Challenges to Reg BI Endorsed by Investor Advocates
Lawsuits filed against the Securities and Exchange Commission this week by seven states, the District of Columbia and two financial planning firms over the SEC’s new Regulation Best Interest has returned issues of advisory conflicts of interests to the spotlight and could change the rule, investor advocates said.
Attorney generals in New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia filed a federal lawsuit in the Southern District of New York on Monday, calling the SEC’s Reg BI rule package “flawed” and violative of the investor protection framework laid out in the 2010 Dodd-Frank Act passed in the wake of the financial crisis.
On Tuesday, XY Planning Network—a coalition of financial planners created by Michael Kitces and Alan Moore—joined Ford Financial Solutions in challenging Reg BI in a second lawsuit in the Southern District.
The regulation, scheduled to become effective next summer, is “anti-competitive,” harming registered investment advisers by letting brokers hide behind a best-interest label and confusing investors about the differences between brokers and RIAs, the planning lawsuit says.
The states focused on Reg BI’s failure to require require brokers, dually-registered advisers and their firms to adhere to the same fiduciary standard as RIAs—who differentiate themselves by marketing their fiduciary obligations. The rule package does not prohibit brokers from calling themselves advisors.
“Under the SEC’s so-called ‘best interest’ rule … a broker/dealer is permitted to take into account its own personal interests in providing recommendations and advice to investors on how to invest their life savings,” the XY lawsuit says. “This new rule means that broker/dealers may maintain harmful conflicts of interests while being able to market themselves as trusted advisers acting in their client’s best interests.”
Barbara Roper, director of investor protection at the Consumer Federation of America and a member of the SEC’s investor advisory committee, welcomed the lawsuits.
“We strongly believe that Reg BI cannot be the last word on this topic,” she said. “Whether it means that a new administration will look to reopen it, or whether these lawsuits can help to accelerate this process, we believe that the rule needs to be reopened and revised to provide the strong protections that investors need and deserve when they turn to financial professionals for help.”
The SEC, which approved Reg BI in a 3-1 vote, didn’t use the clear authority Congress gave it to rein in conflicts of interest in any meaningful way, according to Roper.
Reg BI also disappointed some investor protection advocates by preserving disclosure as a means for RIAs to inform customers of their conflicts of interest.
“Disclosures are not sufficient, nobody reads Form ADV, Part 2,” said Nicole Boyson, a finance professor at Northeastern University on a panel titled “Death of the Fiduciary Rule” at this week’s WealthStack conference in Scottsdale, Arizona.
“If your advisor hands you a disclosure form, you think, ‘What an honest and good guy, I don’t need to read it,’”she said.
Roper takes some comfort from efforts by states such as Nevada and New Jersey to impose high-bar fiduciary standards on brokers, planners and advisors but said the best solution would be a federal solution stronger than what the SEC proposed.
A “strong, uniform fiduciary standard of care for brokers and advisors…would have the benefit of being consistent across all of the accounts that an investor might have at a single firm,” she said.