In the days immediately preceding Reg BI's June 30 compliance date, two major developments took place.
On June 26, a federal appeals court sided with the SEC and rejected a lawsuit aimed at vacating the rule package. On June 29, the Department of Labor unveiled a proposed prohibited transaction exemption that would permit investment advice fiduciaries to receive compensation for their advice.
In its ruling, the 2nd U.S. Circuit Court of Appeals in New York wrote that 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. 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."
In September, XY Planning Network — a Bozeman, Mont., a financial-planning organization for fee-for-service financial advisers seeking to serve Generation X and millennial clients — filed a lawsuit challenging the SEC rule. XY Planning Network claimed that the SEC in promulgating Reg BI exceeded its regulatory authority and failed to hold brokers to the same tough fiduciary standard governing registered investment advisers.
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."
Labor Department officials have said for more than year that a revamped fiduciary rule would harmonize with the SEC's rule package. "The best interest standard in the proposed exemption is aligned with the conduct standards in the SEC's Regulation Best Interest and the fiduciary duty of SEC-regulated investment advisers," a senior DOL official said.
The Employee Retirement Income Security Act prohibits fiduciaries from self-dealing, meaning they cannot cause themselves, their affiliates or related entities to receive additional compensation from transactions involving plans and IRAs unless an exemption applies.
The proposed Labor Department exemption would include fiduciary investment advice to roll over a participant's account in an employee benefit plan to an individual retirement account and other similar types of rollover recommendations.
The exemption would be available to registered investment advisers, broker-dealers, insurance companies, banks and individual investment professionals who are their employees or agents.