SEC Commissioners Amp Up Objections to Recent Rulemakings

Dissents to recent SEC rulemakings are garnering attention for their tone and for their challenges to the agency's legal reasoning and authority. SEC Commissioners Hester M. Peirce and Mark T. Uyeda asserted that recent SEC rule-makings (i) expanding regulation on private fund advisers and (ii) narrowing FINRA registration exemptions for broker dealers were unjustified, inconsistent with required rule making procedures and unauthorized by statute.

Private Fund Advisers Rule

In a dissent published after issuance of the final regulations on private fund advisers (see previous coverage), Ms. Peirce called the rules "ahistorical, unjustified, unlawful, impractical, confusing, and harmful." She argued that the current regulatory regime demonstrates the "sophistication of the parties and the dynamism of the adviser population" but that the SEC justifies its rulemaking by "dismissively recasting private fund investors as unsophisticated." Ms. Pierce raised the question of why the rulemaking is necessary and stated that the SEC struggles to illustrate in the final regulations a "failed market desperately in need of a prescriptive regulatory solution." She stated that even if the SEC had been able to show that the "prescriptive regulations were warranted," the SEC would still require authorization from Congress to proceed with the rulemaking. She argued that the SEC's reliance on Adviser Act Sections 206(4) ("Prohibited transactions by investment advisers") and 211(h) ("Rules, regulations, and orders of Commission") is questionable given that the statutory provisions are "clearly aimed at retail investors’ relationships with their financial professionals."

Ms. Peirce contended that while the final regulations are better than the proposal, the release raises implementation challenges, including (i) ambiguous definitions of terms, (ii) operational difficulties of providing advanced notice of preferential treatment and obtaining investor consent, (iii) the "chilling of communications between advisers and investors" and (iv) the short compliance period. Further, Ms. Peirce asserted that the SEC is effectively "squelching" competition that will ultimately harm investors, advisers and the economy.

Separately, Mr. Uyeda criticized the final regulations for relying on "questionable statutory authority" and failing to consider the aggregate impact of the other regulations proposed in the past year. Further, he called the final regulations "arbitrary and capricious" and said that they impose requirements that are "far more burdensome and restrictive" for sophisticated investors than products for retail investors.

Limitation of Exemption from FINRA Membership

Ms. Peirce also dissented from the new limitations on the exemption from FINRA registration (see previous coverage), criticizing the lack of a "common sense approach" and the SEC’s failure to pursue "alternative and less burdensome ways to fill regulatory and reporting gaps." She argued that the SEC failed to make a compelling reason for narrowing the exemptions and to "impose the significant burden of FINRA membership on these [broker-dealers]." Further, she argued that the year-long implementation would be "far too short to reasonably permit the organization and registration of an alternative to FINRA."

Mr. Uyeda argued that the final amendments (i) lack evidence in support of the mandatory extension of FINRA membership, (ii) raise serious concerns about the procedural foundation for the rulemaking and (iii) are likely to have negative consequences, including a reduction in liquidity.

Market Objections Rely on Similar Reasoning

Both the Managed Funds Association (see here and here ) and the Investment Company Institute (see here) have submitted comments on these proposals that parallel these dissents and suggest that they will challenge these rulemakings in court.