During the first three months of 2023, the SEC had been busy as it issued nine rule proposals, which combined added up to more than 2,000 pages. Many of them touched on a variety of crucial issues, including cybersecurity, custody and privacy.
While that flurry of activity was an aberration based on historical standards, it's become the norm under Gary Gensler's leadership. Since becoming chair of the Securities and Exchange Commission in 2021, Gensler has presided over a rulemaking agenda that is, depending on your viewpoint, either ambitious or too much, too fast.
It's important to note that rulemaking is not, in and of itself, a bad thing. To be sure, proper rulemaking can help advance industry interests and enhance the investor experience. The Financial Services Institute has consistently held that view.
Indeed, we have a long history of supporting commonsense regulations that protect investors and make markets work better for everyone. The best example is Reg BI. Our membership has committed substantial resources to ensure that it's successfully implemented and protects investors long term.
Yet the recent deluge of rule proposals by the SEC is nonetheless problematic.
One big issue with the SEC's ongoing accelerated and scaled-up approach is that it doesn't allow the industry to provide thoughtful, helpful and meaningful feedback during allotted comment periods.
For instance, our process for drafting a comment letter is lengthy, measured in weeks (maybe months), not days. As part of it, we consult with our members and subject matter experts to fully understand the real-world implications of a rule proposal, which helps us to formulate suggestions for improvement.
With this in mind — and given how many rule proposals have been in motion at any given time over the last couple of years — it's fair to ask whether the SEC is receiving constructive feedback from those in the best position to provide it. In some cases, it's probably not always possible, forcing many to pick and choose.
To help address this challenge, the SEC should allow for more extended comment periods. Otherwise, rules will be implemented without an adequate number of industry participants getting an opportunity to weigh in on them. That doesn't benefit the regulators, the industry or other important stakeholders, including investors.
Another issue is that it’s not always clear what problem the commission is trying to solve when it issues a proposal. For example, in a recent comment letter regarding revisions to the SEC's custody rule, we questioned whether the projected impact on investor protection is appropriately aligned with the additional burdens — including higher costs — that investment advisors would need to endure to comply.
But this concern isn't limited to the custody rule proposal. Not only should the commission always consider how much time, effort and resources it takes to comply with new rules, but it should think about whether those rules will have a meaningful impact (i.e., protect investors or make the market work more efficiently). If not, the SEC should rethink whether they are necessary.
Often the presumption is that the SEC and the firms and advisors it regulates are always in conflict. That's not always the case. Most in financial services — including FSI — are willing to support rules that make the industry work better for the greatest number of stakeholders and protect market participants.
Still, the SEC has to be willing to hear constructive criticism from the people implementing the rules. Because when that occurs, it results in much better and more effective outcomes for all. Sadly, though, the pace and breadth of today's rulemaking is not allowing that to happen.
On behalf of the industry, we implore the SEC to slow down, take a deep breath and consider whether its current approach to rulemaking is good for anyone — advisors, firms, the markets and investors.
Dale Brown is president and CEO of the Financial Services Institute.
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