November 27, 2021

Volume XI, Number 331


November 24, 2021

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The Second Circuit Hears the Reg BI Challenge Oral Argument

A three-judge panel of the Second Circuit entertained arguments on June 2, 2020, in a lawsuit seeking to vacate and set aside the Securities and Exchange Commission’s (SEC’s) Regulation Best Interest (Reg BI). By way of background and in brief summary, Reg BI requires that broker-dealers make recommendations that are in the “best interest” of the retail customer, disclose conflicts of interest, and specify the services customers are receiving and the associated costs. As previously covered in this blog, the plaintiffs initially challenged Reg BI in September 2019. Despite this pending legal challenge and brokerage firms’ strained resources due to the pandemic and quarantining, SEC Chairman Jay Clayton said on April 2, 2020, in a public statement that the June 30, 2020, compliance deadline for Reg BI would remain.

At the oral argument, counsel for a group of investment advisers argued that Reg BI does not meet the expectations of the Dodd-Frank Act. They argued that Congress required the SEC to “harmonize” the investment adviser and broker-dealer regulatory regimes. Further, they argued that Congress intended for the SEC to extend the fiduciary duty imposed on investment advisers to broker-dealers, but the SEC failed to do so. Eight states represented by the New York attorney general’s office at the argument joined in by advocating the view that Reg BI was contrary to law and exceeded the SEC’s authority.

In their briefs, the plaintiffs had argued that in not rising to a fiduciary duty standard, Reg BI resulted in a regulatory regime similar to FINRA’s suitability rule, and this offers less, not greater, retail investor protection. Along those lines, two of the judges on the Second Circuit panel noted at the argument that Congress had given the SEC discretion on whether to take any action at all. Thus, the SEC could have left the FINRA suitability standard in place. Among the arguments in response, the SEC argued that if Reg BI were vacated, the regulatory regime for broker-dealers reverts to the suitability standard, which would result in less investor protection.

With Reg BI’s effective date less than 30 days away, we will monitor the Second Circuit closely for a ruling on this challenge to the regulation. As previously described in this blog, the SEC’s Office of Compliance Inspections and Examinations issued a risk alert on April 7, 2020, providing guidance regarding its expectations for how it will examine for Reg BI compliance after June 30, 2020.

© 2021 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume X, Number 156

About this Author

James G. Lundy, Drinker Biddle, regulatory investigations lawyer, financial services compliance attorney

James G. Lundy represents clients in Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), self-regulatory organization, and other financial regulatory agency investigations and examinations, and compliance and governance counseling, white collar criminal investigations, and complex business litigation.

With 12 years of senior SEC experience and more than two years of in-house experience at a futures and securities brokerage firm, Jim has developed an in-depth working knowledge of the various...

Sandra Dawn Grannum, Finance, Securities Lawyer, Drinker Biddle Law Firm

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has tried more than 50 arbitrations before the NASD and FINRA through award represented brokerage firms, banks, clearing firms, and associated persons. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

Bruce Ashton, Drinker Biddle Law Firm Los Angeles, Employment Benefits Attorney

Bruce L. Ashton has more than 35 years of experience handling employee benefits matters. His practice concentrates on representing plan service providers (including RIAs, independent record-keepers, third-party administrators, broker-dealers and insurance companies) in fulfilling their obligations under ERISA. His experience includes representing public and private sector plans and their sponsors, negotiating the resolution of plan qualification issues under IRS remedial correction programs, advising and defending fiduciaries on their obligations and...

Fred Reis Faegre Drinker Biddle Law Firm, Los Angeles, Labor and Employment Law Attorney

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

Fred works with both private and public sector entities and their plans and fiduciaries and represents plans, employers and fiduciaries before federal agencies such as the DOL and IRS. He consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) recordkeeping services, investment products and...

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