A platform for financial planning firms that failed to overturn a new broker investment advice standard in federal court will now focus its attention on supporting states’ efforts to establish their own advice standards.
On Friday, a unanimous three-judge panel of the U.S. 2nd Circuit Court of Appeals upheld the Securities and Exchange Commission’s Regulation Best Interest, ruling the agency acted properly under the Dodd-Frank financial reform law in promulgating the measure. The implementation deadline for Reg BI is Tuesday.
One of the plaintiffs in the suit, the XY Planning Network, is not giving up its efforts to stop Reg BI, but is shifting its focus to states, such as New Jersey, Massachusetts and Nevada, that are developing their own advice rules.
“If we’re not able to prevail at the federal level, XYPN will continue to be active with advocacy at the state level around the very basic principle that advice has only ever been and should always be fiduciary,” XYPN co-founder Michael Kitces told reporters Monday.
In the suit, XYPN and Ford Financial Solutions, one of its members, argued the SEC ignored congressional intent in the Dodd-Frank financial reform law to establish a uniform financial advice standard for investment advisers and brokers that subjects brokers to fiduciary duty, the requirement advisers meet under the Investment Advisers Act.
The SEC established Reg BI for brokers while maintaining the fiduciary standard for advisers and regulating them separately. The agency said it wanted to preserve the broker business model while strengthening brokers’ advice obligation.
But the plaintiffs in the Reg BI lawsuit, as well as the states pursuing their own fiduciary rules, assert that Reg BI is too weak a standard to curb broker conflicts of interest.
The 2nd Circuit decision in favor of Reg BI shouldn’t hamper the states, Kitces said.
“If anything, I would expect some of these states become emboldened by the court’s ruling,” he said. “If [Reg BI] really does become final, then any state that is concerned about the lower standard of Reg BI has all the more incentive to enact their own fiduciary rules. If the states think that the lower Reg BI bar is not enough, they certainly have the option of putting a higher bar in place to protect their states.”
Knut Rostad, president of the Institute for the Fiduciary Standard, said that Reg BI “has toppled” the Investment Advisers Act and that disparate fiduciary activists should coalesce around state-level rules.
“They should recognize the emergency we’re in,” Rostad said. “They should act cohesively, act in a unified way toward the states to the end of getting the best possible fiduciary standard in each state.”
But brokerage and insurance industry groups say Reg BI, reinforced by the 2nd Circuit ruling, should be the final word on the broker advice standard.
“It’s time for the states to listen to the court, to refrain from pursuing politically motivated activist agendas and to embrace the SEC’s national best interest standard,” Chris Iacovella, chief executive of the American Securities Association, said in a statement released after the court ruling.
The American Council of Life Insurers also said Reg BI should apply nationwide.
“The court made the right call,” ACLI chief executive Susan Neely said in a statement. “It affirmed enhanced consumer protections. The result is continued progress in safeguarding access for all consumers and securing harmonized standards across the country.”
Kitces acknowledged that one of the criticisms of state-level fiduciary rules is that they will create a patchwork of regulation. He said the North American Securities Administrators Association, whose president this year is New Jersey Bureau of Securities Chief Christopher Gerold, could help sort things out.
“If we do continue to see more momentum build at the state level, certainly, I think XYPN will also be involved in supporting model rulemaking from NASAA and trying to bring more uniformity to a state-level fiduciary rule,” Kitces said.
State regulators said they will monitor Reg BI before deciding on a model rule.
“NASAA is actively assessing the impact and implementation of Reg BI and closely monitoring the activities and feedback from its member jurisdictions,” Gerold said in a statement. “This information will help determine if a model rule to enhance broker-dealer standards of conduct is necessary and, if so, the parameters of such a rule.”
As it focuses on state fiduciary rules, XYPN is not abandoning a legal challenge. Kitces said it is considering asking the full 2nd Circuit to hear the case or appealing the 2nd Circuit ruling to the Supreme Court.