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Does Reg BI Violate the Advisers Act?

Monday, September 23, 2019

With industry groups failing to take the initiative in challenging the new Regulation Best Interest Advice (Reg BI), Michael Kitces and Alan Moore of XY Planning seek to take on the SEC directly. On behalf of Investment Advisers across the US, Kitces and Moore filed suit against the SEC on September 10th, on what they see as a violation of the Investment Advisers Act of 1940. Kitces and Moore seek to tackle an issue that strikes at the heart of what it means to be a fiduciary, and what is required by the Advisers Act. 

Their court challenge comes after seven states and the District of Columbia brought suit against the SEC, claiming the proposed rule confuses the difference between brokers and advisers, and makes it easier for brokers to market themselves like advisers despite the potential conflict of interest. One might expect a large industry group to challenge a regulation that may harm the interests of the industry and consumers. Strangely, leading industry groups have been silent. Tired of waiting, Kitces and Moore, have decided to leap into the fray. At their own expense, they retained the services of Washington, D.C. law firm Gupta Wessler, PLLC who specializes in tackling government regulation. 

While the states intend to challenge Reg BI on the grounds that it creates client confusion between brokers and advisers (it does), Kitces and Moore have chosen to focus on a more fundamental issue: Reg BI may violate the Advisers Act of 1940. As the pair point out, the Investment Advisers Act requires anyone delivering compensated financial advice to be an RIA, and RIAs are required to follow the fiduciary standard. Reg BI would allow brokers to give advice to clients while claiming that they act in the “best interest” of the client. Meanwhile, brokers are held to a lower standard than Advisers, and your average client will be none the wiser. As Kitces points out, “Because of the way the regulation is written, consumers will now get a lower standard… [because broker-dealers] can now give worse advice with higher cost products, and [they would be] less accountable for [their] worst recommendations because [of their position as] a sales person.”

According to Kitces and Moore, the regulation “best interest” rule will do more harm than good. Not only can brokers provide advice under a lesser standard, but the new regulation can potentially mislead the client into believing brokers are acting under the higher standard RIAs are held to. Kites contents that, “Even the name of the rule will cause harm to consumers.” It is highly unlikely your average client will be able to tell the difference between the “best interest” standard and the fiduciary duty of an Investment Advisor. Some might even believe them to be one and the same, preventing the customer from making an informed decision about whether to use the services of a broker or an adviser.      

Kitces and Moore say they may be willing to drop the suit if the SEC required that brokers no longer provide financial planning advice without RIA registration and adherence to the fiduciary standard. Whether the SEC acts in the best interest of customers, remains to be seen.     

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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