A recent rulemaking petition, submitted by members of the public, asks the Securities and Exchange Commission to prohibit guidance that becomes binding and enforceable without undergoing Constitutionally established rulemaking procedures.
A separate petition asks the Commission to require that banks file more detailed revenue breakdowns, including collected overdraft fees, in their 10-K filings.
Although they seldom gain traction—even when gaining more than 1 million public comments, as was the case with a call to disclose political contributions by public companies—the SEC does accept and consider public rulemaking petitions.
Any person may request that the Commission issue, amend, or repeal a rule of general application. All petitions will be forwarded to the appropriate office or division of the Commission for consideration and recommendation.
A petition for rulemaking, filed on Aug. 7 by the New Civil Liberties Alliance, seeks “regulations prohibiting the issuance, reliance on, or defense of improper agency guidance.
The NCLA is a non-profit civil rights organization that, in its words, was “founded to defend constitutional rights through original litigation, amicus curiae briefs, and other means.”
Although both the Constitution and the Administrative Procedure Act prohibit the practice, federal agencies often issue informal interpretations, advice, statements of policy, and other forms of guidance that are treated as enforceable law or regulation by those agencies, the group claims.
Similar petitions were also filed with the Food and Drug Administration and Department of Justice.
“As the petition sets out in detail, NCLA asks SEC to cease its ad hoc promulgation of guidance by which SEC seeks to bind private parties with the force of law,” wrote Mark Chenoweth, NCLA’s executive director and general counsel.
Chenoweth cited memos issued by the Justice Department to make the case that “such a practice is unlawful.”
In November 2017, Attorney General Jeff Sessions issued a memo prohibiting the Department from “issuing guidance documents that have the effect of adopting new regulatory requirements or amending the law” without the public comment process mandated by the Administrative Procedures Act.
“The memo prevents the Department of Justice from evading required rulemaking processes by using guidance memos to create de facto regulations,” a statement at the time said. A January memo from the Department reemphasized the policy and practice.
“In the past, the Department of Justice and other agencies have blurred the distinction between regulations and guidance documents,” a statement accompanying the earlier memo says. “Under the attorney general’s memo, the Department may no longer issue guidance documents that purport to create rights or obligations binding on persons or entities outside the Executive Branch.”
“Guidance documents can be used to explain existing law,” former Associate Attorney General Rachel Brand, then the chair of the Justice Department’s Regulatory Reform Task Force, said at the time. “But they should not be used to change the law or to impose new standards to determine compliance with the law. The notice-and-comment process that is ordinarily required for rulemaking can be cumbersome and slow, but it has the benefit of availing agencies of more complete information about a proposed rule’s effects than the agency could ascertain on its own.”
“This Department of Justice will not use guidance documents to circumvent the rulemaking process, and we will proactively work to rescind existing guidance documents that go too far,” she added.
The NCLA argues that many of the requirements in its proposed rule represent “constitutional minimums,” so embodying them in a rule “will also help ensure that no future Commission can revert back to the old practice of using guidance in an unconstitutional way.”
“All externally binding rules must implement statutory instructions and be adopted through notice-and-comment rulemaking. By adopting the rule outlined in this petition, the SEC can bring its rulemaking practices into conformity with the Constitution, as well as help its rules withstand court challenges and endure beyond the preferences of the current administration.”
Mark Chenoweth, Executive Director & General Counsel, NCLA
“If a future administration were to repeal the rule requested in this petition and thus facilitate the use of unconstitutional guidance, NCLA would be prepared to bring a facial challenge to the repeal of the rule on constitutional grounds,” the group wrote in a preamble to the petition.
“All externally binding rules must implement statutory instructions and be adopted through notice-and-comment rulemaking,” Chenoweth says. “By adopting the rule outlined in this petition, the SEC can bring its rulemaking practices into conformity with the Constitution, as well as help its rules withstand court challenges and endure beyond the preferences of the current administration.”
The NCLA’s rulemaking petition proposes that the Commission issue a rule prohibiting the Commission, or any of its offices “from issuing, relying on, or defending the validity of improper guidance.”
“The proposed rule not only adopts existing legal limitations on such improper agency action but, critically, also creates a permanent and binding set of limits on departmental practice,” the petition adds. “Agencies and agency heads have a duty to follow the law, not least by avoiding unlawful modes of governance. NCLA advises that all agencies and agency heads must examine whether their modes of rulemaking, guidance, adjudication, and enforcement comply with the APA and with the Constitution.”
The NCLA and the Department of Justice are not alone in flagging the temptation to substitute guidance for rulemaking. In fact, the debate over such matters date back several years.
In January 2001, the Office of Management and Budget (OMB) published a final Bulletin titled, “Agency Good Guidance Practices.” It established policies and procedures for the development, issuance, and use of significant guidance documents by federal departments and agencies.
It was “intended to increase the quality and transparency of agency guidance practices and the significant guidance documents produced through them.” It cited an ongoing problem caused by the issuance of “poorly designed or improperly implemented” “guidance documents” from administrative entities.
The OMB explained that many stakeholders had ongoing “concern about whether agencies” had been improperly issuing guidance documents that actually “establish new policy positions that the agency treats as binding” without following the notice-and-comment requirements of the APA. In addition to promulgating formal rules with the effect of law, it said, many “agencies increasingly have relied on guidance documents to inform the public and to provide direction to their staffs.”
The bulletin noted that many guidance documents do “not receive the benefit of careful consideration accorded under the procedures for regulatory development and review.”
“Because it is procedurally easier to issue guidance documents, there also may be an incentive for regulators to issue guidance documents in lieu of regulations,” it said.
The OMB Bulletin suggested that each significant guidance document adhere to the following: including the citation to the statutory provision or regulation which it applies to or interprets; and not include mandatory language such as ‘‘shall,’’ ‘‘must,’’ ‘‘required,’’ or ‘‘requirement,’’ unless the agency is using these words to describe a statutory or regulatory requirement.
The NCLA says, in its petition, that the bulletin did not go far enough: It was primarily directed at Executive Branch agencies and “did not create any means of review or redress should agencies choose to disregard it.”
The Bulletin itself said that it was meant only “to improve the internal management of the Executive Branch and is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity, against the United States, its agencies or other entities, its officers or employees, or any other person.”
The proposed SEC rule includes the following langrage:
Any pronouncement from the Commission or any office operating within the Commission that is not a “legislative rule” must identify itself as guidance and disclaim any force or effect of law. It must prominently state that it has no legally binding effect on persons or entities outside the agency or office itself and not use mandatory language such as “shall,” “must,” “required,” or “requirement” to direct parties outside the federal government to take or refrain from taking action.
A regulated entity’s non-compliance with any agency pronouncement other than a “legislative rule,” issued from any agency may not be considered by any entity within the Commission in determining whether to institute an enforcement action or as a basis for proving or adjudicating any violation of applicable law.
Any “interested party” may petition any office operating within the Commission to determine whether a prior agency pronouncement is a “legislative rule.”
Any agency determination must be made in writing and be promptly made publicly available and must include a formal statement of reasons for determining that the pronouncement under review does or does not constitute a “legislative rule.”
A rulemaking petition filed on Aug. 7 by a man identified as Richard Joe, a former actuary for insurance companies, demands more detailed bank revenue reporting.
“I am writing to request that the 10-K form provide full breakout by line of business of the elements of the Income and the offsetting Disbursements, for all banks that submit form 10-K,” he wrote. “Account management fees and overdraft fees over the years 2014 through 2016 have run a steady $7 billion, varying from 30 percent to 40 percent of total income. Yet the gross income is provided only. It looks like mostly pure profit at negligible risk exposure for the bank.”
He compared banking disclosures to the more detailed, fiduciary-minded information from insurance companies.
The life insurance industry’s annual “Bluebook,” created and regulated by the National Association of Insurance Commissioners, “requires great detail of income and disbursements for every line of business, no matter how minor,” he wrote, adding that banking disclosures are far less revelatory.
The Richard Joe petition cites a self-made review of Bank of America’s 297-page 10-K filing. Nine citations of overdrafts are provided in the 10-K document, including footnotes of year-ending overdraft balances, “but nothing of income versus disbursements offsetting,” he wrote. “A five-year history [for all banks] would yield extraordinary insight. So, it is up to the SEC to expose to light the extravagant profit margins banks make on overdraft charges, by expanding the detail by line of business profitability.”