On Jan. 14, the Securities and Exchange Commission adopted rules that require security-based swap data repositories (SDRs) to register with it and meet new reporting, recordkeeping, and transparency requirements for transaction data. At the time, Commissioners Daniel Gallagher and Michael Piwowar dissented. On Wednesday, citing a flawed comment letter process, they renewed their objections and slammed “a significant failure of our internal processes.” They have also expressed concerns with a separate rule proposal from earlier in the week.

Piwowar and Gallagher, the two Republicans on the Commission, announced that the nearly three-week delay in publishing Regulation SBSR was due to the discovery that “an extensive comment letter” was inadvertently left out of the publicly available comment file. “This letter was neither considered by staff in developing their recommendation, nor published on the SEC’s website for the benefit of the general public,” they wrote. The letter covered a range of key issues in Regulation SBSR, and “was submitted by an organization whose membership will be responsible for reporting nearly all security-based swaps subject to reporting under Regulation SBSR.” The author of the letter was not named.

The “innocent nature” of the mistake “does not alter the fact that a fully transparent public comment process is the foundation of the SEC’s rulemaking process,” the commissioners wrote, urging their colleagues to publish the missing letter and re-open the public comment period.

That push, for now, seems to be going nowhere. “Unfortunately, the Commission instead is publishing the previously adopted release, modified to include references to the omitted comment letter,” Piwowar and Gallagher wrote, adding that the modified rulemaking release “glosses over a significant failure of our internal processes.”

This is the second time this week the two commissioners have been critical of the SEC’s rulemaking process. Both ultimately supported a Feb. 9 rulemaking proposal requiring registrants to disclose, in proxy or information statements, whether employees, officers, or directors are permitted to engage in transactions to hedge or offset any decrease in the market value of equity securities granted to them as compensation. That support, however, comes with a list of caveats. Among their concerns:

The proposed rules do not exempt emerging growth companies or smaller reporting companies and the release does solicit comment on whether such an exemption, or a delay in the effective date of the rule, could be appropriate for them.

The release does not analyze “whether the incremental cost of this disclosure, when added to the already-substantial cumulative burdens of disclosure” may have negative effects on overall capital formation.

The proposed rule would require certain investment companies (listed, closed-end funds) to make the proposed disclosures. “Given that investment companies are overwhelmingly externally managed, there is very little employee hedging that would be subject to the rule,” they wrote.

The Commission should have exempted disclosures relating to employees that cannot affect the company’s share price. 

The release’s coverage of securities, not just of the issuer but also of the issuer’s affiliates—including subsidiaries, parents, and brother-sister companies—is “overbroad.”

Piwowar and Gallagher also challenged the timing of the proposal. “If we are to focus on Dodd-Frank implementation, it should be on those rules actually germane to the financial crisis—credit ratings reference removal, or Title VII,” they wrote, adding that “it is not clear that prioritizing this release over the Division of Corporation Finance’s comprehensive disclosure review was the highest and best use of that Division’s expert staff.”

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