FSI blasts SEC disclosure cases as ‘regulating without rules’

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After a deluge of SEC cases this year involving some of its largest member firms, independent broker-dealer advocacy group FSI is publicly crying foul.

Recent cases and settlements relating to disclosure of 12b-1 fees and other mutual fund costs are examples of “moving the goalposts” and “regulating without rules,” according to FSI. The trade organization launched a campaign calling for a halt to the enforcement cases on Sept. 4.

FSI has always opposed what members most commonly refer to as “regulation or rulemaking by enforcement,” but the blasting of the SEC share class disclosure initiative follows months of scant public comments about it by the influential group. Nearly 80 firms agreed to pay a combined $125 million in restitution in March — and there are two other pending cases.

The organization now says the SEC took a “circular approach” to enforcement “to completely bypass the rulemaking requirements.” In earlier closed-door meetings with the regulator, FSI made its view on the mutual fund disclosure cases clear, General Counsel David Bellaire says.

“We have worked hard for years to develop a productive and constructive working relationship with the SEC,” Bellaire said in a statement. “But there is no rational justification for moving the goalposts on firms that diligently complied with the rules on the books.”

He added that the SEC should “consider the damage being done to the industry and hard-working American investors.”

Representatives for the SEC declined to comment. In a statement when the SEC announced the March settlements with 79 of the BD firms’ RIAs, Chairman Jay Clayton said he was pleased with the level of participation and client restitution while noting the “vital and trusted role” of RIAs.

“Regardless of the scope and duration of the investment advisory services, investment advisors are fiduciaries and, as such, their duties of care and loyalty require them to disclose their conflicts of interest, including financial incentives,” Clayton said. “This initiative will have immediate and lasting benefits for Main Street investors, including through improved disclosure.”

In something of a foil to the regulator’s website designed to help firms self-report under the share-class program, FSI unveiled a video, frequently asked questions and a “call to action” on the group's website enabling members to write a letter to members of Congress about the enforcement.

The trade group’s argument revolves around the SEC performing “numerous” examinations in the past without raising concerns about their 12b-1 disclosures and its view that the regulator “never set forth guidance or adopted regulations” alerting them to its expectations.

Furthermore, the settlements of varying amounts earlier this year after the SEC announced the program in February 2018 didn’t identify any specific rules or regulations that had been violated. Instead, the regulator cited previous settlements and guidance published in the past, FSI says.

In the two pending enforcement actions since the settlements — which are SEC civil lawsuits charging the firms with defrauding clients and violating their fiduciary duty — the regulator has also accused firms of inadequate disclosure of other types of mutual fund costs besides 12b-1 fees.

Last week, the SEC alleged that Cetera Financial Group’s second largest IBD, Cetera Advisors, reeled in $10.8 million in undisclosed compensation from 12b-1 fees, revenue sharing, service fees and markups. Cetera didn’t participate in the self-reporting program.

In contrast, Commonwealth Financial Network agreed to pay $1.6 million in March under the self-reporting initiative, only to be charged on Aug. 1 with failing to adequately disclose more than $100 million in revenue sharing.

Commonwealth Managing Principal John Rooney is FSI’s vice chair and Cetera President Adam Antoniades also serves on the board. Key executives from Pershing and Fidelity Clearing & Custody Solutions — which clear mutual fund transactions and custody assets for IBDs — are on the FSI board as well.

Some 150 advisors and IBD executives will be visiting Capitol Hill next week, in part to make their case directly to lawmakers. FSI seeks a new SEC rulemaking process around mutual fund disclosures that would be implemented on a go-forward basis instead of retroactively.

“Think of your financial advisors as players on the field; they can’t do their jobs if the rules are unclear,” says a narrator in the glossy video produced by FSI as part of its campaign. “New rules should be created holistically and clearly, not through random enforcement cases.”

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SEC enforcement Independent BDs RIAs Compliance Regulatory guidance Regulatory relief Mutual funds Clearinghouses/custodians SEC FSI