A decision by a federal appeals court on a lawsuit seeking to stop Regulation Best Interest could come down just as the measure is due to be implemented.
The Securities and Exchange Commission said Reg BI, as it’s known, would raise advice requirements for brokers above the current suitability rule. Investor protection is one reason the SEC gave for holding firm on the June 30 implementation date despite brokerage operation disruptions caused by the COVID-19 pandemic.
Plaintiffs in the lawsuit being heard in the U.S. Court of Appeals for the 2nd Circuit requested an expedited oral argument due to the pending Reg BI deadline. The court granted the motion last week and on Friday set the hearing date for June 2.
Experts say that would give the court time to rule just as the Reg BI deadline hits.
“There’s a reasonable possibility we could see a decision before June 30,” said James Lundy, a partner at Faegre Drinker Biddle & Reath.
Reg BI was the centerpiece of an advice reform regulatory package that the SEC approved last summer. Brokers and investment advisers would continue to be regulated separately, with brokers adhering to Reg BI and advisers continuing to be governed by fiduciary duty.
Reg BI drew two lawsuits. One was filed by attorneys general from seven states and the District of Columbia. The other suit was filed by XY Planning Network and one of its members, Ford Financial Solutions. The two suits have been combined.
Both the attorneys general and XYPN argue the SEC exceeded its authority in promulgating Reg BI and ignored a mandate from Congress in the Dodd-Frank financial reform law to formulate a uniform standard of conduct for brokers and advisers.
Both sets of plaintiffs argue Reg BI does not adequately protect investors from conflicted advice. XYPN also claims Reg BI creates a competitive disadvantage for advisers because it makes it more difficult to differentiate the fiduciary duty that applies to advisers from what it calls the weaker Reg BI standard.
In response, the SEC argues that the Dodd-Frank law gave it the discretion and flexibility to promulgate a broker advice requirement separate from the adviser standard. It did so, it said, to preserve the broker business model, which may be more appropriate for some investors than the advisory model.
“Ultimately, petitioners offer only policy arguments that never find a legal hook,” the SEC argued in its brief.
In an amicus brief, former Rep. Barney Frank, D-Mass., and former Sen. Christopher Dodd, D-Conn., said their namesake law called for harmonizing broker and adviser advice standards “through a fiduciary rule.”
It’s difficult to predict how the court will rule.
Micah Hauptman, financial services counsel at the Consumer Federation of America, said the plaintiffs have a good shot at winning. He said the SEC had to twist and turn to claim it was not ignoring a congressional mandate for a uniform fiduciary standard.
“I don’t think those contortions will stand,” Hauptman said.
But Barry Temkin, a partner at Mound Cotton Wollan & Greengrass, said “the chances are excellent” the SEC will prevail. He bases his optimism, in part, on what he says is permissive language in the Dodd-Frank law regarding a uniform fiduciary rule.
In addition, the SEC is on a favorable ground in the court where the lawsuit is being heard.
“The 2nd Circuit is more likely to defer to the SEC because of [the agency’s] expertise,” he said.