SEC's Regulation Best Interest Comes Under Attack

David Buffa, a principal at the law firm of Bressler, Amery & Ross and a member of Bressler's Retail Client Group, which develops solutions for firms subject to Reg BI, added in a comment to IA that "compared to the challenges that ultimately struck down the DOL's fiduciary rule, I believe the SEC has a greater likelihood of success due to the broad discretion authorized by Dodd-Frank."

The AGs' complaint "relies heavily on a provision of Dodd-Frank that authorized — but arguably did not require — the imposition of an investment advisor-level standard of care on broker-dealers, and due to the ambiguity in Dodd-Frank and SEC's formal study and rulemaking process, it seems likely that the [court] will side with the regulator."

Buffa said firms should not put their Reg BI implementation efforts on hold in light of the complaints, as they are the "first of many anticipated challenges to the SEC."

Reg BI's compliance date is June 30, 2020.

Barbara Roper, director of investor protection for the Consumer Federation of America, said that CFA agrees with the premise of the states' lawsuit, "that, in adopting Reg BI, the SEC ignored clear congressional intent and that the result is a rule that is too weak to protect investors."

Added Roper: "Whether in the short run, as a result of this lawsuit, or in a future administration, the rule will need to be scrapped and extensively revised to provide investors the protections they need and deserve."

Susan Neely, president and CEO of the American Council of Life Insurers, argued in a statement, however, that the attorneys general challenge "misses the mark. Reg BI is consistent with the Dodd-Frank Act's mandate requiring the SEC to review investment advice standards and develop better rules, if necessary, to protect consumers."

Reg BI Harm

Attorneys for Bates Research noted in a recent notice that the states argue in their lawsuit that Reg BI causes economic harm "due to lower tax revenues as a result of the diminished value of investment and retirement accounts beset by conflicts of interest."

Additional economic costs, the states' claim, include the need to provide public assistance, "in meeting the unmet needs of retirees and other residents in their states"; and "a reduction in the 'strong quasi-sovereign interest' that states have in maintaining the economic well-being of their residents."

XYPN, meanwhile, argues that Reg BI presents "a significant threat" to its business and to the businesses of its members in two ways.

First, XYPN's business model depends "in substantial part" on financial planners having an incentive to register as RIAs. By failing to impose a standard of conduct for broker-dealers that is the same as the standard for advisors, "as required by Dodd-Frank section 913(g), the SEC's rule reduces the likelihood that broker-dealers will register as investment advisers, resulting in a loss of business for XYPN," the lawsuit states.

Second, the SEC's rule "poses a competitive threat" to XYPN's members.

"In subjecting broker-dealers to a lower standard of conduct than RIAs, the rule allows broker-dealers to pursue their own financial interests even when providing the same financial-planning services as RIAs, while also reducing their legal exposure," the lawsuit states.

The rule does so "while using the label 'best interests' to refer to the lower standard of care applicable to broker-dealers, making it more difficult for RIAs to differentiate the fiduciary duty they owe—and their own 'best interests' standard of conduct—from the duty owed by broker-dealers under the rule," XYPN argues.

"This results in a competitive disadvantage to XYPN's members, who sign a fiduciary oath to act in client's best interests."

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