Next stop for Reg BI: Supreme Court?

The U.S. Supreme Court building stands in Washington, D.C., U.S., on Tuesday, Jan. 22, 2019. A divided U.S. Supreme Court cleared President Donald Trump's administration to start barring most transgender people from serving in the armed forces. The justices, voting 5-4 Tuesday, put on hold lower court decisions that had blocked the administration's planned ban from taking effect. Photographer: Al Drago/Bloomberg
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Could the future of the SEC’s Regulation Best Interest be decided at the Supreme Court?

It’s one of several possible paths for the regulation after a federal appeals court struck down a legal challenge to the SEC’s rule.

The plaintiff in the case, XY Planning Network, a nationwide consortium of fee-only RIAs, had filed a lawsuit contending that the SEC misinterpreted Congress' intent in the 2010 Dodd-Frank bill, arguing that that law directed the commission to codify a uniform standard of conduct for brokers and advisors who provide advice to retail clients.

On Friday, the U.S. Court of Appeals for the Second Circuit upheld the SEC's controversial regulation, determining that the agency was on solid ground with regard to the relevant provisions of the financial reform bill.

"The relevant section of the Dodd-Frank Act grants the SEC broad rulemaking authority, and Regulation Best Interest clearly falls within the discretion granted to the SEC by Congress," the judges wrote in their opinion affirming Reg BI. "Although Regulation Best Interest may not be the policy that petitioners would have preferred, it is what the SEC chose after a reasoned and lawful rulemaking process."

That result was disappointing, if not altogether shocking, to the plaintiffs.

"[U]nfortunately, from our perspective, the courts gave deference to the SEC's interpretation, and certainly that wasn't entirely surprising as a possibility," XYPN co-founder Michael Kitces, a Financial Planning contributor, told reporters on an online press conference Monday.

"Courts do tend to give [government regulators] deference and the bar is fairly high to prove that they misunderstood the law itself and did not apply it properly," Kitces said. "That being said, we had pursued this case all the way through to the end because we really did believe that the SEC fundamentally misinterpreted Dodd-Frank."

As the industry pushed to comply with the fiduciary rule, new issues emerged.
June 23

Seven states and the District of Columbia had joined in XYPN's lawsuit, which also counted the New York RIA Ford Financial Solutions as a petitioner. The court affirmed that the advisors involved in the lawsuit had standing, but that the states did not.

Now that Reg BI has survived its legal challenge, XYPN's lawyers are mulling their next steps, with a decision expected in the next week or two, according to Kitces. If they opt to continue their legal fight, they could either ask the entire circuit court to hear the case, or they could seek a hearing at the Supreme Court.

Irrespective of whether XYPN chooses either of those legal maneuvers or abandons the lawsuit entirely, Kitces expects the group to dedicate more of its resources to encouraging states to adopt their own fiduciary rules.

"If anything, I would expect some of those states to become emboldened by the court's ruling," Kitces said.

"There may have been states that have been waiting to enact their own state rules in the hopes that Reg BI might be defeated and that the SEC would come back with a stronger rule," he added. "If the ruling stands, XYPN doesn't proceed and this really does become final, then any state that is concerned about the lower standard of Reg BI has all the more incentive now to enact their own fiduciary rules, and, again, we'll be advocating in full support of that."

Meantime, industry groups that have championed Reg BI for elevating the standard of conduct for broker-dealers without imposing an advisor-style fiduciary obligation praised the court's ruling, and urged states to refrain from advancing their own advice standards.

"Broker-dealers have been working around the clock for months to comply with this new national standard, which enhances protection, trust and confidence for every American investor," Chris Iacovella, CEO of the American Securities Association, says in a statement. "It's time for the states to listen to the court, to refrain from pursing politically-motivated activist agendas, and to embrace the SEC's national best interest standard."

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Regulation Best Interest Lawsuits SEC XY Planning Network Michael Kitces SCOTUS