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Regulation and Compliance > Federal Regulation > SEC

Kitces Is Confident That Lawsuits Will Squash Reg BI

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Popular advisor and Nerd’s Eye View blogger Michael Kitces says he remains “as confident as ever” that the U.S. Court of Appeals for the 2nd Circuit will affirm XY Planning Network’s lawsuit against the Securities and Exchange Commission’s Regulation Best Interest and delay the rule’s June 30 compliance date.

Both XYPN, which Kitces co-founded, and the attorneys general from seven states filed briefs on Dec. 27 in the 2nd Circuit. The cases are consolidated because they address overlapping issues.

Kitces told ThinkAdvisor in an email on Friday that he was confident the court would “affirm our arguments, both on the basis of Dodd-Frank (akin to the states’ lawsuit) but also the unique arguments we’ve raised with respect to the Investment Advisers Act of 1940 (that were uniquely raised in the XYPN lawsuit).”

XYPN’s Dec. 27 filing argues that Reg BI “exceeds the authority given to the SEC by the Dodd-Frank Act,” as the law “provided the SEC with the authority to ‘promulgate rules to provide that, with respect to a broker or dealer, when providing personalized investment advice … the standard of conduct for such broker or dealer with respect to such customer shall be the same as the standard of conduct applicable to an investment adviser’” under the Investment Advisers Act.

The SEC “had authority under Dodd-Frank not to issue such a regulation,” the filing continues, “but Dodd-Frank did not grant the SEC additional authority to create a new, different standard of conduct governing broker-dealers providing personalized investment advice.”

XYPN also argues that under Reg BI “a broker-dealer is permitted to take into account its own personal interests in providing recommendations and advice to investors on how to invest their life savings. This new rule means that broker-dealers may maintain harmful conflicts of interests while being able to market themselves as trusted advisers acting in their client’s best interests.”

The rule “thus circumvents a key goal of Dodd-Frank — leveling the playing field — and increases investor confusion.”

The SEC has until early March to reply to the XYPN and state AG briefs. “Our final response to the SEC will come in late March,” Kitces said Friday.

XYPN’s lawsuit against Reg BI “is still on track to be decided (and as we hope and anticipate, [the rule will be] vacated)” before Reg BI’s June 30 effective date.

“If delays arise, or the Appeals Court takes a long time to decide the case, we may still pursue further action to delay the Reg BI implementation date,” Kitces added.

“But frankly, it is our hope that, win or lose, the Appeals Court decides quickly, so the industry knows one way or the other if Reg BI is going to stay, or is being vacated.”

Kitces told ThinkAdvisor in a previous interview that the court “would have to vacate Regulation Best Interest or, alternatively, if the SEC is willing to modify the rule and state that financial planning advice is investment advice that is not solely incidental, that would put Reg BI back in compliance” with Dodd-Frank.

Todd Cipperman of Cipperman Compliance Services agrees in his 2020 predictions that due to the lawsuits, “the SEC will have to delay implementation [of Reg BI] and perhaps rewrite the rule in response.”

— Check out Secure Act, Fiduciary Rules Set Up a Doozy of a Compliance Year on ThinkAdvisor.


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