Opposition, and Support, Continue for Reg BI

This past October, the U.S. District Court for the Southern District of New York dismissed a consolidated lawsuit seeking to derail implementation of the Securities and Exchange Commission (SEC) Regulation Best Interest (Reg BI) rulemaking package.

Legal experts suggest that the 2nd U.S. Circuit Court of Appeals is unlikely to take up the case and side with plaintiffs to halt Reg BI—even if it does, a Supreme Court ruling could then be required to ultimately stop the Trump Administration’s push to implement the new conflict of interest standards.

Still, various parties, including some fiduciary advisory firms, consumer advocates and a group of progressive states’ attorneys general, continue to urge the 2nd Circuit to stop the rulemaking.

These opponent argue that Reg BI fails to meet the Congressional mandate established in the Dodd–Frank Act, the sweeping financial industry reform law named for two former Democrat legislators—Christopher Dodd and Barney Frank—who have actually filed their own brief in this matter before the 2nd Circuit. According to Dodd and Frank, one of the regulatory shortcomings their eponymous 2010 act addressed was the inconsistency between the standards of conduct applicable to broker/dealers (B/Ds) and investment advisers when providing investment services to consumers.

Dodd and Frank posit that, as Congress was crafting the Dodd–Frank Act, it knew expecting a full economic recovery was unlikely without restoring the public’s trust in markets by eliminating the consumer confusion caused by these different standards of care. To address that problem, Congress directed the SEC to conduct a study on the effects of the different standards of conduct for broker/dealers and investment advisers, and to make relevant recommendations to address any inconsistency between the standards.

“Congress also provided that any rule responding to a regulatory gap in this area must provide for a uniform fiduciary duty to apply to all broker/dealers and investment advisers,” Dodd and Frank argue. “The Dodd–Frank Act explicitly required that this uniform standard ‘shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice.’”

Their brief concludes that Reg BI violates Congress’ mandate in Dodd–Frank Section 913, which required that any rule promulgated to address the inconsistent standards of care between investment advisers and broker/dealers must harmonize those standards of care.

“The rule therefore cannot stand,” Dodd and Frank argue.

Notably, Reg BI continues to receive strong support from other stakeholders, including the majority of the financial adviser, insurance agent and broker/dealer community. In fact, these groups are concurrently seeking to halt individual states’ efforts to create local conflict of interest mitigation frameworks that go well above and beyond those programmed into Reg BI.

Ground zero for this fight is in the Commonwealth of Massachusetts, where Secretary of the Commonwealth William Galvin recently signed off on the proposal of a rule that would impose an explicit fiduciary conduct standard for all broker/dealers, agents, investment advisers and representatives working in the state.

One public comment letter submitted to Secretary Galvin summarizes the skeptical argument nicely: “The SEC’s recently adopted Regulation Best Interest establishes a workable national best interest standard of conduct that provides a significant strengthening of the standard of care for broker/dealers and their representatives while also preserving the existing business models (advisory and brokerage) that consumers want and need. In addition, the National Association of Insurance Commissioners is in the final stages of amending its model regulation on annuity recommendations and sales to include a best interest standard that aligns well with the SEC’s Reg BI.”