A federal appeals court sided with the SEC and rejected a lawsuit aimed at vacating the agency's best-interest standard, which will go into effect Tuesday as planned.
The Dodd-Frank Act "grants the SEC broad rule-making authority, and Regulation Best Interest clearly falls within the discretion granted to the SEC by Congress," the 2nd U.S. Circuit Court of Appeals in New York wrote in its decision, which was handed down June 26. "Although Regulation Best Interest may not be the policy that petitioners would have preferred, it is what the SEC chose after a reasoned and lawful rule-making process."
With the decision, the SEC's rule package, which is commonly known as Reg BI for its centerpiece best-interest standard that aims to compel brokers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts, cleared the final hurdle before its implementation deadline Tuesday.
XY Planning Network, a Bozeman, Mont., financial-planning organization for fee-for-service financial advisers seeking to serve Generation X and millennial clients, filed a lawsuit challenging the SEC rule in September.
That same month, three months after SEC commissioners approved Reg BI, eight attorneys general filed a federal lawsuit challenging the rule, saying it doesn't sufficiently protect investors under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The two lawsuits were bound together since they challenged the rule in similar ways. Oral arguments were heard June 2.
In rejecting the plaintiffs' case, the court said Reg BI is "not arbitrary and capricious."
SEC Chairman Jay Clayton welcomed the court's decision. Come Tuesday, "whether they choose to work with a broker-dealer or an investment adviser, Main Street investors will be entitled to recommendations and advice in their best interest — the financial professional cannot put its interest ahead of the investor," he said in a statement.
XY Planning Network claimed that the SEC's new rule fails to hold brokers to the same tough fiduciary standard governing registered investment advisers. In creating Reg BI, it said the SEC exceeded its regulatory authority by permitting comprehensive financial-planning services to be delivered in connection with the sale of brokerage products without requiring a financial planner to register as an investment adviser and/or without fully subjecting such financial-planning advice itself to a registered investment adviser's fiduciary duty.
Michael Kitces, XY Planning Network's co-founder, said in a virtual press conference with reporters Monday that his company filed the lawsuit because it felt the SEC "fundamentally misinterpreted Dodd-Frank."
In January, former Democratic legislators Sen. Chris Dodd of Connecticut and Rep. Barney Frank of Massachusetts filed an amicus brief in connection with the lawsuits along with 10 other federal lawmakers, telling the appeals court that Reg BI "cannot stand."
That brief said Reg BI "perpetuates the very inconsistency in standards of care that Congress passed the Dodd-Frank Act to fix and violates Dodd-Frank."
But the court "did not appear to give their amicus brief very much weighting in the end," Mr. Kitces said. "And so we're certainly dismayed to see the outcome."
Industry groups that support the SEC's initiative said the court made the right call. "It affirmed enhanced consumer protections," said ACLI President and CEO Susan Neely in a statement. "The result is continued progress in safeguarding access for all consumers and securing harmonized standards across the country."
Mr. Kitces said XY Planning Network will evaluate its options over the next week or so and didn't rule out appealing the decision to the U.S. Supreme Court.
"It is still possible that we can challenge them up to the Supreme Court just on the fundamental basis that they gave the agency more deference than they should have, that they didn't follow precedence that exist in other circuits around how deference to agencies is determined," he said. "We're ultimately still weighing our options about whether we want to pursue that in full."