Skip navigation
SEC Headquarters

XYPN Submits Final Brief in Suit Challenging Reg BI

Next, judges in the 2nd U.S. Circuit Court of Appeals will hand down a ruling in the group's case against the SEC. A favorable decision for the network could strike down Reg BI and lead to improved consumer protections.

XY Planning Network filed a reply brief in its suit challenging the Securities and Exchange Commission’s Regulation Best Interest this week, the last step before the court rules on the group’s claims that the rule will potentially hurt financial advisors and is an improper use of the regulatory authority under the Dodd-Frank Act.

The original filing deadline for XYPN’s reply brief, submitted in response to the SEC’s arguments against the group’s claims, was in late March but was delayed three weeks, according to XYPN co-founder Michael Kitces. Now, all that remains is a ruling from judges in the 2nd U.S. Circuit Court of Appeals, but it remains to be seen whether the spread of COVID-19 has impacted the time line for a final decision.

“We really have no idea whether or how timely the courts will still be,” Kitces said. “They ‘only’ delayed our briefs by three weeks, but there’s no way to know how productive they were in the meantime or whether there’s been a backlog.”

XYPN originally filed suit against the SEC last September, claiming that the new rule will lead to broker/dealers and dual registrants offering advice similar to the services of an investment advisor without being subject to the same regulatory scrutiny, which would leave RIAs at a competitive disadvantage.

Several state attorneys general also filed suits against the SEC, arguing the commission had failed to adequately protect investors and had invited confusion among clients; the two suits were subsequently consolidated into one suit in the second circuit. (The state attorneys general also filed their own brief this week in response to the SEC.)

Last month, the SEC argued the network’s suit lacked standing, asserting it was spurred by policy disagreements with the commission rather than legitimate grounds to sue based on legal precedent. But XYPN’s brief argued it had standing due to the fact that it generates revenue from its members, who would have “less incentive” to work as RIAs if they can face less regulatory scrutiny while offering similar services as b/ds.

“And XYPN’s members...suffer a competitive disadvantage under Regulation Best Interest because it will permit broker/dealers to say they are acting in the consumer’s ‘best interests’ and use other language that has traditionally implied a fiduciary relationship, making it harder for registered investment advisers to compete by effectively communicating to consumers that their interests are better protected under the regulatory regime governing investment advisers than that governing broker-dealers,” the brief read.

XYPN also disputed the SEC’s claim that the Dodd-Frank Act, created in the wake of the 2008 crash, offered the commission “broad authority” to create any type of standard for b/ds. Instead, XYPN claims that Section 913 of the legislation grants the SEC the authority to promulgate a rule governing b/d conduct (including potentially instilling a fiduciary standard), but it also offers details about what standards the SEC should follow.

“The SEC has failed entirely to respond to the substance of the XYPN petitioners’ arguments here,” XYPN’s brief read. “The after-the-fact argument it makes in its brief—that consumer misunderstanding is outweighed by preserving choice—cannot justify the rule.”

A favorable court ruling for XYPN could lead to increased consumer protections, with the SEC forced to write a new rule, according to Alan Moore, XYPN’s CEO and co-founder.

“We hope this provides additional clarity to consumers looking for financial planning to know if the guidance they are receiving is actually advice, or simply a product sales pitch,” Moore said. “We also believe that because of this, many more reps will be registered as an IAR of an RIA to give financial planning advice, which will bring stricter rules and oversight to the delivery of that advice so consumers are protected.”


TAGS: Industry
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.