Court's decision on Reg BI lawsuit could come down near implementation date

Court's decision on Reg BI lawsuit could come down near implementation date
The 2nd U.S. Circuit Court of Appeals agreed to an expedited oral argument in early June
MAY 08, 2020

A decision by a federal appeals court on a lawsuit seeking to stop Regulation Best Interest could come down just as the measure is due to be implemented.

The Securities and Exchange Commission said Reg BI, as it’s known, would raise advice requirements for brokers above the current suitability rule. Investor protection is one reason the SEC gave for holding firm on the June 30 implementation date despite brokerage operation disruptions caused by the COVID-19 pandemic.

Plaintiffs in the lawsuit being heard in the U.S. Court of Appeals for the 2nd Circuit requested an expedited oral argument due to the pending Reg BI deadline. The court granted the motion last week and on Friday set the hearing date for June 2.

Experts say that would give the court time to rule just as the Reg BI deadline hits.

“There’s a reasonable possibility we could see a decision before June 30,” said James Lundy, a partner at Faegre Drinker Biddle & Reath.

Reg BI was the centerpiece of an advice reform regulatory package that the SEC approved last summer. Brokers and investment advisers would continue to be regulated separately, with brokers adhering to Reg BI and advisers continuing to be governed by fiduciary duty.

Reg BI drew two lawsuits. One was filed by attorneys general from seven states and the District of Columbia. The other suit was filed by XY Planning Network and one of its members, Ford Financial Solutions. The two suits have been combined.

Both the attorneys general and XYPN argue the SEC exceeded its authority in promulgating Reg BI and ignored a mandate from Congress in the Dodd-Frank financial reform law to formulate a uniform standard of conduct for brokers and advisers.

Both sets of plaintiffs argue Reg BI does not adequately protect investors from conflicted advice. XYPN also claims Reg BI creates a competitive disadvantage for advisers because it makes it more difficult to differentiate the fiduciary duty that applies to advisers from what it calls the weaker Reg BI standard.

In response, the SEC argues that the Dodd-Frank law gave it the discretion and flexibility to promulgate a broker advice requirement separate from the adviser standard. It did so, it said, to preserve the broker business model, which may be more appropriate for some investors than the advisory model.

“Ultimately, petitioners offer only policy arguments that never find a legal hook,” the SEC argued in its brief.

In an amicus brief, former Rep. Barney Frank, D-Mass., and former Sen. Christopher Dodd, D-Conn., said their namesake law called for harmonizing broker and adviser advice standards “through a fiduciary rule.”

It’s difficult to predict how the court will rule.

Micah Hauptman, financial services counsel at the Consumer Federation of America, said the plaintiffs have a good shot at winning. He said the SEC had to twist and turn to claim it was not ignoring a congressional mandate for a uniform fiduciary standard.

“I don’t think those contortions will stand,” Hauptman said.

But Barry Temkin, a partner at Mound Cotton Wollan & Greengrass, said “the chances are excellent” the SEC will prevail. He bases his optimism, in part, on what he says is permissive language in the Dodd-Frank law regarding a uniform fiduciary rule.

In addition, the SEC is on a favorable ground in the court where the lawsuit is being heard.

“The 2nd Circuit is more likely to defer to the SEC because of [the agency’s] expertise,” he said.

Latest News

Time to get on the China ETF train? Advisors speak up
Time to get on the China ETF train? Advisors speak up

Chinese stocks have been flying for the past month. Should US wealth managers go along for the ride?

Fidelity reports data breach exposing 77,000 customers' personal data
Fidelity reports data breach exposing 77,000 customers' personal data

The investment giant said Social Security numbers, driver's licenses, and other sensitive information was compromised by a third party using newly established accounts.

Another ex-Edelman advisor joins Baird in Virginia
Another ex-Edelman advisor joins Baird in Virginia

The employee-owned hybrid firm's latest hire in Fairfax reportedly managed $285M at his previous firm.

Milton adds to climate-change worries for retirees
Milton adds to climate-change worries for retirees

The hurricane is the latest severe-weather event in a retirement destination, underscoring the concerns about climate change that clients bring up, financial planners say.

$26B RIA EP Wealth strikes private market alliance with Opto Investments
$26B RIA EP Wealth strikes private market alliance with Opto Investments

The tech-driven alts platform will provide support to advisors seeking customized portfolio access for their high-net-worth clients.

SPONSORED Destiny Wealth Partners: RIA Team of the Year shares keys to success

Discover the award-winning strategies behind Destiny Wealth Partners' client-centric approach.

SPONSORED Explore four opportunities to elevate advisor-client relationships

Morningstar’s Joe Agostinelli highlights strategies for advisors to deepen client engagement and drive success