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Michael Kitces Photo by Jen Mastrud
XYPN co-founders Michael Kitces (right) and Alan Moore

Reg BI Ruling Is Not the End of Fiduciary Advocacy Efforts

In light of the federal appeals court decision to uphold Reg BI, XYPN says it may take its case to the Supreme Court. Fiduciary advocates also expect more states to take action.

Late last week, a federal appeals court struck down the XY Planning Network’s legal challenge to the Securities and Exchange Commission’s Regulation Best Interest, but the group is now considering taking its case to the Supreme Court. Further, fiduciary advocates argue the ruling could accelerate state efforts to enact fiduciary standards.

“This is not the end of a fiduciary advocacy journey for us,” said XYPN co-founder Michael Kitces during a virtual press conference Monday morning. “If this isn’t going to be a matter we can resolve with the SEC through the courts, it will continue to be a state advocacy issue.”

Late Friday evening, three judges in the 2nd U.S. Circuit Court of Appeals denied  XYPN’s petition, which argued Reg BI was in violation of the 2010 Dodd-Frank Act and would negatively impact financial planners. The suit had been conjoined with a separate filing by several state attorneys general, who argued that the rule could cause eventual harm to investors. All three judges decided that the states lacked standing to challenge the rule, with one judge arguing that XYPN lacked standing as well.

XYPN had requested an expedited ruling in order to get legal clarity before Reg BI’s implementation date, which is this Tuesday. Now, the network will consider whether they will press for the case to be heard en banc (in which the entirety of judges on the 2nd U.S. Circuit Court of Appeals would hear the case) or to push for the Supreme Court to consider hearing their suit. XYPN will make a decision on further legal action in the next week or two.

“It’s possible we can challenge them up to the Supreme Court, arguing that [the judges] gave the SEC more deference [than] they should have,” Kitces said.

The outcome could also put pressure on the states to address the fiduciary issue.  

Since the passage of Reg BI last year, numerous states have considered their own regulation or legislation to mandate a fiduciary standard for brokers akin to investment advisors; Massachusetts has already passed its own rule, which will go into effect this September. 

Friday’s ruling against XYPN made it more likely that other states would consider pursuing their own fiduciary rules, according to Knut Rostad, the co-founder and president of the Institute for the Fiduciary Standard. He said the next “game-changer” would be when one of these state regulations inevitably faces its own legal challenge.

“The key issue will be what type of rule is successful in the courts, because there are obviously a number of different approaches the states have taken,” he said. “How the first challenged state fares in court is going to be important and will set parameters for other states going forward.”

While the decision was expected, it was nevertheless a disappointment to Barbara Roper, head of investor protection at the Consumer Federation of America. She said that there was no reason the legal decision would prevent states from enacting their own standards.

“On the contrary, knowing that Reg BI is going ahead as planned should spur states to step in and provide the protections the rule does not,” she said.

Despite Reg BI’s implementation date, much remains uncertain about the rule’s future, including how it could be affected should President Donald Trump lose reelection. Kitces said that while XYPN had never viewed fiduciary rule-making as a partisan issue, he’d witnessed a burgeoning partisan divide between Democrats, who have become more pro-fiduciary, and Republicans, who have increasingly tended to side with the parts of the financial services industry pushing back on fiduciary mandates for broker/dealers. However, Kitces felt that congressional action could be far more impactful than the actions of a potential Joe Biden administration.

“I think the real question will be whether Congress takes this up again and whether we get legislation on a fiduciary rule,” Kitces said.

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