsuit that Reg BI allows brokers to provide comprehensive financial planning services without having to register as investment advisors and abide by the requisite fiduciary requirements.

XYPN alleges that the SEC exceeded its authority by reinterpreting the advisor registration requirements under the Advisers Act and the 'solely incidental' exemption for broker-dealers to permit dual-registrants to use advisor-like titles. This, according to the lawsuit, allows brokers to portray themselves as being in the business of providing financial planning advice while actually selling non-advisory brokerage services and products.

“The plaintiffs seek a declaration that the 'best interest' rule exceeds the SEC’s statutory authority and is arbitrary, capricious, or otherwise not in accordance with law," the lawsuit states.

Kitces estimated the lawsuit will cost about $60,000 in legal fees, but added that XYPN's bill could spike to as high as $125,000 depending on appeals.