Why XYPN Is Suing The SEC Over Regulation Best Interest’s Double-Standard For Financial Planning Advice



Since the beginning of the modern era of financial services regulation in the aftermath of the crash of 1929 and the Great Depression, Congress has recognized a fundamental difference between the activities of broker-dealers and registered investment advisers. Broker-dealers were in the business of literally brokering (effecting securities transactions for their customers) and dealing (effecting securities transactions for their own accounts) as a part of the capital formation process and operation of publicly traded investment markets. While registered investment advisers were in the business of providing advice itself. And accordingly, the two were assigned different regulatory standards, with a Suitability standard for sales-based, transactional brokerage activity, and a Fiduciary standard for advice.
Yet in recent decades, the rise of technology has made various brokerage services increasingly accessible to consumers directly (through the discount brokerage movement and then the emergence of online brokers), coupled with the emergence of the independent broker-dealer model (independent of the investment banks that used to own broker-dealers to facilitate the sale and distribution of public offerings they underwrote), has increasingly led broker-dealers in the direction of providing advice to supplement (or validate entirely) their value proposition to their customers. Leading to a blurring of the lines between broker-dealers and investment advisers, and leading Congress in enacting the 2010 Dodd-Frank legislation to direct the SEC to lift the standard of conduct for brokers to be at least as stringent as the standard for RIAs, recognizing the advice that broker-dealers now deliver.
However, in issuing the new Regulation Best Interest rules, the SEC declined to equalize the standard of care for broker-dealer-delivered versus RIA-delivered advice as mandated by Dodd-Frank, and instead expanded the broker-dealer exemption that would allow broker-dealers to even more easily provide comprehensive financial planning advice without being subject to a fiduciary standard for that advice, nor for the implementation of that advice, and without requiring such advisors to register as investment advisers either… which creates, literally, a double-standard for the delivery of financial planning advice.
Accordingly, last week XY Planning Network filed suit against the SEC to challenge Regulation Best Interest, recognizing that the SEC both failed to follow the provisions of Dodd-Frank to apply an advice standard for brokers at least as stringent as the RIA standard, and that the SEC has exceeded its authority by impermissibly trying to re-write the registration requirements to become an investment adviser to stipulate that investment advisers are only engaged in such fiduciary activity when they manage investment accounts and not with respect to the entire advisor-client relationship (even contradicting SEC’s own prior and concurrent guidance). Particularly when it comes to the delivery of comprehensive financial planning, which the SEC itself recognized in 2005 as being too comprehensive by its nature to be considered “solely incidental” to the sale of brokerage products, and instead would have required all financial planning to be delivered under the aegis of an RIA (before the 2005 rule itself was vacated in FPA vs SEC).
Ultimately, though, the purpose of the XYPN lawsuit against the SEC is not to undermine the ability of broker-dealers to engage as such; instead, the issue is simply that Congress has repeatedly prescribed that the delivery of financial advice must be delivered under a fiduciary standard of care, either by lifting the standards for brokers when providing such advice, or by requiring such advice to be delivered as a registered investment adviser in the first place. In other words, the point is not to challenge the broker-dealer model, but simply to separate brokerage sales from investment advice – as Congress mandated nearly 80 years ago – and instead let financial advisors be (fiduciary) advisors, and let brokers be brokers (who market and communicate their services as such to the public). Especially when delivering comprehensive financial planning, which by its very nature, is too holistic of an advice process to ever be solely incidental to the sale of brokerage products, and must instead be regulated the way all advice has ever been regulated: as fiduciary advice.
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