Once again, guidance is under the gun. In this recent speech, SEC Commissioner Hester Peirce expressed her concern for SEC staff guidance and interpretation that she seems to view as sometimes runaway or out-of-control and, sometimes, too much under the radar. A few days later, the Acting Director of the Office of Management and Budget joined in, distributing a memo designed to limit rules and guidance that federal agencies issue, particularly outside of the notice-and-comment process. But potentially the most significant impact could result from an important case that SCOTUS is now considering (to be discussed in a separate post), which could undo the historic deference that courts have generally given to agency interpretations of their own regulations, often referred to as Auer deference. In this highly politicized environment, what will be the impact on staff guidance?
Commissioner Peirce began her address by noting that, not only are her views expressed not the views of the SEC as whole, but neither are those of the staff. Although Peirce recognizes that "guidance can help practitioners and market participants navigate the complexity of the federal securities laws and understand how to apply provisions enacted and promulgated decades ago to novel developments," she has "grown increasingly concerned that this necessary guidance—due to a lack of transparency and accountability—may have turned into a body of secret law. This secret law, as a practical matter, binds market participants like law does but is immune from judicial—and even Commission—review."
She understands that, often, engagement between the staff and market participants is useful and necessary; sometimes, however, the line is crossed. That may occur, for example, when "an examiner insists that a regulation means something that may be doubtful under any reasonable reading of the Commission's rules or policy as spelled out in publicly available materials." In a case like that, market participants are unable to effectively push back. Moreover, she asks, does "the staff's guidance reflect a thorough consideration of the likely benefits and costs of that guidance? Does access to our markets depend on hiring counsel that has access to the non-public views of the staff? Will market participants change their behavior in ways that may not make sense under our rules as written to comply with the vast body of guidance, much of which may not be publicly available? All of these issues point, in turn, to a much larger question, which is this: Is the Commission regulating the markets and market participants in a way that is designed to cultivate and maintain the public trust over the long term?"
Her views are not inconsistent with those expressed by SEC Chair Jay Clayton. In September last year, Clayton issued a statement intended to make clear the importance of the distinction between SEC rules and regulations—which are adopted in accordance with the APA, have the effect of law and are enforceable by the SEC—and staff guidance, such as the CDIs and various letters and speeches, which is nonbinding and not enforceable by the SEC or others. He also indicated that Corp Fin and other Divisions "have been and will continue to review whether prior staff statements and staff documents should be modified, rescinded or supplemented in light of market or other developments. I believe that public engagement on staff statements and staff documents is important and will assist the Commission in developing rules and regulations that most effectively achieve the SEC's mission. I encourage such engagement, with the recognition that it is the Commission and only the Commission that adopts rules and regulations that have the force and effect of law." (See this PubCo post.)
Finally, following the Peirce address (although not necessarily instigated by it), the Acting Director of the OMB—apparently, OMB has both a Director (Mick Mullvaney) and an Acting Director (Russell Vought)—issued a memo directing federal agencies to submit to the Office of Information and Regulatory Affairs (OIRA) for review summaries of their "rules" before publication in the Federal Register. Notably, however, the term "rules" is expansively defined to include, subject to certain exceptions, "'the whole or a part of an agency statement of general ... applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency.'" The term "applies to more than just notice-and-comment rules; it also encompasses a wide range of other regulatory actions, including, inter alia, guidance documents, general statements of policy, and interpretive rules." The memo indicates that it applies broadly to all federal agencies, "including the historically independent agencies," potentially implicating the SEC.
With regard to rules and guidance, the Acting Director is apparently displeased with the level of compliance by federal agencies with the Congressional Review Act, which requires agencies to submit proposed "rules" to Congress, which Congress may then, with presidential agreement or veto override, invalidate. Under the CRA, federal agencies must coordinate with the OIRA in making a determination of whether a rule is "major," that is, whether the rule would have an annual effect on the economy of $100,000,000 or more, result in a major increase in costs or prices for consumers, industries, regions or agencies or have a significant adverse effects on competition, employment, investment, productivity or innovation. According to the memo, OIRA does not consistently receive from agencies the information necessary to determine whether a rule is major. The memo provides that, under the new process, agencies will now need to notify OIRA of upcoming rules and provide summaries, analyses and recommendations as to status as a "major" or "not major" rule prior to effectiveness or publication in the Federal Register.
