The XY Planning Network, the membership organization that provides business support services to over 1,000 registered investment advisors, filed suit against the U.S. Securities and Exchange Commission in federal court today, arguing that the SEC’s Regulation Best Interest Rule offers broker/dealers an unfair competitive advantage over RIAs.
The suit, filed in federal court in the Southern District of New York, argues that because of Reg BI, broker/dealers and dual registrants (who work both as investment advisors and b/ds) can offer clients financial advice and services similar to that of registered investment advisors (RIAs) without having to register as investment advisors with the Securities and Exchange Commission. Registering with the SEC means advisors are held to a fiduciary standard, as per the Investment Advisers Act of 1940.
The suit challenges the SEC's "reinterpretation" of the Advisers Act registration requirements and the "solely incidental" exemption for brokers who did not have to register as RIAs if their advice was deemed incidental to their brokerage business. The resulting confusion, which would be exacerbated under REG BI, they say, runs afoul of Congress' intent.
XYPN co-founders Michael Kitces and Alan Moore announced the suit during the network’s annual advisor conference in St. Louis. The nearly 600 conference attendees burst into cheers and applause, interspersed with gasps of disbelief, when the duo announced the news from onstage. The pair said the initial cost of the suit would be $50,000.
As an organization that provides business support services to over 1,000 fee-only registered advisors in their network, Kitces and Moore argued their advisors were disproportionately affected by Reg BI. Washington, D.C., law firm Gupta Wessler is representing XYPN in the lawsuit.
Under the SEC's Regulation Best Interest rule, "if you deliver the identical financial plan when you work for a broker/dealer, you no longer have to register as a financial advisor and be subject to a fiduciary standard. You can say these are solely in connection with and related to my brokerage services and therefore I should not be subject to RIA registration and a fiduciary standard for my financial plan," Kitces said. "So, when we look at just the plain language of the '40 Act itself, if you give advice for compensation, you're in the business of giving advice. You have to register as an advisor."
“The goal of the lawsuit is to ensure that all financial planning and its implementation occurs as a fiduciary, whether that's done by vacating Reg BI and starting over, or the SEC amending Reg BI to recognize that comprehensive financial planning is never solely incidental," said Moore.
Earlier today, numerous state attorneys general (including in New York, California and Connecticut) announced they’d filed suit against the SEC in federal court in New York’s Southern District. Their suit alleges that Reg BI fell short of protecting investors by failing to create a uniform standard of conduct for advisors and brokers. XYPN’s suit also asserts that the SEC overstepped its bounds by redefining how broker/dealers are exempt from registering as investment advisors by expanding the kind of financial planning and advice they can conceivably offer clients.
The SEC voted in favor of Reg BI on June 5, and it is scheduled to go into effect starting June 30, 2020. Even prior to the rule’s public release, many worried that the regulation would fall short of creating a uniform standard between broker/dealers and RIAs. Several states are pushing forward to enact their own fiduciary standards; many proponents of state regulatory efforts argue that Reg BI did not go far enough to adequately protect investors. These legislative and regulatory efforts are likely to result in court proceedings challenging their legality. In their meeting to discuss the filing, Kitces noted that it can be difficult for states to prove standing in these cases, and the most successful legal challenges tended to come from within the industry.
"Everybody should get the same playing field," Kitces said. "You've got to be a fiduciary if you're going to give that planning advice so consumers don't get harmed."