FSI Submits Supplemental Letter to SEC Chair Urging Procedural Reforms to Prevent Regulation by Enforcement

Letter builds on January 2024 white paper urging the Commission to formalize safeguards that promote fairness, transparency and predictability in enforcement practices

The Financial Services Institute (FSI) has submitted a supplemental letter to U.S. Securities and Exchange Commission (SEC) 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, Recommendations to the SEC to Prevent Regulation by Enforcement, and reaffirms FSI's commitment to constructive engagement with regulators. It follows the appointment of Judge Margaret Ryan as the SEC's Director of the Division of Enforcement and 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 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."

The letter highlights recent enforcement initiatives-such as those involving share class disclosures and off-channel communications-as examples illustrating the need for procedural reform. It also notes that in the crypto and digital asset space, the new blockchain technologies and tokenization do not fit neatly into existing regulatory schemes, which heightens the risk for regulation by enforcement and further underscores the need for reform.

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.

FSI noted that preventing regulation by enforcement will strengthen market confidence and align with federal efforts to promote fairness and accountability. The organization added that these reforms would enhance the SEC's long-term credibility and help sustain balanced oversight.

The white paper and supplemental letter were developed with counsel from A. Valerie Mirko of Armstrong Teasdale and Peter Chan of Baker McKenzie.