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Regulation and Compliance > Federal Regulation > SEC

SEC Prevails Over XYPN in Reg BI Suit

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The U.S. Court of Appeals for the 2nd Circuit ruled late Friday afternoon that Section 913(f) of the Dodd-Frank Act grants the Securities and Exchange Commission broad rulemaking authority, “and Regulation Best Interest clearly falls within the discretion granted to the SEC by Congress.”

The court stated that “although Regulation Best Interest may not be the policy that petitioners” XY Planning Network and the seven states attorneys general and the District of Columbia “would have preferred, it is what the SEC chose after a reasoned and lawful rulemaking process.”

Reg BI goes into effect on Tuesday.

The court held that the individual investment-advisor petitioner, XY Planning Network, has standing to bring its petition for review because of competitive disadvantage, but the state petitioners do not.

Regulation Best Interest “is not arbitrary and capricious” under the Administrative Procedures Act, the court ruled.

Michael Kitces, co-founder of XY Planning Network, said in an emailed comment shared with ThinkAdvisor: “While we appreciate the court’s acknowledgment that XYPN members and other registered investment advisors will be put at a competitive disadvantage by Regulation Best Interest  affirming our standing to challenge the rule  we are incredibly disappointed that the courts have nonetheless allowed Regulation Best Interest to stand.”

The Dodd-Frank Act authorizes the SEC to promulgate Reg BI, the 28-page brief states.

“Congress stated that the SEC ‘may commence a rulemaking, as necessary or appropriate in the public interest and for the protection of retail customers . . .  to address the legal or regulatory standards of care for’ broker-dealers,” the ruling stated.

“This broad grant of permissive rulemaking authority encompasses the best-interest rule adopted by the SEC,” it added.

Contrary to petitioners’ argument, the court ruled, Section 913(g) does not narrow the scope of Section 913(f) 9 but rather provides a separate grant of rulemaking authority.

“The key language in each of the provisions at issue is ‘may,’ which is permissive and reflects Congress’s grant of discretionary rulemaking authority to the SEC,” the court ruled.

Kitces added in his statement that the Investment Advisers Act of 1940 “has made it clear that brokers provide important but distinctly non-advice functions in the marketplace, while those who are in the business of advice itself must be registered as investment advisers and be held to a fiduciary standard.”

Dodd-Frank “gave the SEC the option to permit brokers to be in the business of personalized advice, under the stipulation that if they offered such advice, that advice must again be held to a fiduciary standard,” he said.

Yet, Kitces continued, while the Investment Advisers Act “has long permitted brokers to be (non-fiduciary) brokers and advisers to be (fiduciary) advisers, and Dodd-Frank gave the SEC the option to allow brokers to become fiduciary advisers alongside investment advisers, the SEC chose neither of these paths with Regulation Best Interest … .”

The popular blogger noted that the SEC “in fact reinterpreted and dangerously broadened the solely incidental exemption specifically to allow more brokers to provide non-fiduciary advice under Regulation Best Interest.”


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