Corporate Accountability

XY Planning Network, LLC v. SEC

In XY Planning Network, LLC v. SEC, the United States Court of Appeals for the Second Circuit is considering whether the Securities and Exchange Commission’s “Best Interest Rule” violates the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Case Summary

In July 2019, the Securities and Exchange Commission (SEC) promulgated a final rule setting the standard of conduct that applies when broker-dealers give recommendations and advice to individuals about how to invest their money. This so-called Best Interest Rule requires broker-dealers to act in their clients’ “best interest,” but allows them to take their own financial interests into account when advising their clients as long as they do not place those interests ahead of clients’ interests. This standard is less stringent than the standard that applies to investment advisers, who are considered fiduciaries and cannot take their own financial interests into account at all when advising clients.

In September 2019, a group of states challenged the Best Interest Rule in federal court on the ground that it violates Dodd-Frank. An organization of financial planners working under registered investment advisers, along with an individual registered investment adviser, also challenged the rule. The district court, believing the Court of Appeals was the appropriate venue to challenge the Rule, consolidated the cases and dismissed them both, directing the parties to seek review in the Second Circuit. Both plaintiffs filed petitions for review in the Second Circuit, which is now reviewing the case.

In January 2019, CAC filed an amici curiae brief on behalf of current and former members of Congress in support of Petitioners. Our brief makes three main points. First, Congress enacted Section 913 of Dodd-Frank in response to the consumer confusion and financial market instability caused by the inconsistency between standards of conduct for broker-dealers and investment advisers. At the time Congress passed Dodd-Frank, investment advisers were required to act in their clients’ best interests without taking their own financial interests into account, while broker-dealers could consider their own financial interests when giving financial advice. The increasing complexity of the financial industry, and the resulting overlap between the advice given by broker-dealers and investment advisers, meant consumers were often unable to understand the standards of care that applied to the advice they received.

Second, as its text and history make clear, Congress passed Section 913 to ensure that any rule the SEC promulgated to address this problem harmonized the standards of care governing broker-dealers and investment advisers. Dodd-Frank directed the SEC to study this problem, and it specified that any rule the SEC promulgated must establish a uniform standard “to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

Third, the brief argues that the Best Interest Rule violates this statutory mandate because it fails to harmonize the standards of care for broker-dealers and investment advisers.  Rather, the Rule codifies the status quo that existed when Congress passed Dodd-Frank, which subjected broker-dealers to a less stringent standard of care that permitted them to take into account their own interests when giving financial advice. The Rule is therefore at odds with the clear statutory mandate of Dodd-Frank because it ignores Congress’ direction and the recommendations of its own staff and instead perpetuates the very inconsistency in the standards of care that Congress passed the Act to fix.

Case Timeline

  • January 3, 2020

    CAC files an amici curiae brief

    2d Cir. Amici Br.
  • June 2, 2020

    Second Circuit hears oral arguments