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US Securities and Exchange Commission

States, Investment Adviser Network Attacks SEC’s Interpretation of Dodd-Frank in Reg BI Rules

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Bill Flook

The SEC exceeded its authority under the Dodd-Frank Act in issuing its “Best Interest” standard for broker-dealers, a coalition of states and a network of investment advisers both argued in December 27, 2019, briefs urging an appeals court to strike down the rules.Sec. 913 of PL111-203

The consolidated lawsuit, filed at the Second Circuit Court of Appeals, is part of a larger campaign against the SEC’s Regulation Best Interest, a cluster of rules issued in June designed to help retail investors spot and avoid conflicted financial advice.

Critics say the rules fall well short of a true fiduciary standard for broker-dealers. Investment advisors are today, under the Investment Advisers Act of 1940, subjected to a more rigorous fiduciary standard compared to the SEC’s rules, which have a compliance deadline of June 30, 2020.

The petitioners are New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon, and D.C., as well as XY Planning Network, an organization of financial planners working on a a fee-for-service basis, and Ford Financial Solutions LLC, a registered investment adviser and member of XY Planning Network.

A core argument of both groups is that the SEC improperly invoked Dodd-Frank to issue the rules in a way that oversteps the commission’s powers under the 2010 Wall Street reform law.

Prior to the SEC finalizing the rule, Democrats in Congress wanted the market regulator to make full use of its authority under Section 913(g) of the Dodd-Frank Act, which empowers the commission to put in place a uniform fiduciary duty across investment advisers and broker-dealers.Sec. 913(g) of PL111-203

The commission instead relied on the more generalized Section 913(f), which gives the SEC the authority to issue rules “to address the legal or regulatory standards of care for brokers, dealers, investment advisers,” among others. SEC Chairman Jay Clayton has said Reg BI, as issued, will protect investors through enhanced disclosures and other requirements.Sec. 913(f) of PL111-203

The states, in their late December brief, criticized the SEC’s reliance on Section 913(f), along with certain provisions of the Securities Exchange Act of 1934, to “support the final rule’s non-fiduciary standard of conduct.”

“The Commission is wrong,” the states wrote. “None of the statutes on which the Commission relies authorizes the agency to disregard Congress’s intent to impose a fiduciary obligation on broker-dealers offering personalized investment advice to retail investors as a substantial part of their business.”

Likewise, XY Planning Network, in its brief, attacked the SEC’s reasoning that it can build rules regulating standards of conduct for broker-dealers using Section 913(f), and not Section 913(g).

“But if that were true, there would be no reason for Section 913(g) of the Act to exist. That section provides a detailed, specific grant of rulemaking authority that gives the SEC a clear directive: after studying the market and the laws, decide whether to harmonize the standard of care for those giving personalized financial advice,” the group wrote. “If Section 913(f) gave the SEC general authority to regulate the standard of care more broadly, there would be no need for the specific powers granted in Section 913(g).”

The SEC issued the rules in Release No. 34-86031Regulation Best Interest: The Broker-Dealer Standard of ConductRelease No. 34-86032Form CRS Relationship Summary; Amendments to Form ADVRelease No. IA-5248Commission Interpretation Regarding Standard of Conduct for Investment Advisers; and Release No. IA-5249, and Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser.

Reg BI puts in place four obligations to broker-dealers. They must disclose material facts about the relationship and recommendations, including specific disclosures about the capacity in which the broker is acting, fees, the type and scope of services provided, conflicts, limitations on services and products, and whether they provide monitoring services.

Brokers must also exercise reasonable diligence, care, and skill when recommending an investment to a retail customer; understand potential risks, rewards, and costs associated when making the recommendations in the customer’s best interest; consider the costs of the recommendation; and have policies and procedures reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest, among other provisions.


This article originally appeared in the January 3, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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