A three-judge panel of the 2nd U.S. Circuit Court of Appeals heard arguments June 2 challenging the Securities and Exchange Commission’s Regulation Best Interest.
Via a pandemic-necessitated teleconference, attorneys in the consolidated suit representing the XY Planning Network and eight Attorneys General 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 a ignored the will of Congress expressed under Dodd-Frank.
The 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 the Attorneys General followed by XY Planning Network.
Much of the thrust of the oral arguments between the two sides—beyond the baseline issue of whether the plaintiffs had standing to bring suit—centered around Section 913 of the Dodd-Frank Act and whether that statute mandated a uniform standard of conduct between broker dealer and advisers.
In Section 913(f), Congress authorized the SEC to proceed with rulemaking to address the standards imposed on brokers and advisers for providing personalized advice, taking into consideration the findings of a staff study. Section 913(g) authorized that rules be created providing that “the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”
Representing XY Planning Network, Deepak Gupta of Gupta Wessler argued that his clients “are willing to grant the premise of the SEC’s argument that the SEC could have done nothing,” but argued that the best way to interpret the statute is that Congress directed that, if the SEC did choose to write a regulation, that it had to harmonize the two regimes “to create the same standard of conduct to govern people who do the same thing with flexibility to the agency to do more if it so chose.”
In contrast, Jeffrey Berger, Senior Litigation Counsel at the SEC, argued that, in the SEC’s view, “the text of the Dodd Frank Act, section 913, amending the Exchange Act is the start and end point. Both 913(f) and 913(g) use the word ‘may’ and not ‘shall.’ ... If Congress had wanted the Commission to act here, or to act in a particular way, it would have used the word ‘shall’ and not ‘may.’” Berger went on to argue that the gist of 913(g) was to provide “guardrails” preserving the ability to adopt a uniform standard, even if it had decided against doing so.
Oral arguments to the case can be heard here. It’s possible that the 2nd Circuit will rule on the case before the rapidly approaching June 30, 2020, compliance deadline for Reg BI.
The oral arguments also come as the Department of Labor apparently is moving forward with a revamped investment advice rule that many anticipate will be harmonized with the SEC’s rule.
