A group of industry organizations say the Securities and Exchange Commission (SEC) has spent the past year using its enforcement authority to change longstanding, and previously uncontroversial, business practices in the mutual fund space.
The groups have filed a petition for a rulemaking that would seek to end the agency’s regulation by enforcement tactics.
“This is not how the rule of law is supposed to work,” the groups said in a release announcing the filing of the petition.
The American Securities Association (ASA), the Competitive Enterprise Institute (CEI), the Financial Services Institute (FSI), and the New Civil Liberties Alliance (NCLA) said in the release that when the stay-at-home orders finally are lifted, American businesses will need to know that the law is what is says, and not what the SEC, years later, decides unilaterally what it should have been.
The groups said their petition arises from the SEC’s 30-year effort to effectively outlaw Rule 12b-1 fees, and the amnesty program which followed.
“For decades, mutual funds have used 12b-1 fees to compensate financial advisers for ongoing sales and marketing assistance. And (despite the SEC’s efforts to the contrary) no statute or rule changed the manner in which those fees were disclosed,” the release stated. “Undeterred by a failed effort to adopt prospective rules in this area in 2010, the SEC has recently turned to ‘guidance,’ coupled with ‘voluntary’ self-reporting programs for those in ‘violation’ of the ‘guidance,’ and punitive enforcement actions for past conduct for those who didn’t turn themselves in.”
They said the SEC’s effort was undertaken without a notice-and-comment rulemaking process.
“ ‘If at first you don’t succeed, try, try again’ is a good rule for schoolchildren, but not for federal agencies that are determined to impose their own policy preferences on regulated entities regardless of the requirements of federal law,” said Helgi Walker, a partner at Gibson Dunn and lead counsel on the petition, in the release. “It is time for the SEC to follow the rulemaking procedures that the people’s elected representatives in Congress have prescribed. Investment advisers, like all Americans, have a right to be bound only by duly enacted statutes and the regulations lawfully promulgated under them — and, most importantly, to know what the law is before the SEC brings its enormous enforcement arsenal to bear.”
ASA CEO Christopher Iacovella said the regulation by enforcement tactics – the widely condemned practice first publicly adopted by the Consumer Financial Protection Bureau – established a dangerous precedent.
“We will comply with clear rules of the road adopted using the formal rulemaking process, anything else flies in the face of how the rule of law in America is supposed to work,” he stated.
NCLA Senior Litigation Counsel Michael DeGrandis was blunt.
“Federal agencies may not issue ‘guidance’ to advance new regulatory initiatives. Period,” he stated.
The groups said the SEC should initiate rulemaking to promulgate regulations around the guidance issued.
“Other agencies have already taken similar action,” Walker said. “The SEC should get with the program and end its enforcement abuses once and for all.”