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Industry Voices

Commentary: SEC is proving it can be both cop and counselor

In just one week in March, the Securities and Exchange Commission showed just how much things have changed under the leadership of Chairman Jay Clayton — and how much they've stayed the same.

After the 2016 election, it was easy to find predictions that the SEC would scale back its oversight of asset managers, loosen the reins on Wall Street banks and turn a blind eye to corporate misbehavior. Yet, three SEC actions on March 14 — and a string of other recent events — show that regulation is alive and well in financial markets.

On that day, the SEC brought headline-grabbing actions against blood-testing startup Theranos for fraud, and charged a former Equifax executive with insider trading associated with the disclosure of a major security breach last summer. In neither instance can it be said the individuals received a slap on the wrist, as evidenced by large fines and restitution agreements.

There is further evidence of ongoing, aggressive SEC scrutiny. Consider that, on March 19, the largest ever whistleblower awards were announced, at a combined $89 million, highlighting the commission's focus on pursuing large and complicated cases. And, in an age of uncertain regulation surrounding the cryptocurrency sector, the commission is devoting significant resources to identifying "initial coin offerings" or other investment vehicles that run afoul of long-standing investor protection principles.

But even as SEC enforcement activities reinforce that the commission is focused on protecting investors (a chief priority of Mr. Clayton), it has become clear that regulating the financial services industry is becoming more of a two-way conversation.

For instance, also on March 14, the SEC made a rare move, proposing to amend and scale back a burdensome liquidity management and disclosure rule for investment companies that previously had passed unanimously. The rules were described by many in the fund industry as a "game changer," and not in a positive way. Mutual funds and ETF providers would have had to submit granular, complicated position-level data to the SEC, and also publicly disclose liquidity profiles on a quarterly basis. The financial and human resources being marshaled were a major concern for the industry, to say nothing of the operations and technology overhaul they would require.

Naturally, the industry pushed back against the rules, arguing that classifying assets according to the SEC's liquidity standards was overly complex, subjective and confusing to investors. But, in what has certainly been a surprise to an industry feeling beleaguered by new rules, the SEC on Feb. 12 extended the compliance deadline for the rules and explained that it heard and understood the industry's feedback. Then, in March, it went further, proposing to amend the rule by reducing the frequency with which funds would need to publicly report liquidity profiles to once a year and requesting that they do so in a narrative form that investors would easily understand.

What conclusion can we draw from these seemingly opposite approaches to regulation? One lesson is that we shouldn't assume the SEC is out to make life easier for financial firms. Instead, it apparently wants to make things better for investors — even if that means a lighter touch when it comes to oversight.

More saliently, the SEC has sent a clear message that it is willing to listen to industry concerns and that focusing on investors requires cooperation with companies and funds. It still will pursue clear violations in the market, but pull back from a "broken windows" philosophy of pursuing even minor infractions that are unlikely to harm investors.

So, are asset managers and funds in the clear? Not exactly. They still need to follow the letter of the law, and the easing of the liquidity rule leaves even less wiggle room to get compliance right the first time. Financial services firms should be analyzing data the same way the SEC does to monitor for indicators of fraud. Additionally, the industry should speak up about rules and regulations that are overly burdensome, especially if the costs are being passed through to investors. The SEC is listening — but it takes two to have a conversation.

Jeanette Turner is chief regulatory officer of Compliance Solutions Strategies, New York. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.