For independent financial advisers and firms, regulatory requirements not only shape their conduct — they shape every element of their businesses. From strategic planning to pricing decisions to technology platforms, advisers and firms must be mindful of the regulatory implications of everything they do, in order to avoid unexpected compliance complications and unforeseen costs in both dollars and time.
When regulatory obligations are not clearly defined by transparent and consistent rules, therefore, it becomes difficult or impossible for firms and advisers to effectively operate their businesses and fulfill their mission of providing professional guidance to clients.
With this in mind, the Financial Services Institute was concerned about the Securities and Exchange Commission's conduct of its recent share class selection disclosure initiative, which was launched in February 2018 and became an unfortunate example of "rulemaking by enforcement."
The SCSD initiative encouraged advisory firms to self-report instances in which they had received compensation from mutual funds for recommending certain share classes to clients. However, the SEC's enforcement staff could not cite a clear rule or regulation that firms may have violated or that comprehensively spelled out their disclosure obligations.
Instead, the SEC referred to previous enforcement actions and guidance (which are statements of the staff's views on a topic) to impose settlements. The program resulted in penalties of more than $125 million across 79 investment firms, along with ongoing questions — and the possibility of even stiffer penalties — for firms that did not self-report.
FSI is pleased to maintain a longstanding and productive dialogue with the SEC, and we have publicly praised the commission for its recent passage of Reg BI. We have been especially supportive of the SEC's progress in modernizing disclosure requirements through Form CRS.
For firms and advisers to confidently serve their clients, however, it is critical that the SEC return to basing its regulatory expectations and enforcement actions on clearly established rules.
These rules should be developed according to a consistent, transparent process that allows firms to comment and includes an appropriate phase-in period, with consideration given to grandfathering established practices.
This February, we sent a letter to the SEC articulating these views and requesting further dialogue to rein in future "rulemaking by enforcement" and clarify disclosure obligations regarding compensation tied to specific share classes.
Our letter also outlined our view that the commissioners should instruct the enforcement division to stay further enforcement actions under the SCSD initiative and refrain from expanding it further. Additionally, we argued that payments made under the initiative should be deemed restitution in order to help firms offset their losses via limited tax relief.
We have also brought our concerns on this issue to the attention of members of the Senate Banking Committee and other concerned legislators, seeking their help to return our industry to a more common-sense approach to rulemaking.
We are committed to working constructively with the SEC and lawmakers to remedy this challenge on behalf of clients, advisers and firms across the country.
Dale Brown is president and CEO of the Financial Services Institute.