Less than 24 hours after eight Attorneys General filed suit challenging the SEC’s Regulation Best Interest, a suit by an investment advisor network contends that the rule gives broker-dealers an unfair competitive advantage.
The new challenge, XY Planning Network LLC v. SEC (S.D.N.Y., No. 19-cv-08415, complaint filed 9/10/19) comes from XY Planning Network (XYPN), a financial planning platform cofounded by Michael Kitces that claims to have more than 1,000 fee-for-service financial advisors focused on working with Gen X and Gen Y clients. Both suits have been filed with the U.S. District Court for Southern District of New York.
Like the AGs’ suit, XYPN’s complaint contends that the SEC’s rule did not adequately address what the organization saw as the increasingly “blurred roles” between broker-dealers and investment advisers and ignored the will of Congress under the 2010 Dodd-Frank Act.
“By failing to impose a standard of conduct for broker-dealers that is the same as the standard for investment advisers, as required by Dodd-Frank section 913(g), the SEC’s rule reduces the likelihood that broker-dealers will register as investment advisers, resulting in a loss of business for XYPN,” the suit states. In contrast, it notes, a non-broker providing identical financial planning services would be required to register as an investment adviser and be subject to a fiduciary duty for such financial planning advice.
Reinterpreting the Advisers Act
XYPN further alleges that the SEC exceeded its authority by reinterpreting the investment adviser registration requirements under the Investment Advisers Act of 1940. In particular, the organization points to the “solely incidental” exemption for broker-dealers, to permit dual-registrants under Reg BI to use advisor-like titles and hold out as being in the business of providing financial planning advice while selling non-advisory brokerage services and products.
The suit emphasizes that the SEC’s creation of a “best interest” rule for broker-dealers that falls short of a full fiduciary rule is anti-competitive to RIAs who seek to differentiate themselves in the marketplace by their actual best interest commitment to consumers – a standard to which they are actually held, the suit notes. “By allowing brokers to hold out as financial planners and provide financial planning advice upfront, 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,” notes Alan Moore, XYPN’s cofounder and CEO.
Kitces, author of the Nerd’s Eye View blog, emphasized that during the SEC’s comment period on the proposal, he raised specific concerns about the need to separate product sales from financial planning and investment advice.
Echoing Moore’s comments, Kitces explains that this harm was exacerbated because the SEC was also operating under a misunderstanding of the Investment Advisers Act, such that except for the narrow category of advice “solely incidental” to the provision of brokerage services, broker-dealers are supposed to register as investment advisers before they give advice to retail investors, triggering a fiduciary-duty standard.
However, the suit claims that rather than adjusting Reg BI, the SEC reinterpreted the Act’s registration requirements for RIAs and the scope of the “solely incidental” exemption for broker-dealers to permit brokers and dual-registrants to hold themselves forth as being in the business of advice and then providing non-RIA non-fiduciary financial planning advice, exceeding its regulatory authority by overwriting Congress. “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 suit states.
“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 advisers in the business of providing financial advice, and that the SEC’s Reg BI has inappropriately attempted to redefine this bright line separation," Kitces adds.
This second suit comes as the legal quarreling over the proper standards for investment advice continues to unfold after years of legislative, regulatory and legal battles at both the federal and state levels.
XYPN is being represented by the Washington, DC law firm of Gupta Wessler PLLC.
