There’s a new battle raging over so-called “regulation by enforcement.”
The Financial Services Institute has just launched a campaign to halt the Securities and Exchange Commission’s Share Class Selection Disclosure Initiative — which FSI along with former SEC Commissioner Paul Atkins argue is regulation by enforcement.
FSI’s online “Call to Action” encourages interested parties to contact Congress, stating: “It’s time for the SEC to return to required rulemaking to impose new regulations, rather than regulating without rules.”
Former SEC Chairman Harvey Pitt argues, however, that, while he’s not a fan of regulation by enforcement, the securities regulator has long employed the practice and through the share-class initiative is trying to get a handle on a widespread industry problem.
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The initiative, FSI states, is the “kind of drive-by regulating without rules [that] harms independent financial services firms and American investors.”
Independent financial firms and advisors, FSI continues, “have a reasonable expectation the SEC will establish clear rules of the road before engaging in enforcement.”
In early March, the SEC announced that as a result of the share-class initiative, 79 investment advisors would return $125 million to clients as part of settled actions for directly or indirectly receiving 12b-1 fees for investments selected for clients without adequate disclosure, including disclosures that were inconsistent with the advisors’ actual practices.
The SEC enforcement division should “stay further enforcement actions” under the initiative, FSI argues, and not expand it further, “until appropriate rules addressing the Commission’s concerns have been adopted.”
With the initiative’s new focus on revenue sharing, “the SEC is compounding their mistake by extending the logic to other streams of revenue in phase two,” David Bellaire, FSI’s general counsel, told ThinkAdvisor on Friday in a statement. “It’s time for the SEC to call a timeout on regulating without rules. We are asking them to play the game fairly by proposing a rule and enforcing it prospectively.”
Atkins, CEO of Patomak Global Partners in Washington, noted in a recent ThinkAdvisor blog post that “alarmingly, in neither announcing the Initiative nor the subsequent settlements did the SEC cite violations of any particular rule or regulation as support for its view of the sufficiency of the disclosure — a disclosure that had long been standard in the industry — but instead referred to previously pressured settlements that do not carry the weight of law.”