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Court Rules Against XYPN, States in Suit to Stop Reg BI

The SEC’s Regulation Best Interest stands, with a compliance date of Tuesday.  

Just four days before the Securities and Exchange Commission’s Regulation Best Interest takes effect, the U.S. Court of Appeals for the second circuit ruled against the XY Planning Network and numerous state attorneys general in a lawsuit that was considered a last-ditch effort to fight the rule. With the court’s decision, the rule stands, with a compliance date of Tuesday, June 30.

In the court ruling filed late Friday, the judges argue that Section 913 of the Dodd-Frank Act does authorize Regulation Best Interest, and that the rule is “not arbitrary and capricious.”


XYPN Co-Founder Michael Kitces said the group would explore their options in terms of challenging the rule further.

“For 80 years, the Investment Advisers Act of 1940 has made it clear that brokers provide important but distinctly non-advice functions in the marketplace, while those who are in the business of advice itself must be registered as investment advisers and be held to a fiduciary standard,” said Kitces said, in a statement.

“Dodd-Frank gave the SEC the option to permit brokers to be in the business of personalized advice, under the stipulation that if they offered such advice, that advice must again be held to a fiduciary standard. Yet while the Investment Advisers Act has long permitted brokers to be (non-fiduciary) brokers and advisers to be (fiduciary) advisers, and Dodd-Frank gave the SEC the option to allow brokers to become fiduciary advisers alongside investment advisers, the SEC chose neither of these paths with Regulation Best Interest, and in fact reinterpreted and dangerously broadened the solely incidental exemption specifically to allow more brokers to provide non-fiduciary advice under Regulation Best Interest.”

“As a result, we strongly disagree with the court's permissive interpretation allowing the SEC to alter the substantive consumer protections Congress mandated in both the Investment Advisers Act and Dodd-Frank, will be exploring our options about whether to challenge this ruling further, and will continue to work proactively with the growing number of States and their own Securities regulators who understand the business of advice has always only ever been fiduciary... and should remain that way for the protection of consumers.”

In their suit, which was first filed last September, XYPN argued that Reg BI would confuse clients about the differences between investment advisors, who were held to a fiduciary standard, and broker/dealers, which are not.

XYPN also argued that Section 913 of the Investment Adviser's Act not only granted the SEC the authority to promulgate a rule governing b/d conduct but also set out certain standards of what that rule should be if the SEC decided to move forward. 

“But 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,” said Judge Michael H. Park, in his decision. “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.” will have more on this story as it develops.

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