FINRA’s head of enforcement’s speech yesterday at SIFMA AML was noteworthy. Schroeder signaled a commitment by FINRA to avoid regulation by enforcement. She said “(t)ransparency is particularly important in Enforcement. In order for the industry to be able to follow a rule, FINRA’s expectations have to be clear and rule violations have to be foreseeable. We want to avoid any perception of “rulemaking by enforcement.” That is why as we continue to integrate two enforcement teams, we are also thinking about our internal processes when we bring a case. In particular, we are considering how to identify any novel issues early, and ensure that we flag and discuss these issues with the rest of FINRA to develop the most effective regulatory response on behalf of the organization. Enforcement actions are one type of tool that FINRA can use to effect compliance. Other departments have other tools, and we want to make sure that we consult and collaborate early and often with our FINRA colleagues to consider issues holistically, and to think about the range of actions we might take, from an enforcement action to a Regulatory Notice or even a new rule.
Under a new self-reporting initiative just announced by the SEC staff, the SEC’s Enforcement Division will recommend “standardized, favorable settlement terms” to investment advisers that self-report that they failed to disclose conflicts of interest associated with the receipt of 12b-1 fees. This is the latest effort by the SEC to crack–down on inadequate disclosure of adviser receipt of 12b-1 fees in connection with advisory accounts where a lower -cost share class of the same mutual fund was available for the advisory clients. The SEC States that among other things, the Division will recommend settlements that will require the adviser to “disgorge its ill-gotten gains and pay those amounts to harmed clients. ” The plus: no civil monetary penalty. Investment advisers must notify the Division of Enforcement of their intent to self-report no later than June 12, 2018.