After years of the broker-dealer industry battling what it calls "regulation by enforcement," the Financial Services Institute today laid out "non-controversial policies and procedures” including internal fairness audits it says the Securities Exchange Commission should adopt to eliminate unfair practices.
“Firms and individuals regulated by the SEC should have reasonable notice as to what conduct would constitute violation of the federal securities laws and rules” the Financial Services Institute said in a new white paper released at its annual conference in Orlando, Fla.
“We have shared this white paper with SEC commissioners and the Director of Enforcement and we look forward engaging with them,” Robin Traxler, senior vice president and general counsel at FSI, said at a press conference.
Regulation by enforcement “is when an enforcement action involves certain actions that market participants did not previously understand to be a violation of the federal securities laws, despite their reasonable efforts to interpret those laws," Traxler said.
“In our democracy no one should be subject to government agency enforcement actions without prior, fair notice of the laws that form the basis of the alleged violation. This issue is important to our members who work hard to comply with applicable federal securities laws and rules and dedicate considerable resources to compliance, supervision and disclosure,” Traxler added.
The FSI white paper recommends that the SEC adopt a straightforward procedural framework that includes the following:
• Consideration of prior novel enforcement actions, including evidence of prior notice, reasonable alternatives to enforcement actions and the extent of inaction by staff despite awareness of the issue.
• Discussion of these factors in recommendations or advice memos to the SEC.
• Transparency regarding deliberations, including references in public releases on prior notices regarding the potential of such novel enforcement actions.
• Incorporation of these procedures in the SEC enforcement manual.
• Periodic fairness audits by the Office of the Inspector General to ensure compliance with fair procedures.
“Unfair practices by agencies, such as the SEC, undermine the integrity of the agencies’ missions, do harm to the regulated, and violate their basic rights," the white paper stated. "Public perception of unfairness degrades a government agency’s moral authority and dilutes the deterrence value of its enforcement authority. Such perception hampers the Commission’s mission to protect the investing public and foster capital formation."
Several SEC commissioners have also criticized the regulator for “unfair enforcement actions that improperly created new standards or expanded the scope of existing rules,” Traxler noted.
Commissioner Hester M. Peirce, for example, has said she has due process concerns with the SEC’s “Share Class Selection Disclosure Initiative,” a voluntary self-disclosure program that allowed investment advisors to self-report to the SEC if they had allocated clients to higher cost-share brackets without disclosing that the investment advisor received a fee for doing so, even when a lower cost share class existed.