Xy Planning Network, LLC v. U.S. Sec. & Exch. Comm'n, Docket Nos. 19-2886-ag(L)

963 F.3d 244

XY PLANNING NETWORK, LLC, Ford Financial Solutions, LLC, State of New York, State of California, State of Connecticut, State of Delaware, State of Maine, District of Columbia, State of New Mexico and State of Oregon, Petitioners,

v.UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Walter Clayton, in His Official Capacity as Chairman of the United States Securities and Exchange Commission, Respondents.

Docket Nos. 19-2886-ag(L)

19-2893-ag(CON)

August Term, 2019

United States Court of Appeals, Second Circuit.

Argued: June 2, 2020

Decided: June 26, 2020

Deepak Gupta (Jonathan E. Taylor, Daniel Wilf-Townsend, on the brief), Gupta Wessler PLLC, Washington, DC, for Petitioners XY Planning Network, LLC and Ford Financial Solutions, LLC.

Ester Murdukhayeva (Attorney General Letitia James, Solicitor General Barbara D. Underwood, Steven C. Wu, Matthew Colangelo, Kevin Wallace, Jeffrey A. Novak, Rita Burghardt McDonough, Jonathan Zweig, on the brief), New York, NY, for Petitioner State of New York.

Jeffrey A. Berger (Robert B. Stebbins, Michael A. Conley, Daniel E. Matro, on the brief), Washington, DC, for Respondents United States Securities and Exchange Commission and Walter Clayton.

Attorney General Xavier Becerra, Matthew Rodriguez, Martin Goyette, Amy Winn, Nathaniel R. Spencer-Mork, San Francisco, CA, for Petitioner State of California.

Attorney General William Tong, Joseph J. Chambers, Hartford, CT, for Petitioner State of Connecticut.

Attorney General Kathleen Jennings, Marion Quirk, Joseph E. Gibbs-Tabler, Jillian Lazar, Wilmington, DE, for Petitioner State of Delaware.

Attorney General Aaron M. Frey, Gregg D. Bernstein, Augusta, ME, for Petitioner State of Maine.

Attorney General Hector Balderas, Nicholas M. Sydow, Tania Maestas, Santa Fe, NM, for Petitioner State of New Mexico.

Attorney General Karl A. Racine, Loren L. AliKhan, Jacqueline R. Bechara, Graham E. Phillips, Washington, DC, for Petitioner District of Columbia.

Attorney General Ellen F. Rosenblum, Brian A. de Haan, Portland, OR, for Petitioner State of Oregon.

Todd M. Galante, Piro Zinna Cifelli Paris & Genitempo, LLC, Nutley, NJ, for Amicus Curiae Financial Planning Association in support of Petitioners.

Brianne J. Gorod, Ashwin P. Phatak, Elizabeth B. Wydra, Clare E. Riva, Constitutional Accountability Center, Washington, DC, for Amici Curiae Current and Former Members of Congress in support of Petitioners.

Dennis M. Kelleher, Better Markets, Inc., Washington, DC, for Amici Curiae Better Markets, Inc. and the Consumer Federation of America in support of Petitioners.

Adam J. Weinstein, Gana Weinstein LLP, New York, NY, for Amicus Curiae The Public Investors Arbitration Bar Association in support of Petitioners.

Jesse Panuccio, Jordan R. Goldberg, Boies Schiller Flexner LLP, Washington, DC, for Amici Curiae Representatives Ann Wagner, Andy Barr, J. French Hill, Blaine Luetkemeyer, and Senator Tom Cotton in support of Respondents.

Kelly P. Dunbar, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, DC, for Amici Curiae the Securities Industry and Financial Markets Association, the Chamber of Commerce of the United States of America, the American Council of Life Insurers, and the Financial Services Institute in support of Respondents.

Before: Sullivan, Park, and Nardini, Circuit Judges.

Judge Sullivan concurs in part and dissents in part in a separate opinion.

Park, Circuit Judge:

Investment advisers and broker-dealers both offer financial services to retail customers. Under federal law, investment advisers owe a fiduciary duty to their clients, but broker-dealers do not. The traditional distinctions between the services offered by the two types of firms have blurred in recent decades, raising questions about this standard-of-care framework. As a result, in 2019, the Securities and Exchange Commission ("SEC") adopted Regulation Best Interest, which imposes a new "best-interest obligation" on broker-dealers.

Petitioners—an organization of investment advisers, an individual investment adviser, seven states,¹ and the District of Columbia—now challenge Regulation Best Interest as unlawful under the Administrative Procedure Act ("APA"), 5 U.S.C. § 706(2). They argue that the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") requires the SEC to adopt a rule holding broker-dealers to the same fiduciary standard as investment advisers. But Section 913(f) of the Dodd-Frank Act grants the SEC broad rulemaking authority, and Regulation Best Interest clearly falls within the discretion granted to the SEC by Congress. Although Regulation Best Interest may not be the policy that Petitioners would have preferred, it is what the SEC chose after a reasoned and lawful rulemaking process.

We thus hold that: (1) the individual investment-adviser petitioner has Article III standing to bring its petition for review, but the state petitioners do not; (2) Section 913(f) of the Dodd-Frank Act authorizes the SEC to promulgate Regulation Best Interest; and (3) Regulation Best Interest is not arbitrary and capricious under the APA.

For these reasons, we deny the petitions for review.

I. BACKGROUND

A. Regulatory Background

Broker-dealers effect securities transactions for customers, for which they typically charge a commission or other transaction-based fee. see 15 U.S.C. §§ 78c(a)(4)(A) (defining brokers), 78c(a)(5)(A) (defining dealers). In connection with their services, broker-dealers often provide advice and make recommendations about securities transactions and investment strategies. When doing so, they are generally subject to a "suitability" standard of care, which arises from the federal securities laws, Financial Industry Regulatory Authority ("FINRA") rules, and SEC precedent. This standard requires broker-dealers to "have a reasonable basis to believe that a recommended transaction or investment strategy ... is suitable for the customer." FINRA Rule 2111(a).

Investment advisers, on the other hand, provide advice and other discretionary services on an ongoing basis, for which they typically charge recurring fees based on a percentage of the assets they manage. Investment advisers are regulated under the Investment Advisers Act of 1940 ("IAA") and owe a fiduciary duty to their clients. see 15 U.S.C. § 80b-2(a)(11)(C) (defining investment adviser); SEC v. Capital Gains Research Bureau, Inc. , 375 U.S. 180, 194, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963) (describing "an affirmative duty of utmost good faith, and full and fair disclosure of all material facts, as well as an affirmative obligation to employ reasonable care to avoid misleading ... clients" (internal quotation marks omitted)). The IAA's definition of investment adviser has a "broker-dealer exemption," which excludes "any broker or dealer whose performance of such services is [1] solely incidental to the conduct of his business as a broker or dealer and [2] who receives no special compensation therefor." 15 U.S.C. § 80b-2(a)(11)(C). A business may register as both an investment adviser and a broker-dealer.²

B. The Dodd-Frank Act

In 2010, Congress authorized the SEC to promulgate new standards of conduct for broker-dealers and investment advisers under the Dodd-Frank Act, Pub. L. No. 111-203, § 913, 124 Stat. 1376, 1824–30. Section 913(b) of the Dodd-Frank Act directed the SEC to study "the standards of care for brokers, dealers, [and] investment advisers." Id . at 1824–25. Sections 913(f) and (g), the main provisions at issue here, concern the SEC's rulemaking authority.

Section 913(f) states that the SEC "may commence a rulemaking, as necessary or appropriate in the public interest and for the protection of retail customers ... to address the legal or regulatory standards of care for brokers, dealers, [and] investment advisers." Id . at 1827. In doing so, the SEC "shall consider the findings[,] conclusions, and recommendations" of the Section 913(b) study. Id. at 1828.

Section 913(g)(1) states that the SEC "may promulgate rules to provide that, with respect to [broker-dealers], when providing personalized investment advice about securities to a retail customer[,] ... the standard of conduct for such [broker-dealers] ... shall be the same as the standard of conduct applicable to an investment adviser ...." Id . Section 913(g)(2) provides that the SEC "may promulgate rules to provide that the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers[,] ... shall be 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 .... [S]uch standard of conduct shall be no less stringent than the standard applicable to investment advisers under [the IAA]." Id.

In 2011, SEC staff issued the Section 913(b) study and recommended that the SEC adopt a "uniform fiduciary standard ... regardless of the regulatory label (broker-dealer or investment adviser) of the professional providing the advice." App'x at 328.

C. Regulation Best Interest

In June 2019, the SEC adopted Regulation Best Interest, which establishes a new standard of care for broker-dealers serving retail customers.³ Regulation Best Interest , 17 C.F.R. § 240.15l -1 (2019). Specifically, Regulation Best Interest imposes a "best-interest obligation" on broker-dealers, requiring them to "act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the [broker-dealer] ... ahead of the interest of the retail customer." Id . The best-interest obligation has four components: (1) a "disclosure obligation," requiring broker-dealers to disclose any material facts relating to the scope and terms of the relationship with the customer, as well as all material conflicts of interest related to their investment recommendations; (2) a "care obligation," requiring broker-dealers to "[h]ave a...