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.
