The SEC's Proposed Regulatory Review and the D.C. Circuit

Is the SEC setting itself up for another D.C. Circuit loss, or perhaps a whole series of such losses?

The SEC is seeking comments on a plan to do retrospective reviews of its existing regulations. The announcement and the release, as well as a link for comments, are available here. The SEC‘s request is in response to Executive Order 13579 (July 11, 2011), in which President Obama called on independent agencies to “consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.”

The SEC release, in addition to requesting general comments, solicits responses to the following specific questions:

1. What factors should the Commission consider in selecting and prioritizing rules for review?
2. How often should the Commission review existing rules?
3. Should different rules be reviewed at different intervals? If so, which categories of rules should be reviewed more or less frequently, and on what basis?
4. To what extent does relevant data exist that the Commission should consider in selecting and prioritizing rules for review and in reviewing rules, and how should the Commission assess such data in these processes? To what extent should these processes include reviewing financial economic literature or conducting empirical studies? How can our review processes obtain and consider data and analyses that address the benefits of our rules in preventing fraud or other harms to our financial markets and in otherwise protecting investors?
5. What can the Commission do to modify, streamline, or expand its regulatory review processes?
6. How should the Commission improve public outreach and increase public participation in the rulemaking process?
7. Is there any other information that the Commission should consider in developing and implementing a preliminary plan for retrospective review of regulations?

In my academic career, I have proposed changes to many SEC rules. I’m not a fan of some of the things the SEC has done. But I seriously doubt this review is going to have much effect, and I would rather see the Commission use its resources for fraud enforcement than to waste money on superficial reviews that are likely to result in marginal tweaking of the rules. I suspect the entire undertaking is an exercise in public relations, and there are better ways to spend the SEC’s limited funds.

But there is at least a possibility that the effort will backfire. When the SEC engages in rulemaking, it has a statutory obligation to consider whether its action will promote “efficiency, competition, and capital formation.” See Securities Act § 2(b); Exchange Act § 3(f); Investment Company Act § 2(c); Investment Advisers Act § 202(c). The recent Business Roundtable decision in the D.C. Circuit, which I and Stefan Padfield  blogged about earlier, relied on one of these provisions to hold that the SEC’s failure to adequately consider the economic consequences of its proxy access rule violated the Administrative Procedure Act.

If the SEC sets up a formal, public process to review its rules, is it setting itself up for another D.C. Circuit failure? Assume, for example, that the SEC initiates a public review of Regulation D, which exempts certain securities offerings from the registration requirements of the Securities Act. Some of the commenters propose revisions that would substantially liberalize Regulation D, arguing that exempting more offerings would promote capital formation without significantly affecting investor protection. The SEC rejects those comments and makes only marginal changes to the regulation. Could the proponents of more radical change successfully argue that the SEC failed to adequately consider their economic arguments?

It’s possible that the SEC, at the President’s behest, is about to open a Pandora’s box.

-Steve Bradford