The Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. are taking a new approach to enforcement — and the industry should pay attention. It just might save firms and advisers considerable sums of money, while at the same time satisfying the goals of the regulators.
Both agencies have recently instituted programs that waive penalties for brokers and advisers who come forward and self-report malfeasance. In exchange for acknowledging that they have overcharged clients and agreeing to make them whole, the regulators agree not to impose fines.
The SEC was the first of the two regulators to try such a process. Last February, it
offered to waive fines for advisers who stepped up and admitted they had not disclosed to clients that they were being put in
share classes that paid 12b-1 fees when other, less-expensive share classes were available. Just last week, the SEC reported the
first results of the program: signing agreements with 79 firms that had agreed to refund $125 million to clients.
Finra
announced a similar program more recently that will apply to
529 college savings programs. Brokerage firms that self-report overcharging clients by selling them inappropriate share classes and make restitution to those clients will escape a fine from Finra.
Quick remedy
In both cases, the regulators see the amnesty programs as a relatively quick way to remedy a problem and get money back to investors in a timely fashion. Both agencies have limited resources, so if they can take some shortcuts and still get the same results for the public, they must see it as a cost-effective method of enforcement.
The alternative would be to bring enforcement actions on a case-by-case basis. Yes, the regulators would be able to extract their pound of flesh in the form of fines, but the process would take considerably longer — and in the meantime investors would be waiting to get their money back.
It should be noted that self-reporting programs are used regularly in other areas of society. For example, in an effort to get guns off the streets, cities have urged residents to come forward and turn in guns, no questions asked. Taxing districts, most recently New Jersey, often hold tax amnesty programs in which they waive penalties for taxpayers who come forward and pay back taxes.
In the case of Finra, the 529 amnesty program fulfills another one of its goals: to take a more cooperative approach to regulation that seeks to protect the interests of investors without placing an unduly heavy financial burden on brokerage firms in the process. In the past, small brokerage firms complained that Finra was too heavy-handed when it came to enforcement and was more interested in collecting big fines than helping firms comply with the agency's regulations.
The big question in both these self-reporting programs is whether they will work.
The real test
Critics may say the regulators are letting the offending firms off easy by waiving penalties. But let's put that issue aside, since the real test of any enforcement program is whether it will effectively deter bad behavior in the future. We won't know that until some time has gone by and the regulators can discern whether advisers and brokers are playing by the rules.
In the meantime, it seems that both amnesty programs are putting a much-needed spotlight on areas that advisory firms and brokers may have overlooked but to which they should have been paying attention. Some have suggested that in the past, share class decisions were simply not a priority in the industry. Now there will be no excuses for not toeing the line and putting customers' interests first.
