Strong financial industry criticism of what it calls the Securities and Exchange Commission’s proclivity to regulate through enforcement rather than rulemaking will continue this year, despite recent strong pushback from an SEC member.
For months, brokerages and their trade associations have denounced the SEC’s crackdown on inadequate disclosure of mutual fund fees. The agency has been zeroing in on financial professionals dually registered as brokers and advisers who fail to tell their customers they were recommended share classes with 12b-1 fees when less expensive classes were available in the same fund.
In December, SEC member Robert Jackson Jr. called industry criticism of the SEC’s share-class initiative “bull---t” and said brokers were simply trying to avoid regulation.
Despite that rebuke, the Financial Services Institute, which represents independent brokers and financial advisers, has crusaded against so-called regulation by enforcement and will make it a focus of its advocacy agenda this year.
“It remains our highest priority,” FSI Chief Executive Dale Brown told reporters Tuesday at the group’s OneVoice conference in San Diego.
Mr. Brown asserted that the SEC has changed the rules in the middle of the game when it comes to 12b-1 policy and that it is taking enforcement action without giving the industry appropriate notice.
Last year, Mr. Jackson colorfully countered that the industry is crying crocodile tears and simply doesn’t want the SEC to enforce 12b-1 disclosure standards.
“It’s unfortunate that he chose to characterize this serious issue that way,” Mr. Brown said. “We’re not going to back off from pursuing constructive engagement. We don’t call what the SEC’s doing pejorative names.”
Mr. Brown said FSI has requested meetings with Mr. Jackson and he hasn’t responded. Mr. Jackson will be leaving the SEC next month.
Mr. Jackson said he recently met with FSI but is not backing down from his questioning of the regulation-by-enforcement charge.
“As constituents across our markets know, during my tenure on the commission I’ve met with folks of all perspectives — including FSI, who I last saw a few weeks ago," Mr. Jackson said in a statement to InvestmentNews. "I’m just not convinced that our exceptional enforcement staff has pursued regulation by enforcement during my tenure, and remain incredibly proud of the tremendous results that our enforcement team gets for ordinary American investors every day.”
Repercussions for Regulation BI
Investor advocates assert that critics like Mr. Brown will level the same regulation-by-enforcement charge against Regulation Best Interest when it is enforced. The centerpiece of SEC’s investment-advice reform efforts, Reg BI is designed to raise the broker requirement above suitability and must be implemented by June 30.
The regulation does not however provide brokers with specific measures on how to act in a customer’s best interest, nor does it outline how they should mitigate conflicts of interest. Consequently, when the SEC finds firms in violation of Reg BI, investor advocates say groups like FSI cry foul because Reg BI is principles-based and doesn’t provide specific compliance requirements.
But Mr. Brown said the fact that Reg BI “is not overly prescriptive” is one of its strengths. He also said the regulation has been established through a long rulemaking process on which the industry has had input. He doubts it will be challenged as regulation by enforcement.
“On Regulation Best Interest, that’s possible, but because of how carefully they worked to craft the rule, give it the flexibility, the adaptability, our hope is they’ll avoid falling into that trap,” Mr. Brown said.
The industry just wants to know the rules of the road, said John Rooney, managing principal at Commonwealth Financial Network.
“It's retroactive application of standards that most rankles the industry,” said Mr. Rooney, chairman of the FSI Board. “We’re all happy to comply. Tell me what the rules of engagement are. Don’t in hindsight claim that a widespread industry practice that they’re well aware of was inappropriate.”
Mr. Brown also told reporters that FSI is doing well financially, having generated more than $10 million in revenue for the second straight year. He touted FSI’s efforts to help push Reg BI over the finish line and help get the SECURE Act passed.
“If there’s one word to summarize where FSI is … especially based on 2019, it is ‘momentum,’” Mr. Brown said.
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