A financial advocacy organization has called on the Securities and Exchange Commission to adopt procedural reforms in its enforcement practices, according to Financial Advisor.
The Financial Services Institute (FSI) submitted a supplemental letter to SEC Chair Paul Atkins, urging the commission to implement formal safeguards that ensure fairness, transparency and predictability in its enforcement.
The letter was intended to build on a January 2024 white paper from the FSI, a group representing the independent broker-dealer industry. It called for measures to prevent what the group calls “regulation by enforcement”.
The letter states: “Regulation by enforcement is when an enforcement action penalizes 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.”
The FSI said the letter reflects its commitment to constructive engagement with regulators. It follows the appointment of Judge Margaret Ryan as the SEC’s Director of the Division of Enforcement as well as recent comments by Atkins on the importance of clear and predictable rulemaking that supports innovation and investor protection.
“Regulation by enforcement is not only unfair to the regulated entities, it also stifles innovation and creates confusion,” said FSI President & CEO Dale Brown. “Our letter provides specific steps to ensure enforcement aligns with due process and established rules. Clear guidelines, consistent oversight and transparent procedures are essential to protect investors while maintaining confidence in the SEC’s work.”
FSI’ has proposed a framework urging the SEC to consider a number of factors before pursuing novel cases, codify due process standards in the SEC Enforcement Manual and conduct regular fairness audits through the Office of the Inspector General.
Financial Advisor notes that the SEC has been bringing fewer enforcement actions in recent months, filing 144 enforcement cases in the second half of fiscal year 2025 compared to 362 in the first half of the year.
FSI urged the Commission to (i) embed procedural safeguards in the SEC Rules of Practice, (ii) evaluate and document key factors before pursuing novel cases (e.g., whether there was fair prior notice of the standard being enforced, whether the staff had long been aware of the practice without acting, and whether alternative approaches—such as rulemaking or staff alerts—would be fairer and more effective), and (iii) conduct periodic “fairness” audits to confirm compliance with procedural safeguards and to identify potential instances of unfair enforcement.
Brown said it is an appropriate time to consider permanent structural reforms, given the transition in presidential administrations.
“Based on recent events, FSI believes it is appropriate for the Commission to review past tactics engaged in by the Enforcement Staff in pressuring unfair settlements, as such tactics have been part and parcel of the method used by the Staff to engage in regulation by enforcement,” Brown said.
FSI pointed to enforcement initiatives such as the SEC’s share-class disclosure settlements and its off-channel communications crackdown as examples of regulatory risk without clear rulemaking. FSI contends that the lack of transparency and predictable standards forces firms to settle even when legal questions remain unresolved.
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