A group of lawyers for the Securities and Exchange Commission said today that seven states and a high-profile network of financial planners have no legal stake in the rollout of “Regulation Best Interest,” a rule establishing conduct for broker-dealers, and argued the suit should be tossed.

Attorneys for the agency submitted a brief on Tuesday arguing that the lawsuit submitted by the XY Planning Network and the states to overturn Regulation Best Interest fails to demonstrate that they will be hurt by the suit, which affects broker-dealers, and so the plaintiffs have no legal standing.

The brief was submitted in federal court and signed by the SEC’s General Counsel Robert Stebbins and three other agency attorneys. They argued that the commission was justified in creating the rule, which proposes that broker-dealers should follow a best interest standard in lieu of a fiduciary duty akin to the one investment advisors must follow.

The XY Planning Network and the states have argued that the current law requires a uniform standard for both brokers and advisors, and thus the SEC’s rule is invalid. The law they are referring to, the Dodd-Frank Act, says in Section 913 that Congress’s mandate is to harmonize the standards of conduct between advisors and brokers. Even the law’s sponsors (and namesakes), former U.S. Sen. Chris Dodd and Rep. Barney Frank, agreed with that point and submitted an amicus brief to the court in support of the states’ and XY Planning Network’s lawsuit.

Many pundits and legal experts believe that the SEC has a diminished ability to prevail against the Reg BI lawsuits—they argue that the agency is trying to circumvent an act of Congress, the Investment Advisers Act of 1940, through administrative action and can’t. Specifically, they say, the commission lacks the authority to circumvent Congress’s explicit requirement in the act requiring brokers to register as fiduciary investment advisors if they are offering and being compensated for advice.

“The SEC has a poor track record of successfully defending its rules in court,” said Duane Thompson, a senior policy analyst with Fi360. He speaks from experience. 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.

The SEC lawyers have argued that Congress gave the agency “broad authority” to balance the needs for investor protection with investors’ need to access different services.

The XY Planning Network, which offers support services to more than 1,000 registered investment advisors, filed its suit against the SEC over Reg BI last September, arguing that the new rule will enable broker-dealers and dual registrants to offer advice and services similar to what RIAs can offer without having to follow a fiduciary standard, putting RIAs at a competitive disadvantage. 

Shortly after, state attorneys general from New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia filed a joint suit in an attempt to stop Reg BI’s implementation, arguing that it failed to protect investors by not going further than the previously established “suitability” standard (stressing a product’s suitability for a client, not a fiduciary duty) and by inviting confusion among clients. (The two suits were later consolidated into one lawsuit in the U.S. Second Circuit Court of Appeals.)

The petitioners, the SEC lawyers’ brief said, “fail to substantiate their assumption that Regulation Best Interest is less protective than the investment-advisor fiduciary standard. … Indeed, they barely engage with the rule text itself, generally ignoring the rule’s enhancements over suitability and the extent to which it aligns with the fiduciary standard at the time a recommendation is made.” The attorneys accused the XY Planning Network of seeking a ruling that would allow it to grow its 1,000-advisor network.

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