FSI Releases Recommendations to SEC on Preventing Regulation by Enforcement 

January 30, 2024

White paper outlines policies and procedures the SEC should adopt to detect and prevent unfair and improper regulation by enforcement  

Today, the Financial Services Institute (FSI) released its white paper, Recommendations to the SEC to Modify its Procedural Framework to Prevent Regulation by Enforcement, as part of the organization’s effort to combat regulation by enforcement by the U.S. Securities and Exchange Commission (SEC) and other regulatory agencies. The paper defines regulation by enforcement as “when an enforcement action involves certain conduct that market participants did not previously understand to be a violation of the federal securities laws despite these market participants’ reasonable efforts to interpret existing laws, regulations, policies, and guidance from the SEC and other agencies.”  

FSI recommends the SEC adopt a procedural framework, through concrete procedures, to detect and prevent certain unfair enforcement practices by the Commission and its staff. The report underscores the harmful effects of regulation by enforcement, including the circumvention of agency rulemaking requirements, violation of the rights of the regulated by not allowing the opportunity for notice and comment, and the undermining of the agency’s authority by generating a perception of unfairness. 

“Our members have experienced the harmful effects of regulation by enforcement first-hand. We share the Commission’s investor protection goals, and we strongly support regulations adopted through the proper rulemaking process. However, regulation by enforcement hinders independent financial services firms’ and financial advisors’ ability to properly serve their clients and confidently operate their businesses,” said FSI President & CEO Dale Brown. “This white paper provides common-sense solutions that will assist the SEC in detecting and preventing regulation by enforcement, and we welcome opportunities to collaborate with the SEC to curtail regulation by enforcement.” 

The procedural framework outlined in the white paper includes the following: 

  • Factors the Commission and its staff should consider before any novel enforcement action, such as evidence of prior notice, reasonable alternatives to enforcement action, and the extent of inaction by Commission staff despite awareness of the issue; 
  • Discussion of these factors in recommendation or advice memos to the Commission; 
  • Transparency on such deliberation, including references in public releases on prior notices regarding the potential of such novel enforcement actions; 
  • Incorporation of such procedures in the SEC Enforcement Manual; and 
  • Periodic fairness audits by the Office of the Inspector General to ensure compliance with such procedures. 

Click here to download the full white paper.