The investment advisor network announced Oct. 12 that it would not pursue a challenge against Regulation Best Interest with the U.S. Supreme Court, but would instead concentrate its efforts on state advocacy efforts.
XY Planning Network (XYPN), which describes itself as a membership organization comprised of more than 1,300 independent fee-for-service financial advisors, confirmed in the announcement that it will not appeal its unfavorable U.S. 2nd Circuit Court of Appeals ruling on the Securities and Exchange Commission’s Regulation Best Interest.
That June 26, 2020, ruling by a three-judge panel of the 2nd Circuit—which came just days ahead of the regulation’s scheduled implementation—found that Section 913(f) of the Dodd-Frank Act authorizes Regulation Best Interest, and Regulation Best Interest is not arbitrary and capricious.
Two suits were originally filed in September 2019 in U.S. District Court for the Southern District of New York within 24 hours of each other—the first by a group of seven states and the District of Columbia, followed shortly thereafter by XYPN and Ford Financial Solutions, LLC. The plaintiffs had argued that the regulation did not adequately address the “blurred roles” between broker-dealers and investment advisers and not only failed to meet basic investor protections under the 2010 Dodd-Frank Act, but ignored the will of Congress expressed under Dodd-Frank.
The three-judge panel of the 2nd Circuit was unpersuaded, however, concluding in a 28-page opinion that “Section 913(f) 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 court went on to acknowledge that “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.”
Fighting at the State Level
When the court’s decision to uphold Reg BI was announced, XYPN leadership vowed to continue advocating for “distinguishing between the product distribution and capital formation function of brokers, from advisors who are in the business of advice and who owe a fiduciary duty to their clients.”
Instead of appealing to the Supreme Court, XYPN said that it plans to continue its fiduciary fight at the state level. The organization noted that it has engaged Duane Thompson, president and founder of Potomac Strategies LLC, to assist in its “state advocacy efforts for a fiduciary standard for all financial advice, and that the fee-for-service business model XYPN pioneered be regulated in a manner consistent with other (e.g., assets under management) fee models.”
“As a membership organization with more than 1,300 advisors and RIAs in all 50 states, we recognize the challenges of uniformity in state fiduciary rulemaking,” said XYPN co-founder Michael Kitces. “Nonetheless, with the firms that manufacture and distribute products blocking effective Federal regulation, we believe the states represent the best path to advance fiduciary regulation of advice.”
In fact, a growing number of states have moved forward with their own fiduciary rulemaking efforts, contending that the SEC’s Reg BI is an insufficient standard of advice, including Massachusetts, Nevada and New Jersey, to name a few.
“Many of those states not only fought alongside XYPN in challenging Regulation Best Interest but have also been enacting their own state-based fiduciary duties that uniformly apply a fiduciary duty for both investment advisers and brokers providing advice in their states,” the XYPN statement further noted, adding that, “It’s not surprising, then, that following XYPN’s loss against the SEC, the states naturally became the new battleground for fiduciary advice.”
In the meantime, the Department of Labor is moving forward with its proposed fiduciary advice rulemaking package that restored the 1975 five-part test on the conditions for advice to constitute “investment advice” and proposed a new prohibited transaction exemption allowing investment advice fiduciaries under ERISA to receive compensation.
The “Improving Investment Advice for Workers & Retirees” package was released June 29 and a hearing was held Sept. 3, where the department received a wide range of input, ranging from withdrawing the proposal altogether, to overall support but making significant changes before proceeding.
