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Industry Spotlight > Broker Dealers

Dodd and Frank Say SEC's Reg BI Violates Law

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The Securities and Exchange Commission’s Regulation Best Interest violates Section 913 of the Dodd-Frank Act, which directed the commission to “harmonize” the standards of conduct for broker-dealers and investment advisors through a fiduciary rule, current and former Democratic lawmakers, including the law’s authors, told the U.S. Court of Appeals for the 2nd Circuit.

Congress’ mandate in Section 913 of Dodd-Frank “required that any rule promulgated to address the inconsistent standards of care between investment advisers and broker-dealers must harmonize those standards of care,” the lawmakers, which include former Rep. Barney Frank and former Sen. Chris Dodd, said in their amicus brief supporting XY Planning Network’s lawsuit against Reg BI. “The rule therefore cannot stand.”

Reg BI “fails to harmonize the standards for broker-dealers and investment advisers through a fiduciary rule, and is therefore at odds with the text and structure of Section 913, as well as Congress’ plan in passing it,” the current and former lawmakers state.

House Financial Services Committee Chairwoman Maxine Waters, D-Calif., and Senate Banking Committee ranking member Sherrod Brown, D-Ohio, further state in the amicus brief that Dodd-Frank did not give the agency permission to write a separate rule.

In its final rule, “the SEC suggests that it issued the rule pursuant to a ‘grant of rulemaking authority in Section 913(f),’ on the theory that that Section 913(f) provides an ‘overlapping, yet distinct, rulemaking power’ with Section 913(g).”

To be sure, the amicus brief continues, “Section 913(f) provides the SEC with the authority to ‘commence a rulemaking … to address the legal or regulatory standards of care for brokers, dealers, [and] investment advisers … for providing personalized investment advice about securities to such retail customers.’”

However, Section 913(f) “must be read in conjunction with the provision that immediately follows it — Section 913(g) — which provides specific limits on the SEC’s rulemaking authority,” the current and former lawmakers state.

“The SEC’s interpretation of Section 913 — that it allows the SEC to provide a different, lesser standard for broker-dealers that does not harmonize the standards across all financial professionals — would render superfluous Section 913(g), which specifically dictates that the SEC’s rule implement a uniform fiduciary standard of care,” according to the amicus brief.

The former and current lawmakers — who stated that they either sponsored Dodd-Frank, participated in drafting it, or served on committees with jurisdiction over the federal financial regulatory agencies — state that “consumer confusion and the blurred distinctions between broker-dealers and investment advisers — and the consequences of that inconsistency for everyday Americans — spurred Congress to enact reforms” in the Dodd-Frank Act.

Therefore, the lawmakers say they “have a strong interest in ensuring that the SEC does not promulgate a less-protective standard for broker-dealers that is at odds with Congress’ plan” in passing Dodd-Frank.

— Check out Kitces Is Confident That Lawsuits Will Squash Reg BI on ThinkAdvisor.


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