In the latest development in the lawsuit seeking to overturn the SEC’s Reg Best Interest rulemaking, the SEC challenges Petitioners’ standing to sue and argues it acted appropriately in enacting the regulation. We published in SAA 2020-05 (Feb. 5) a guest squib by Advisory Board Member Prof. Christine Lazaro describing this litigation. Here, Prof. Lazaro updates her earlier report and analysis.
A Review
To review: on September 10, 2019, two suits were filed in the Second Circuit against the SEC, challenging the Regulation Best Interest rulemaking (Reg BI): the first filed by XY Planning Network, LLC and Ford Financial Solutions, LLC; Docket No. 19-2886; the second filed by the States of New York, California, Connecticut, Delaware, Maine, New Mexico, and Oregon, and the District of Columbia; Docket No. 19-2893 (ed: we reported on the multi-State filing in SAA 2019-35 (Sep. 11)). On November 5, 2019, the cases were consolidated under Docket No. 19-2886. On December 27, 2019, the Petitioners filed their briefs.
The SEC Brief: Petitioners Lack Standing…
On March 3, 2020, the SEC filed its responsive brief in XY Planning Network LLC v. SEC. The Commission argues that both the XY Planning Petitioners and the State Petitioners lack standing to sue under Article III of the Constitution. First, the SEC claims that Petitioners have not demonstrated that the adoption of Reg BI will cause injury. Rather, the SEC argues that Petitioners have only argued that the failure to adopt a more stringent standard is what will cause their injury, which the brief states is insufficient to demonstrate causation. Second, the SEC argues that the relief requested by Petitioners will not redress their asserted injuries because undoing Reg BI will reinstitute the suitability standard, which will only exacerbate Petitioners’ injuries. Finally, the SEC argues that Petitioners’ claimed injuries are conjectural or hypothetical.
… and the Complaint Fails on the Merits
With respect to Petitioners’ challenges to Reg BI on the merits, the SEC argues that Dodd-Frank section 913 provided two different paths to permissible rulemaking in subsections (f) and (g). It claims subsection (f) is a broad grant of discretionary authority, separate from the permissive authority set forth in subsection (g). The SEC further argues that Reg BI does not contravene the broker-dealer exclusion of the Advisers Act. It argues that its understanding of the terms “solely incidental” and “special compensation” within the exclusion are consistent with the Advisers Act’s text and history. The SEC also argues that its adoption of a tailored standard of conduct for broker-dealers was not arbitrary and capricious. It was intended to enhance protections for investors while preserving access to advice. Finally, the SEC argues that its economic analysis satisfied its obligations under the Exchange Act to “consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.” The SEC argues that it reasonably considered the harm to investors flowing from conflicts of interest and reasonably analyzed the benefits of Reg BI.
Amici Briefs
Two Amicus Briefs were filed in support of the SEC: the first by Congressional Representatives Ann Wagner (R-MO), Andy Barr (R-KY), J. French Hill (R-AR), and Blaine Luetkemeyer (R-MO), and Senator Tom Cotton (R-AR); the second by SIFMA, the Chamber of Commerce of the USA, the American Council of Life Insurers, and the Financial Services Institute.
(ed: *Once again, the Alert thanks the Professor for her insightful analysis! **We usually don’t cover lawsuits prior to a decision, but this one is of great interest to our readers and is the exception to the rule. ***Email us at Help@SACArbitration.com for copies of either brief. ****See also SEC Chair Clayton’s announcement that the COVID-19 virus will not delay the June 30 implementation of Reg BI.)
