The financial planning firm joins US states and the District of Columbia in suing the regulator.

A financial planning firm is suing the US Securities and Exchange Commission over its recent “Best Interest” rule over financial advice, adding to other organizations who are alarmed that the regulator’s rule enables conflicts of interest. 

XY Planning Network announced yesterday at its XYPN LIVE National Conference that it is filing a lawsuit in the Southern District of New York to challenge the SEC over its new Regulation Best Interest rule. It claims that the SEC has “exceeded its regulatory authority” with the rule by permitting comprehensive financial planning services to be delivered in connection with the sale of brokerage products without requiring the financial planner to register as an investment advisor and/or without fully subjecting such financial planning advice itself to an RIA's fiduciary duty. 

The lawsuit follows a similar action filed earlier this week by seven states and the District of Columbia against the SEC. The claimants say the new rule is too weak. New York Attorney General Letitia James reportedly said in a statement that the SEC rule puts the savings and retirement accounts of Americans at risk by exposing them to potential conflicts of interest.

The SEC has yet to comment on the lawsuits. Reports said the regulator did not respond to requests for comment.

In its lawsuit, XY Planning alleges that the SEC also exceeded its authority by reinterpreting investment advisor registration requirements by permitting dual-registrants to use advisor-like titles and hold out as being in the business of providing financial planning advice while actually selling non-advisory brokerage services and products.

SEC commissioners in early June voted by three to one for the Regulation Best Interest, and supported other actions to improve disclosures and clarify advisors’ responsibilities. Regulators had started proposals for such a move a year ago. They follow a failed attempt by the Department of Labor to enact a fiduciary rule that would have introduced a “best interests” test of how financial advice is provided. (In the case of the DoL's Fiduciary Rule, a key issue was whether broker-dealers’ recommendations to clients counted as “advice” and should be subject to a fiduciary responsibility rule or not. This remains a big area of contention.)

However, senior wealth management industry figures have criticised the SEC as a “far cry from the existing fiduciary standard required of registered investment advisors”. (See related commentary here.)

Explaining its lawsuit, XY Planning said: "We are ferocious advocates for the impact financial planning can have to help clients live their great lives, and therefore the fiduciary responsibility that a financial planner must have when delivering such advice to their clients. A duty that is required of all registered investment advisors, and that Congress first recognized in 1940 by requiring that anyone who delivers advice for compensation, and is in the business of providing such advice, must register and be regulated accordingly.”

"With Reg BI, however, the SEC is permitting brokers and dual-registrants to provide financial planning advice, without being subject to full RIA registration and/or without being subjected to the fiduciary duty that Congress prescribed for such advice,” XYPN's co-founder and CEO Alan Moore said.

Moore and fellow XY Planning founder Michael Kitces issued a public comment letter to the SEC after the initial draft of Regulation Best Interest was released, specifically raising concerns about the need to separate product sales from financial planning and investment advice. 

"When a consumer hires a financial planner, they expect that the advice they receive will be in their best interests at all times, which is the very essence of a fiduciary rule and the definition of 'advice' itself," Moore said. "By allowing brokers to hold out as financial planners and provide financial planning advice upfront, and then switch to non-advisory services selling brokerage products during the implementation phase, the SEC amplifies the very consumer confusion they claimed they were seeking to fix with Regulation Best Interest,” he added.

"It is our hope that the courts will recognize that when Congress created the Investment Advisers Act of 1940, they created a clear and bright-line delineation between brokerage salespeople in the business of selling products, and investment advisors in the business of providing financial advice, and that the SEC's Reg BI has inappropriately attempted to redefine this bright line separation,"  Kitces said.

"In the end, there is a place for both the sale of brokerage products and services, and financial planning and other investment advice, but reducing consumer confusion requires a clear separation between the two, including a requirement that all financial planning advice be delivered under an RIA and subject to the RIA's fiduciary duty, that brokers and dual-registrants should not be able to use titles that connote they are in the business of providing fiduciary advice unless they do so at all times, and that once a consumer engages a fiduciary advisor that advisor remains a fiduciary for the entirety of the advice relationship and such advisors cannot downgrade their fiduciary duty when implementing brokerage products pursuant to that fiduciary advice,” he added.