Ever wanted to step into the shoes of an SEC commissioner? Or pitch rulemaking mandates just like Congress does?
Under a Securities and Exchange Commission process known as a Petition for Rulemaking, any person, organization, or business has the right to request that the SEC issue, amend, or repeal a rule.
The longstanding practice is used infrequently (only five have been filed so far this year) and rarely leads to new rulemaking. Recently, however, some high-profile efforts have taken on the challenge and some think the process is on the cusp of becoming more widely used. “The petition process has really become a focus in the last couple of years,” says Robert Jackson, an associate professor at Columbia Law School.
Jackson should know. Along with Lucian Bebchuk, professor of law, economics, and finance at Harvard Law School, he spearheaded a petition effort that calls on the SEC to develop rules requiring public companies to disclose their spending on political activity. The petition calls on the SEC to develop a framework that would detail how often public companies should be required to disclose their political spending, the types of spending subject to disclosure, and the threshold for small outlays that would be exempt from reporting requirements.
Other petitions currently awaiting SEC action include:
One that would amend Rule 10b5-1 (which allows insiders of publicly traded companies to set up a trading plan for selling their stock) to restrict the use of such plans or the SEC would provide further interpretive guidance on the circumstances under which Rule 10b5-1 trading plans may be adopted, modified, or cancelled. The petition was submitted by Jeff Mahoney, general counsel for the Council of Institutional Investors. Critics of those plans, and many shareholder advocates, say the current rule allows wiggle room that leads to abuse and lack of transparency.
A petition urging the Commission to adopt regulations to recognize a new category of investment adviser, a “neutral Internet voting platform,” that an investor may use to receive information about his or her investments, to vote shares at corporate meetings, and to designate as the recipient of proxy materials to be transmitted by companies whose stock is registered with the Commission. The petition was submitted by Larry Eiben, co-founder of Moxy Vote, a now defunct online shareholder voting facilitator.
A request for rulemaking to exempt securities offerings up to $100,000, from registration, with a $100 maximum per investor. The petition was submitted by Jenny Kassan, co-founder of the Sustainable Economies Law Center.
Weighing in on Conflict Minerals
Last month, the law firm Troutman Sanders filed a petition with the SEC that seeks disclosure alternatives to those established by the Dodd-Frank Act conflict minerals rules that the SEC adopted in August of last year and up to a two-year deferral. Final rules adopted by the SEC require companies to assess products they manufacture to determine whether any contain minerals mined from the war-torn Democratic Republic of the Congo.
“When many companies started their implementation efforts it was clearly more difficult than anyone had anticipated,” says Brinkley Dickerson, a securities partner with Troutman Sanders. “By early June, we realized many weren't going to be able to get to the finish line in time.”
Why go the Petition for Rulemaking route? “The only formal way to tee up an issue for the SEC, publicly, is through a rulemaking petition,” he says. “It's not the most commonly used tool. There are very few of them, but we thought our proposal was worthy of consideration.”
“The most unfortunate securities law development of the past decade has been the D.C. Circuit's approach to reviewing SEC rulemaking. It has put the SEC in a position where they are afraid because the courts have set such an unrealistic standard for the analysis of costs and benefits ...”
—Robert Jackson,
Associate Professor,
Columbia Law School
Dickerson is well aware there is no guarantee of success, but thinks his firm's approach will be well-received. “When you look at the cross-section of rulemaking petitions, a tremendous number of them are by single interest groups with an agenda,” he says. “We are not here for any other reason than to improve the ultimate quality of disclosures by companies that have conflict minerals issues and facilitate their doing it in the most economical fashion possible.”
That doesn't mean that the SEC doesn't sometimes listen to single interest groups with an agenda. Jackson, for example, remains hopeful the SEC may soon issue a proposal based on his political spending disclosure petition, although he says he doesn't know how likely it is to happen. Helping his cause: More than 650,000 supporters have filed comments with the SEC backing the plan.
“We are going to get an answer, one way or the other,” Jackson says. “I doubt we are going to have complete radio silence through the end of the year. They aren't going to throw it in a drawer.”
He suggests that the many challenges to provisions of the Dodd-Frank Act have created a climate where petitions may have a better chance. “The most unfortunate securities law development of the past decade has been the D.C. Circuit's approach to reviewing SEC rulemaking,” he says. “It has put the SEC in a position where they are afraid because the courts have set such an unrealistic standard for the analysis of costs and benefits you are supposed to do in rulemaking. They fear any rule that folks don't like might be the victim of a successful legal challenge.”
Getting Heard
The petitions are an “expression of frustration that a solution, viewed by some significant part of the market as making makes sense, isn't being proposed,” says Carolyn Walsh, of counsel for the law firm Patton Boggs, who focuses her practice on regulatory efforts at the SEC. She called them “another bite at the apple” when a party feels concerns laid out in comment letters were not heeded.
FROM CONFLICT MINERALS TO POLITICAL SPENDING …
The following are Petitions for Rulemaking Received thus far in 2013 by the Securities and Exchange Commission.
Sept. 11, 2013
Request for rulemaking to permit, for a temporary period, alternative disclosure in lieu of the disclosure currently required by the Conflict Minerals Rules.
Submitted by: W. Brinkley Dickerson, Troutman Sanders
April 22, 2013
Request for rulemaking regarding Option Floor Crosses
Submitted by: Citadel Securities, Susquehanna International Group
March 12, 2013
Request for rulemaking to: adopt new Securities Act Rule 241 to exempt certain over-the-counter options from provisions of the Securities Act; provide a temporary exemption with respect to Credit Default Swaps; and to amend Exchange Act Rule 12h-1 to exempt from Exchange Act registration options that are issued and cleared by a registered or exempt clearing agency in its function as a central counterparty.
Submitted by: James Brown, executive vice president, legal, The Options Clearing Corp.
Feb. 4, 2013
Request for rulemaking concerning amendment of beneficial ownership reporting rules under Section 13(f) of the Securities Exchange Act of 1934 in order to shorten the reporting deadline under paragraph (a)(1) of Rule 13f-1
Submitted by: Janet McGinness, executive vice president and corporate secretary, NYSE Euronext; Kenneth Bertsch, president and CEO, Society of Corporate Secretaries and Governance Professionals; and Jeffrey Morgan, president and CEO, National Investor Relations Institute
Jan. 2, 2013
Request for rulemaking concerning amending Rule 10b5-1 or further interpretive guidance regarding the circumstances under which Rule 10b5-1 trading plans may be adopted, modified, or cancelled
Submitted by: Jeff Mahoney, general counsel, Council of Institutional Investors
Source: SEC.
“To proceed with a petition is a way to concretely suggest an alternative and try and force the SEC's hand, but there is a very long widow before you will see results,” she says. “It's a very regimented process.Ultimately the agency rulemaking still must comply with the with the Administrative Procedure Act and due process safeguards to make sure that the rule is well-founded and has a well-vetted consideration of costs and benefits.”
The long review process may be one reason that rulemaking petitions aren't used more often. “It may be an outlet to get into the public discourse and put pressure on the SEC, but it still has to go through all of those reviews,” Walsh says. “It's not something that has a terrific chance of success unless you already have the buy-in of the staff or Commission.”
Jackson says another reason the petition process is not used more is simply that not many people know about it. “It's not widely advertised that anybody, literally any person, can petition the SEC to do anything,” he says. Also, “securities lawyers, in particular, aren't yet focusing on helping regulators and think of it as an adversarial process.”
That perception may be changing, which bodes well for petition efforts, Jackson says. “Corporate lawyers are seeing that regulators will listen and want to work with them to get things right,” he says. “More and more, you are going to see the petition process used as lawyers understand the SEC will listen, and they should all have a collegial, rather than confrontational relationship.”
Not everyone at the SEC may be willing to embrace the greater use of petitions. “We'd get that crap all the time” one former SEC lawyer said, adding that the petitions, no matter how self-serving, were always presented as for “the benefit of investors. He referred to the process as “democratizing insanity.”
“At the staff level I think there are people who might find the petition process distracting and concerning,” Jackson admits.
On the other hand, Walsh suggests that the petition process could be seen as “a helpful tool” for an overworked SEC staff, some of whom may agree with a cause but need a public push to prioritize a rule or amendment that will otherwise languish due to budget and manpower cuts. Any legwork, especially on costs and benefits, a petitioner can do will likely be appreciated.
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