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SEC Reg BI Seeks to ‘Carve Up’ Market for Investment Advice, XYPN Says

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Attorneys for XY Planning Network on Tuesday ripped into the Securities and Exchange Commission’s Regulation Best Interest in a brief before the U.S. Court of Appeals for the 2nd Circuit.

XYPN attorneys said in the brief that the “fundamental purpose” of Securities and Exchange Commission’s Regulation Best Interest is “to carve up the market for investment advice and introduce new standards to govern the actions and disclosures of broker-dealers as distinct from registered investment advisors.”

In their 38-page reply brief to the SEC’s March 3 response brief, XYPN attorneys from Gupta Wessler argue that Reg BI is “premised on an unreasonable understanding of the activities and laws separating” advisors and broker-dealers.

The result, XYPN maintains, “is that entire businesses will be subject to Regulation Best Interest as broker-dealers when they should be regulated as investment advisers. The regulation therefore ‘cannot stand as promulgated.’”

In its response brief, SEC attorneys argued that Reg BI should stand because it “reasonably balances” the SEC’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.”

But XYPN argues in its Tuesday brief that Reg BI “is just the latest in a series of attempts by the SEC to exceed or misapply its regulatory authority in ways that have required judicial scrutiny.”

“In this latest round” with Reg BI, “the SEC has written a rule that cannot be squared with the plain text of the Dodd-Frank Act, has ignored evidence from its own empirical studies, and has even contradicted its own past interpretations of the Investment Advisers Act,” XYPN asserts.

The SEC’s March 3 response brief “fails to rebut these problems, invoking rationales that were not relied on in Regulation Best Interest itself, contradicting the SEC’s own past stances, relying on novel misinterpretations of Dodd-Frank.”

The SEC’s interpretation of the Dodd-Frank Act “is critically flawed,” XYPN says. “The law requires that if the SEC issues a regulation governing the standard of care for broker-dealers’ provision of personalized investment advice, it must hold broker-dealers to the same standard as investment advisers.”

XYPN’s lawsuit against Reg BI has been consolidated with the suit filed against the rule by seven state attorneys general.

In their reply brief, also filed Tuesday, the state Attorneys General of New York,  California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia, claim that the SEC’s “statutory arguments rely on its startling and illogical view that Congress enacted Section 913 of the Dodd-Frank Act specifically to address the problems caused by divergent standards of conduct for functionally identical investment advice—but then was entirely indifferent to whatever rule the Commission chose to promulgate.”

The text and purpose of Section 913 “demonstrate otherwise,” the state AGs said in their 48-page brief. “Congress was deeply concerned that broker-dealers were providing conflicted investment advice to retail investors and sought to curb that practice by requiring broker-dealers to adhere to the same fiduciary standard that had applied to investment advisers for decades.”