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The SEC's Rule Making Rule Doesn't Follow The Rules

As discussed in yesterday's post, Congress has once again directed the Securities and Exchange Commission to engage in rule making.  The SEC almost always adopts rules through the informal rule making procedures of the Administrative Procedure Act (5 U.S.C. § 553) rather than the formal, on the record provisions (5 U.S.C. §§ 556 & 557).  In general, Section 553 requires:

  • Publication of a notice of proposed rule making in the Federal Register; and
  • An opportunity interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments with or without opportunity for oral presentation.

President Obama in Executive Order 13563 directed agencies generally to provide a 60 day comment period.  The APA requires, with some exceptions, that rules be published not less than 30 days before the effective date.  This means that if the SEC follows the rules it will not be able to meet the 90 day deadline for revising Rule 506 of Regulation D imposed by Section 201 of the JOBS Act.

The SEC itself has adopted rules for its own rule making activities.  Rule 192(b) (17 C.F.R. § 201.192(b)) of the SEC's Rules of Practice is generally in accord with the APA but does contain some curious deviations.  For example, the rule provides an exception from the public notice and comment procedures when the SEC finds it to be impracticable, unnecessary or contrary to the public interest.  However, noticeably absent from the rule are the statutory requirements that the Commission make a finding for "good cause" and incorporate the finding and reasons in the rules that are issued.

Earlier this month, Iowa Congressman Tom Latham introduced a bill,  HR 4116, to expand significantly the matters that agencies such as the SEC will be required to consider when adopting rules, including the option of doing nothing.  He claims that last year  federal agencies adopted 760 new major regulations in more than 75,000 pages in the Federal Register.  Congress and the Dodd-Frank Act, of course, have had a hand in contributing to these statistics.

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