The American Securities Association and three public interest organizations petitioned the SEC on Wednesday to produce a new rule related to mutual funds paying others to promote their shares.
The Financial Services Institute, the Competitive Enterprise Institute and the New Civil Liberties Alliance petitioned the financial regulator along with ASA, according to a filing with the SEC obtained by POLITICO. The groups are trying to undo a 2018 administrative action by the agency that they believe is an attempt to eliminate fees paid to investment advisers and other professionals for selling mutual fund shares.
The SEC has attempted to curb payments by mutual funds to investment advisers by forcing the funds to disclose the payments. But the groups claim the SEC enacted a substantive change in regulation by issuing guidance in the form of the announcement of an enforcement initiative, and as a result was able to sidestep the normal notice and comment process that a rulemaking would require.
“We will comply with clear rules of the road adopted using the formal rulemaking process; anything else flies in the face of how the rule of law in America is supposed to work,” said ASA CEO Chris Iacovella.
The advocacy groups supporting the petition along with ASA are all broadly geared toward less regulation and more business-friendly policy. Specifically, FSI wants lighter regulations on independent financial services firms and independent financial advisers. CEI is a conservative think tank, and NCLA is geared toward reducing the size of federal administrative proceedings.
The groups want the SEC to issue a “corrective rulemaking” to remedy what they call the regulator’s “misguided effort to regulate Rule 12b-1 fees out of existence,” according to the petition. The groups are referring to the part of the rule that allows mutual funds to make payments to investment professionals for recommending mutual fund shares to clients.
The SEC in 2010 proposed to replace the rule with a proposal that would limit the amount mutual funds could pay for promotion of fund shares, but withdrew it in 2013. The petitioners argue the regulator has instead chosen a path of “backdoor regulation” through the announcement of an initiative and related enforcement action, which the groups said pressures firms to voluntarily disclose fees paid to advisers and to pay some fees back to investors.
The groups charged that the announcement of a mutual fund disclosure initiative and a related frequently asked questions document were unlawful rulemaking activities that “alter[ed] the legal obligations of hundreds of investment advisers” by requiring more detailed disclosures related to compensation, according to the petition.
“It is time for the SEC to follow the rulemaking procedures that the people’s elected representatives in Congress have prescribed,” said Helgi Walker, a partner at Gibson Dunn and lead counsel on the petition.
“Investment advisers, like all Americans, have a right to be bound only by duly enacted statutes and the regulations lawfully promulgated under them — and, most importantly, to know what the law is before the SEC brings its enormous enforcement arsenal to bear,” Walker said.