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Industry Spotlight > Broker Dealers

SEC Fires Back in Reg BI Court Battle

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Regulation Best Interest should be upheld because it “reasonably balances” the Securities and Exchange Commission’s regulatory objective, and reflects the agency’s concern that “requiring broker-dealers to conform to a regulatory regime that is tailored to the services and fee arrangements offered by investment advisors would reduce the availability of brokerage services,” attorneys for the agency told an appeals court Tuesday.

In their 109-page reply brief in the case brought against Reg BI by XY Planning Network and seven state attorneys’ general, the SEC attorneys argued that Congress gave the SEC “broad authority to balance investor protection with access to services.”

They stated: “The contours of the fiduciary duty for investment advisers have been shaped by the ongoing nature of advisory relationships with an array of different types of investors, ranging from retail customers to hundred-billion-dollar pension funds.”

Transplanting that fiduciary duty “to the broker-dealer context without accounting for the episodic nature of the business could cause broker-dealers to stop offering transactional services, prompt them to offer ‘advice in the capacity of investment adviser’ through fee-based accounts, or otherwise increase the cost of advice,” the attorneys wrote.

The attorneys also argue that the Dodd-Frank Act gave the SEC “express authority” to adopt Reg BI.

The plaintiffs’ argument that the commission exceeded its statutory authority in crafting Reg BI “disregards the text of Dodd-Frank, which gave the commission express, but discretionary, power to adopt a rule imposing a standard of care for broker-dealers,” the attorneys said.

Ultimately, the SEC attorneys argue, XY Planning and the state AGs “offer only policy arguments that never find a legal hook.”

XY Planning and the state AGs “believe that Congress should have subjected broker-dealers and investment advisors to the same standard — by applying to broker-dealers the fiduciary standard that has been tailored to investment advisers; by creating a new uniform standard, despite the differences in services and compensation structures; or by requiring that all financial professionals that provide advice register as investment advisers,” the attorneys state.

“But Congress chose none of those paths. Instead, Congress directed the Commission to evaluate multiple alternatives and gave the Commission broad authority to balance investor protection with access to services, which it reasonably exercised in adopting Regulation Best Interest.”

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