XYPN sues SEC to overturn Regulation Best Interest
ST. LOUIS — Less than 24 hours after seven states and the District of Columbia sued the SEC to vacate Regulation Best Interest, the XY Planning Network is jumping into the melee.
The firm is suing the commission, claiming the rule harms it and its network of more than 1,000 independent advisors by putting fiduciary planners at a competitive disadvantage, according to the lawsuit filed on Tuesday in the Southern District of New York. The lawsuit also claims Reg BI does not meet the standards of the Investment Advisers Act of 1940, which requires financial advisors to register with regulators and become subject to a fiduciary standard if they are compensated for financial planning.
“Financial advice should be fiduciary,” says Michael Kitces, cofounder of the XY Planning Network. “Our whole focus and mission is around delivering financial planning that's independent from product sales. It's all about real financial planning and real financial advice.”
Reg BI gives broker-dealers an edge over financial planners by allowing them to market and provide comprehensive financial planning to consumers while being subject to a lower standard than that of fiduciary planners, according to the lawsuit. It also prevents RIAs from differentiating themselves as fiduciaries.
“We are harmed because we participate in the registration of financial planners,” Kitces says. “It puts all of the XYPN community at a competitive disadvantage. They actually have to be fiduciaries when they do financial planning just because they don’t sell products.”
The only area that is subject to a fiduciary standard under the current rule is a managed account opened for a client, Kitces says. By definition, everything else get regulated under the lower broker dealer standard.
The lawsuit follows another legal challenge filed by eight attorneys general against the SEC in the Southern District of New York. The attorneys general represent New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia.
Reg BI “created massive amounts of consumer confusion,” says Alan Moore, CEO of the XY Planning Network.
The SEC did not immediately return a request for comment.
The legal challenge comes after years of contentious struggles over finding the appropriate standard of conduct, most notable the legal wrangling around the now defunct Department of Labor fiduciary rule. Others include the CFP Board’s effort to strengthen its fiduciary requirement for planners that faced significant industry pushback — and equally vocal support.
Further complicating the matter are several state securities regulators that have proposed their own fiduciary rules, with some citing the SEC’s Reg BI as motivation.
The SEC’s rule was hotly contested when it was proposed, with thousands of comment letters being sent to the commission before the rule was adopted in June. XYPN’s comment letter was cited multiple times in the final rule, Kitces says.
Broker-dealers and Wall Street trade groups gave Reg BI a much warmer reception than they did the Department of Labor’s fiduciary rule. A coalition of trade groups successfully sued last year to have that regulation overturned.
“The brokerage industry has been pretty consistent throughout in trying very hard to never be subject to a fiduciary rule,” Kitces says. “Thus, the world turns.”