Reg BI allows brokers doing planning to avoid becoming fiduciaries: FPA

Group files amicus brief in support of lawsuits seeking to overturn regulation

The Financial Planning Association argued in a court filing Friday that the Securities and Exchange Commission’s investment advice reform allows brokers to provide financial planning while meeting a lower requirements than other planners.

In an amicus brief, the FPA supported lawsuits that would overturn Regulation Best Interest, which the SEC approved last year to raise broker requirements above the current suitability standard. Reg BI and other parts of the regulatory package must be implemented by June 30.

The FPA gave an example of a financial planner who prepares a comprehensive financial plan for a fixed fee. That planner, the group said in its brief, must be registered as an investment adviser. Investment advisers are held to fiduciary duty, which will continue to cover them under the SEC’s advice reform tegulations.

Under Regulation Best Interest, however, a registered representative of a broker-dealer could construct a financial plan for a customer and instead of charging a fee for the plan could instead be paid on commissions from the products the rep sells to fulfill the plan. In that scenario, the rep would be subject to Regulation Best Interest but would not have to register as an adviser under the Investment Advisers Act and adhere to fiduciary duty.

“Regulation Best Interest narrows the scope of the [Investment Advisers] Act by allowing broker-dealers to evade the registrations requirement and customer protections of the Act and creates a regulatory arbitrage,” the FPA amicus brief states.

Higher standard

FPA President Martin Seay said the FPA is trying to ensure that financial planning be held to a higher standard than the one contained in Reg BI, as it’s known.

“Our goal is that financial planning be delivered under a fiduciary standard,” Mr. Seay, an associate professor of personal financial planning at Kansas State University, said in an interview. “This rule, as it exists, significantly impacts the development of financial planning. The voice of the financial planning community needs to be heard here.”

The Reg BI lawsuits, one filed by the XY Planning Network and Ford Financial Planning and another filed by seven state attorneys general and the District of Columbia, have been consolidated in the U.S. Second Circuit Court of Appeals.

The plaintiffs originally filed in the Southern District of New York in September, which sent the cases to the Second Circuit. They filed briefs in the Second Circuit on Dec. 27.

The FPA and the Public Investors Arbitration Bar Association filed requests for the court to accept amicus briefs last Friday. The court has not yet decided whether to permit them. In its amicus brief, PIABA argued that Reg BI “does not adequately address investor confusion [about the differing advice standards of care] or the investor harm that has resulted from the confusion.”

The plaintiffs in the Reg BI suits argue that the SEC exceeded its authority in promulgating Reg BI, ignoring the mandate of Congress in the Dodd-Frank Act to implement a uniform standard of care that is “not less stringent than” fiduciary duty. In its suit, XYPN also asserts that Reg BI puts investment advisers at a competitive disadvantage to brokers.

The SEC has not yet responded to the lawsuits.

In a meeting with reporters on the sidelines of the Securities Industry and Regulatory Markets Association in November, SEC Chairman Jay Clayton said he is not worried that the suits will derail Reg BI.