New FSI Report Takes On 'Regulation by Enforcement'

The word compliance with related words drawn on a sheet of paper

The Financial Services Institute released steps the Securities and Exchange Commission should take to end what FSI claims is the agency’s long-held practice of regulation by enforcement.

In a new white paper released Tuesday, FSI defines regulation by enforcement as “when an enforcement action involves certain conduct that market participants did not previously understand to be a violation of the federal securities laws despite these market participants’ reasonable efforts to interpret existing laws, regulations, policies, and guidance from the SEC and other agencies.”

FSI, a trade group for independent financial advisors and the firms they affiliate with, has seen the SEC’s crackdown on 12b-1 fees via its Share Class Selection Disclosure Initiative as “backdoor regulation,” or regulation by enforcement.

The securities regulator, according to FSI’s paper, “should adopt a procedural framework, through concrete procedures, to detect and prevent certain unfair enforcement practices by the commission and its staff.”

The paper provides “common-sense solutions that will assist the SEC in detecting and preventing regulation by enforcement, and we welcome opportunities to collaborate with the SEC” to curtail the practice, Dale Brown, FSI’s president and CEO, said Tuesday in a statement announcing the paper.

FSI ”members have experienced the harmful effects of regulation by enforcement first-hand,” Brown said. “We share the Commission’s investor protection goals, and we strongly support regulations adopted through the proper rulemaking process. However, regulation by enforcement hinders independent financial services firms’ and financial advisors’ ability to properly serve their clients and confidently operate their businesses.”

Regulation by enforcement, according to the report, includes “the circumvention of agency rulemaking requirements, violation of the rights of the regulated by not allowing the opportunity for notice and comment, and the undermining of the agency’s authority by generating a perception of unfairness.”

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