Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > State Regulation

The Reg BI Battle Comes to a Head

Your article was successfully shared with the contacts you provided.

Will XY Planning Network and the seven state attorneys general succeed in stopping the Securities and Exchange Commission’s Regulation Best Interest in its tracks? We’ll know soon enough, as the U.S. Court of Appeals for the 2nd Circuit agreed to hear oral arguments in the case on June 2.

The appeals court said in early May that it would expedite hearing the case. “We’re hopeful an expedited hearing leads to an expedited ruling before June 30,” which is Reg BI’s compliance date, Michael Kitces, XYPN’s co-founder, told me in an early May email message.

Compliance with Reg BI and adoption of the SEC’s Customer Relationship Summary form, or Form CRS, are two of the most arduous requirements for advisors and broker-dealers this year. The state attorneys general of New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia pressed the appeals court in mid-April to expedite oral arguments.

“We and the states are aligned in wanting to see an outcome to this sooner rather than later (to bring certainty for the industry either way about whether the June 30 effective date is going to happen, or not),” Kitces said in April.

The uncertainty of a response by the court “added by coronavirus just makes it more uncertain,” Kitces said. XYPN’s lawsuit against the rule has been consolidated with the suit from the state attorneys general.

Attorneys for the RIA said in an April 14 brief before the appeals court that the “fundamental purpose” of Reg BI was “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.”

XYPN lawyers from Gupta Wessler argued that Reg BI was “premised on an unreasonable understanding of the activities and laws separating” advisors and BDs. The result, XYPN maintains, “is that entire businesses will be subject to [Reg BI as BDs] when they should be regulated as investment advisers. The regulation therefore ‘cannot stand as promulgated.’”

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,” XYPN attorneys said. “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 asserted.

The SEC maintained in its early March brief before the court, however, that Reg BI should be upheld 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.”

Labor Fiduciary Rule on Back Burner

A Labor Department fiduciary rule to align with Reg BI, however, won’t be out anytime soon. Preston Rutledge, assistant secretary of Labor for the Employee Benefits Security Administration, left his post at the end of May.

As head of EBSA, Rutledge was charged with spearheading Labor’s new fiduciary rule to align with Reg BI. At press time in early May, that rule had yet to land at the Office of Management and Budget for review.

Labor “is focusing on guidance related to coronavirus issues,” including the Coronavirus Aid, Relief and Economic Security (CARES) Act, said ERISA attorney Fred Reish of Faegre Drinker Biddle & Reath. “I don’t think the fiduciary reg is a high priority.”

While it “would be convenient” for Labor to release its rule, “it’s not necessary” as it relates to compliance with Reg BI, Reish added.

Brad Campbell, former head of EBSA who’s now a partner at Faegre Drinker Biddle & Reath in Washington, added that while Rutledge’s departure won’t result “in any additional delay to current outstanding projects at EBSA, given the strength of his deputy, Jeanne Wilson, and the importance of the agency’s mission to current events,” Labor’s fiduciary rule reboot has been pushed to the back burner.

“Reproposing the fiduciary rule is not at the top of the department’s agenda,” Campbell said. “How far down it has slipped only time and publication of the spring regulatory agenda will tell.” That reg agenda had yet to be released by press time.

Reish added that even if Labor’s fiduciary rule was sent to the OMB now, “it probably couldn’t be final until after the next president is sworn in,” and could be reversed if the new president is a Democrat.

Rep. Phil Roe, R-Tenn., a member of the House Education and Labor Committee, said during a Zoom webcast held in late April by the American Council for Capital Formation that Labor should hold off releasing a fiduciary rule.

“I would wait,” Roe said. “Certainly the less rulings that can be rendered during a pandemic when people are just trying to keep their head above water — to delay any of those — would be a good idea.”

Iowa Enters Fiduciary Rule Fray

The Iowa Insurance Division adopted in mid-May its best-interest standard requiring financial professionals to act in the best interest of clients when selling annuities, and will repropose its rule for securities later this summer.

The plan, released by the Iowa Insurance Division, is based on the model regulation approved by the National Association of Insurance Commissioners earlier this year that is harmonized with Reg BI and requires annuity agents and broker-dealers and their reps to act in the best interest of their clients.

The Iowa Insurance Division is a member of the NAIC and North American Securities Administrators Association.

Iowa Insurance Commissioner Doug Ommen, who is also the state’s securities regulator, said in a statement that “Iowans expect their financial professional to act in the consumer’s best interest when recommending an annuity. Iowa not only expects it, but we will require it.”

Ommen said he hopes to also work with other U.S. insurance regulators “to require the same of any Iowa insurer writing annuity business in those states.”

During the comment period, Ommen said, several comments requested that due to COVID-19, the division delay the proposed best-interest standard in securities regulations. “We have decided that is the appropriate course. I anticipate proposing best-interest securities standards again later this summer.”

Jason Berkowitz, chief legal officer for the Insured Retirement Institute, said in a statement that he applauded the Iowa Insurance Division “for moving expeditiously to finalize their proposal to adopt the NAIC’s enhanced annuity sales practices model regulation, and for recognizing the need to step back and re-evaluate the proposed best interest standard for broker-dealers.”

Barbara Roper, director of investor protection for the Consumer Federation of America, told me, however, that CFA has “strongly opposed” the annuity rule because “under the NAIC model, an annuity seller meets their so-called ‘best interest’ obligations by recommending a product that meets the customer’s needs, in other words by recommending a generally suitable product. It includes provisions to address conflicts of interest, but exempts the biggest conflict, cash and noncash compensation, from the definition of material conflicts.”

Massachusetts’ fiduciary rule took effect on March 6, and enforcement will start Sept. 1.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.