FSI Letter Urges SEC to Reform Enforcement Practices, Citing ‘Regulation by Enforcement’ Risks

The Financial Services Institute, an advocacy group representing independent financial services firms and advisers, has submitted a supplemental letter to U.S. Securities and Exchange Commission Chair Paul Atkins urging the Commission to adopt formal safeguards that ensure fairness, transparency, and predictability in its enforcement practices.

The letter expands on FSI’s January 2024 white paper on recommendations to the SEC to prevent regulation by enforcement, and reaffirms FSI’s commitment to constructive engagement with regulators. It also reflects Chair Atkins’ recent comments 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 Dale Brown, president and chief executive officer of FSI. “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’s proposed framework, issued following the appointment of Judge Margaret Ryan as director of enforcement, recommends that SEC staff evaluate and document several factors before pursuing novel enforcement actions – such as whether the public had prior notice of the conduct at issue.

Concurrently, Chair Atkins recently announced significant changes to the Commission’s “Wells process,” a procedural step used to notify potential defendants of impending enforcement charges.

FSI’s letter goes on to outline several enforcement areas where FSI believes the SEC unfairly leveraged its power to create new rules and further underscores the need for reform.

• Settlement pressure: FSI argues that cases like Commonwealth Equity Services illustrate a structural imbalance where the financial risk of litigation (facing potential nine-figure penalties) forces firms to settle, even when the underlying legal claims – like evolving interpretations of “materiality” – are weak or unsettled, as courts later suggested.
• Off-channel communications: The SEC’s initiative, which has yielded over $2 billion in penalties since late 2021, is criticized for punishing firms for a technological issue (applying old rules to modern messaging) without issuing new, clear guidance. FSI called this approach inconsistent, noting the irony that the agency itself has faced internal scrutiny over record-keeping failures.
• Crypto enforcement: FSI drew a parallel to the digital asset market, arguing that the SEC’s current strategy of suing crypto companies rather than writing clear rules is an unsustainable substitute for rulemaking that risks stifling financial innovation.

FSI asserts that when neither individuals nor firms can reasonably discern the boundaries of lawful behavior, enforcement becomes arbitrary.

As outlined in its 2024 white paper, FSI’s proposed framework recommends the SEC 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. The organization added that these reforms would enhance the SEC’s long-term credibility and help sustain balanced oversight.

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