XYPN rules out Supreme Court appeal over Reg BI

The XY Planning Network said Monday it will not appeal to the Supreme Court to overturn the new broker standard of conduct and will instead launch advocacy efforts at the state level to promote investment-advice reform.

Over the summer, the 2nd U.S. Circuit Court of Appeals upheld Regulation Best Interest, the broker investment advice standard implemented by the Securities and Exchange Commission on June 30.  The court said the SEC acted properly under the Dodd-Frank financial reform law in promulgating the rule.

The XYPN, a national platform for about 1,300 financial planning firms, was one of the plaintiffs in the suit. There is little chance the Supreme Court will put an appeal of the 2nd Circuit's decision on its docket, said Michael Kitces, XYPN co-founder.

“We’re not fans of tilting against windmills,” Kitces said in a session opening XYPN Live(ish), the group’s virtual annual conference. “We want to actually fight things we think we’ve got a shot at winning — and that’s not pursuing this to the Supreme Court.”

Kitces said XYPN will turn its attention to influencing investment-advice regulation at the state level, where nearly all of its advisers are registered. The group hired Duane Thompson, founder of Potomac Strategies and a longtime fiduciary proponent and policy adviser, to lead its advocacy efforts.

States have become a flash point in the debate over investment advice regulation. Massachusetts implemented in September a fiduciary rule for advisers and brokers in the state. New Jersey and Nevada also are developing fiduciary rules.

Regulators and legislators in all three states have expressed opposition to Reg BI, which they assert does not sufficiently protect investors against broker conflicts of interest. Other states, including Maryland, New York and Illinois have considered fiduciary legislation.

The fact that Reg BI is not a fiduciary standard is one reason XYPN filed its lawsuit. It argued the SEC should have established a uniform investment advice standard that subjects brokers to the same fiduciary duty that governs investment advisers when brokers give advice. Instead, Reg BI has muddied the waters, XYPN asserts.

Kitces said XYPN would work at the state level to promote a clear distinction between fiduciary investment advice and product sales activity by brokers. Brokers are now subject to Reg BI, which requires them to act in the best interests of their customers, while advisers will continue to be governed by fiduciary duty.

“Advice should only and always ever be fiduciary period,” said Kitces, head of planning strategy at Buckingham Wealth Partners. “You will hear us talk more and more about the philosophy: Let brokers be brokers, including saying that on their business card, and let all advice be fiduciary.”

The group also will address state-level oversight of advice fees. Kitces said there is inconsistency among states when it comes to regulating fee-for-service models, such as hourly, retainer and monthly subscription fees as well as fees based on client net worth and income.

“We’re not necessarily going to be asking for any special favors,” Kitces said. “We simply want to see regulation of fee-for-service consistent with any other adviser fee model.”