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Regulation and Compliance > Federal Regulation > SEC

GOP Lawmakers Back Reg BI in Court Battle

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Section 913 of the Dodd-Frank Act granted the Securities and Exchange Commission “broad authority” to craft a standard of conduct rule for broker-dealers, and the agency, in drafting Regulation Best Interest, used its expertise “to craft a rule that balances many competing considerations,” Republican lawmakers told the U.S. Court of Appeals for the Second Circuit.

In their 37-page amicus brief filed on Tuesday in the case brought against Reg BI by XY Planning Network and seven state attorneys general, the lawmakers — which included Reps. Ann Wagner, R-Mo.; Andy Barr, R-Ky.; French Hill, R- Ark.; Blaine Luetkemeyer, R-Mo; and Sen. Tom Cotton, R-Ark. — argued that Section 913 of Dodd-Frank “does not restrict the SEC’s authority to a binary choice between imposing either a single duty on all investment professionals or doing nothing at all.”

Indeed, the lawmakers wrote, the much-debated subsection 913(f) of Dodd-Frank “speaks of ‘standards,’ not ‘one standard.’”

The XY Planning and state AGs’ case presents this question: “Does section 913 of the Dodd-Frank Act contain a circuit breaker or a dimmer switch?” the lawmakers state.

“The answer is straightforward. As with almost all delegations of lawmaking power to regulatory agencies, in section 913 Congress granted the SEC broad authority to use its expertise to craft a rule that balances many competing considerations,” the lawmakers said.

The lawmakers then cite a subsection titled “Rulemaking,” in which Congress stated: “The Commission may commence a rulemaking, as necessary or appropriate in the public interest and for the protection of retail customers (and such other customers as the Commission may by rule provide), to address the legal or regulatory standards of care for brokers, dealers, investment advisers, persons associated with brokers or dealers, and persons associated with investment advisers for providing personalized investment advice about securities to such retail customers.”

“This is classic discretion-granting language,” the lawmakers argued.

XY Planning Network, the state AGs along with former Rep. Barney Frank, D-Mass., and former Sen. Chris Dodd, D-Conn., “would have this Court excise subsection 913(f)’s grant of authority from the law,” the GOP lawmakers’ brief states.

XY Planning and Dodd and Frank contend that the “SEC’s reading of subsection 913(f) renders subsection 913(g) superfluous,” the lawmakers said.

“But that contention ignores the fact that subsection 913(g) is an amendment to preexisting statutes with a particular regulatory and interpretive history. As was recognized during the hearings on the Dodd-Frank Act, there was a question whether the ‘broker-dealer exemption’ in the Investment Advisers Act of 1940 erected a barrier to the SEC’s imposition of a uniform standard of care on broker-dealers and investment advisers,” the brief states.

In order to ensure that the SEC “possessed authority to impose such a standard if — in the exercise of its discretion, it found it to be “necessary or appropriate in the public interest” — subsection 913(g) amends those laws to ensure that the SEC could do so,” the brief states.

Subsection 913(g) “thus sets a new outer bound on the SEC’s authority, but it is part of a broader statutory scheme, not a standalone directive to adopt a particular substantive rule,” the brief says. “That is why subsection 913(g) states that the SEC ‘may,’ rather than ‘shall,’ impose a uniform standard.”

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