Phyllis Borzi, the former assistant secretary of Labor in the Obama administration, criticized some financial services advocacy organizations, including the Financial Services Institute (FSI), for a recent petition arguing that the Securities and Exchange Commission’s Share Class Selection Disclosure Initiative was a form of “regulation by enforcement.”
In a webinar hosted by the Institute for the Fiduciary Standard, Borzi, a longtime fiduciary advocate who oversaw the creation and implementation of the DOL’s fiduciary rule, said the FSI’s petition was a “no holds barred challenge” on the SEC’s authority to enforce existing regulations on certain fees by asserting that agency cannot pursue action on any regulatory or guidance documents with respect to 12b-1 mutual fees without a full public comment and review rule-making process.
"If your goal is to ensure the rulemaking process itself produces a rule that is weak and favorable to the industry, and if you then go after the rule is issued, to attempt to legally nullify any attempt for the agency to enforce even that weak rule by challenging its ability to articulate its enforcement policy, that's quite an audacious strategy that clearly raises in my mind whether or not these groups have been participating in this process all along in good faith," she said.
The FSI, which was joined by the American Securities Association, the Competitive Enterprise Institute and the New Civil Liberties Alliance, argued in the petition that the SEC had long wanted to outlaw Rule 12b-1 fees, which advisors can get from selling and marketing certain funds. But without an official rule in place outlawing the practice, the institute believed the commission tried to achieve the same result with the use of a self-reporting initiative. In April, the SEC announced its final cases that the Division of Enforcement intended to bring under the disclosure initiative, with a total of more than $139 million returned to investors in the program.
A spokesperson for FSI did not return a request for comment by press time.
The webinar covered a wide breadth of issues with participants who were largely critical of the SEC’s actions on Reg BI and other issues, including the need for disclosure documentation to be written in “plain English” language, as well as how Reg BI could potentially be affected if President Trump loses reelection in November. Borzi said that it was unclear what would happen if Joe Biden beat Trump in the contest, but by removing numerous executive orders, a potential Biden administration could move to change the SEC's approach on a “sub-regulatory” basis.
Brian Hamburger, the president and CEO of MarketCounsel, agreed, saying that while it was difficult to create new regulations, Reg BI’s language and what he deemed to be unclear definition of the terms it used gave a potential Biden administration latitude.
“While it would presumably be difficult to roll back rules and regulations, it wouldn’t be difficult to simply interpret Reg BI in a different manner than this administration is interpreting it,” he said. “A change in administration would leave the rule as it exists today in a vulnerable state.”
Hamburger questioned how the new rule addressed investor confusion about industry terminology; clients, he found, typically would find it difficult to discern the differences between a broker and advisor, and the suitability and fiduciary standards they’ve respectively had to follow in the past. To ease the confusion, he believed the SEC should have either taken steps to make sure the two industries were more starkly distinguished. Or, it could impose a fiduciary standard on brokers, which he argued the SEC had the ability to do based on the Dodd-Frank Act. (This question is currently being litigated in XY Planning Network’s suit against the SEC.)
Hamburger felt that the SEC had attempted to weave a middle ground, and thus failed by making differentiations between brokers and advisors even more confusing than before.
“One has to wonder if the two standards are indistinguishable...why is the brokerage industry fighting so hard to maintain that distinction?” he asked.
