XYPlanning Network co-founder and blogger Michael Kitces

The U.S. Court of Appeals for the 2nd Circuit ruled late Fridayafternoon that Section 913(f) of the Dodd-Frank Act grants theSecurities and Exchange Commission broad rulemaking authority, "andRegulation Best Interest clearly falls within the discretiongranted to the SEC by Congress."

The court stated that "although Regulation BestInterest may not be the policy that petitioners" XY PlanningNetwork and the seven states attorneys general and the District ofColumbia "would have preferred, it is what the SEC chose after areasoned and lawful rulemaking process."

Reg BI goes into effect on Tuesday.

The court held that the individual investment-advisorpetitioner, XY Planning Network, has standing to bring its petitionfor review because of competitive disadvantage, but the statepetitioners do not.

Regulation Best Interest "is not arbitrary and capricious" underthe Administrative Procedures Act, the court ruled.

Michael Kitces, co-founder of XY Planning Network, said in anemailed comment shared with ThinkAdvisor: "While we appreciate thecourt's acknowledgment that XYPN members and other registeredinvestment advisors will be put at a competitive disadvantage byRegulation Best Interest — affirmingour standing to challenge the rule — weare incredibly disappointed that the courts have nonethelessallowed Regulation Best Interest to stand."

The Dodd-Frank Act authorizes the SEC to promulgate Reg BI, the28-page brief states.

"Congress stated that the SEC 'may commence a rulemaking, asnecessary or appropriate in the public interest and for theprotection of retail customers . . .  to address the legalor regulatory standards of care for' broker-dealers," the rulingstated.

"This broad grant of permissive rulemaking authority encompassesthe best-interest rule adopted by the SEC," it added.

Contrary to petitioners' argument, the court ruled, Section913(g) does not narrow the scope of Section 913(f) 9 but ratherprovides a separate grant of rulemaking authority.

"The key language in each of the provisions at issue is 'may,'which is permissive and reflects Congress's grant of discretionaryrulemaking authority to the SEC," the court ruled.

Kitces added in his statement that the InvestmentAdvisers Act of 1940 "has made it clear that brokers provideimportant but distinctly non-advice functions in the marketplace,while those who are in the business of advice itself mustbe registered as investment advisers and be held to afiduciary standard."

Dodd-Frank "gave the SEC the option to permit brokers to be inthe business of personalized advice, under the stipulation that ifthey offered such advice, that advice must again be held to afiduciary standard," he said.

Yet, Kitces continued, while the Investment Advisers Act "haslong permitted brokers to be (non-fiduciary) brokers and advisersto be (fiduciary) advisers, and Dodd-Frank gave the SEC the optionto allow brokers to become fiduciary advisers alongside investmentadvisers, the SEC chose neither of these paths with Regulation BestInterest … ."

The popular blogger noted that the SEC "in fact reinterpretedand dangerously broadened the solely incidental exemptionspecifically to allow more brokers to provide non-fiduciary adviceunder Regulation Best Interest."