SEC No-Action Letters: Explanation, Please

The SEC should put explanations in its no-action letters.

For those not familiar with no-action letters or the SEC no-action process, here’s how it works. Someone, usually an attorney, submits a letter to the SEC staff detailing a proposed course of action and, in essence, asking whether the proposed action will violate some particular part of the federal securities laws. The SEC staff will usually respond in one of two ways:

1.    On the basis of your representations and the facts set forth in your letter, the Division will not recommend enforcement action by the Commission under [whatever the relevant parts of the statute are] if [the client] engages in the activities described in your letter.

2.    We are unable to offer you assurance that the staff of the Division would not recommend enforcement action by the Commission under [whatever the relevant parts of the statute are] if [the client] engages in the activities described in your letter.

The problem is that the staff seldom explains why it thinks the proposed action is or is not acceptable. Sometimes, the staff response merely repeats the facts from the request letter and concludes with the language above. Other times, the staff may specifically flag some of the facts as important. The response will say something like, “This response is conditioned on your representation that Client will not …..” But, even then, the staff doesn’t explain why those particular facts are important to the conclusion. Only rarely does the staff provide a full explanation of its conclusion.

This may be enough for the person requesting relief. They want to know if they may do what they propose and they have an answer.

But others rely on these letters. In areas of securities law where case law and regulations are sparse or non-existent, no-action letters are the primary source of guidance. Attorneys and others reviewing these letters must parse the facts of each one and try to reconcile the various positive and negative responses. It’s especially frustrating when you suspect that what’s really going on is that the staff’s view has simply changed over time.

I have been struggling through a long series of SEC no-action letters for a project I’m working on, and, I promise, the analysis isn’t easy. I realize that some of you might attribute this to my own lack of mental prowess, but the treatise writers in these areas struggle as well.

Would it be too much to ask the staff to give a brief explanation, particularly when they are refusing no-action relief?

The upside to lawyers (and law professors) who have to use these letters would be tremendous. No more treatises guessing about the rationale. Fewer future no-action requests from lawyers who can’t figure out what the SEC’s position is. More certainty.

The cost to the SEC would be minor. Presumably, the staff member is not just flipping a coin; he or she has some rationale for not granting the request. The additional effort to put that rationale on paper would be minimal. And the SEC makes it clear that no-action responses have no precedential value, so a poorly reasoned position taken by a single staff member in a single letter isn’t going to devastate the Commission.

-Steve Bradford