In her remarks yesterday at PLI’s SEC Speaks—after a detour to excoriate the SEC’s “maze of staff guidance” defining industry practices that has become effectively “mandatory” even in the absence of input from the full SEC (with crypto accounting under SAB 121 coming in for her particular animus)—Commissioner Hester Peirce turned to her main topic: the “dwindling of genuine Commission and staff engagement with the public.” When it comes to providing interpretive guidance or otherwise engaging with industry, she asserts, the SEC is “closed for business.” For this development, she ascribes blame to the Commission itself. She has some ideas for overcoming the problem.
Peirce sees manifestations of this issue in the current rulemaking process, which, in her view, involves “very broad proposals, unreasonably short public comment periods, pared back final rules with substantial elements on which the public has not commented, and little SEC engagement in implementation discussions.” The SEC, she advises, “should think about each rule proposal as an opportunity to foster a public discussion with the goal of developing the best solution to a carefully identified problem, not as the opening bid in a hard-driving negotiating strategy designed to force a cowed public to accept a slightly less onerous—though perhaps still unworkable—final rule.”
Part of the problem, she contends, is that the industry suffers from compliance overload. Her conversations with advisers, for example, revealed that they were so preoccupied with implementation of new rules that they had little time “to read, let alone comment on, proposed rules. Further exacerbating the burden of commenting, rule proposals often fail clearly to identify a problem that needs solving, which makes offering alternative solutions difficult.”
But the problem, she argues, is not just with rulemaking. When the public seeks advice, the staff has an important responsibility “to help the industry work through difficult regulatory issues.” The staff used to be more accessible, but now, in her view, the public is often met with “crickets.” For “interpretive guidance, ‘the Commission is closed for business.’” Why? The reason may be the lack of staff bandwidth resulting from “a punishing rulewriting agenda,” or even the remote work environment that “reduces opportunities for spontaneous staff collaboration to work through tough questions.” But, “the root of the problem,” she believes “is that the Commission discourages the staff from offering much more than silence, shrugs, sighs, and slow-walking. The culture at the top of the SEC has changed, which in turn has changed the way the agency interacts with the public.”
In addition, some interactions lead to “an interminable round of unproductive monologues before an unresponsive audience….The registration process too often involves unpredictable timelines, inconsistent comments, and an unprecedented lack of transparency.” In addition, she suggests, some are “scared off” from contacting the SEC, concerned that meetings with the SEC are “inadvisable,” potentially leading to enforcement or further rulemaking.
In Peirce’s view, the “stilted communication, half-hearted engagement, quick-draw of enforcement guns, and limited transparency that characterize the Commission’s current relationship with the industry we regulate should concern anyone who cares about this great institution and the amazing markets we regulate.” In addition, “[d]issuading people from coming in to speak with us also deprives us of valuable information that we need to regulate the markets.” (It’s worth noting here that Corp Fin Director Erik Gerding made a particular point in the Corp Fin Workshop at SEC Speaks, perhaps in response to her comments, to emphasize that Corp Fin “is committed to public engagement.”)
Peirce has a number of suggestions to improve the problem she perceives: For the SEC, these include paring back the rulemaking agenda, using concept releases and roundtables to identify problems and workable solutions, proposing “realistic rules without clickbait provisions” that draw commenters’ attention and then disappear, forming an advisory committee of chief compliance officers, providing more insight into the status of a registration statement or application in the course of its review process, directing the staff to “articulate specific issues delaying Commission action and a plan for resolving them,” and encouraging the staff to “use its expertise to work through difficult regulatory issues, including the application of existing rules to new technologies.” In that context, the staff should consider not only the potential harm but also “how blocking them could harm investors. We should empower the staff to facilitate the entry of new products and providers into the market in a compliant, yet commercially viable way.”
For staff, she recommends that they “look for opportunities to apply [their] deep expertise to difficult legal, accounting, economic, and technical problems”; “foster a culture of curiosity and collaboration by working with colleagues across the Commission”; be as precise as possible about their concerns and timing in communications with industry; speak up about concerns or questions regarding any “unsound legal, economic, or accounting analysis, identify facts that need to be corrected, and raise procedural concerns”; and “cultivate mutual respect and frank communication with the public by discussing new rules at industry conferences, working with registrants to solve problems “in a way that benefits investors and the markets. Look for appropriate opportunities to get to know the person on the other end of the phone line.”
Finally, she advises market participants (like us) to “nudge the SEC” along, once things improve, by doing the following:
- “First, optimize any meetings you have with the staff. Prepare an agenda that outlines what you hope to convey and identify what you are seeking from the meeting. If there are related materials that would help facilitate a productive meeting, email those well in advance.
- Second, if you want to present a novel idea, conduct a preliminary high level legal analysis before meeting with the staff. Although you may not want to invest significant time and resources in an idea that may not be viable, showing that you have done the basic due diligence is an important indication of your good faith and commitment to exploring the idea. This analysis can identify areas where legal clarity is needed. This exercise also will help you demonstrate if what you are doing merely iterates on something the Commission has already permitted, which may make it easier for the Commission to get comfortable with the idea.
- Third, if you want to do something that involves numerous complex legal questions, break down the components of your proposal and the related legal issues to determine the feasibility of an iterative approach toward your final goal. Iterative progress and small-scale experiments can be illuminating for both the Commission and the public.
- Fourth, if a broader group shares your novel legal questions, you may want to develop a consensus on the messages and questions you present to the Commission.
- Fifth, if the staff reacts negatively to your inquiry, try to identify their concerns and whether the staff sees a legal path for you to move forward. If you get a negative response, seek clarity on the legal basis of the staff’s position. Ask for specific reasons. What questions and concerns need to be addressed? Are there particular regulatory obstacles?
- Sixth, document your interactions with the Commission. If you are two or three years into a process without progress, and you have regularly been reaching out and trying to respond to the staff’s concerns, the documentation will prove invaluable.
- Seventh, do not be a stranger and do not give up. Carefully consider what the staff is saying. If you do not see a strong legal justification for stopping your idea, do not give up. Be realistic about the timeline, but, if you do not hear back from the Commission, keep following up. Innovation is not linear, and the path to launching an innovative idea will not always be straight. Try to see things from the SEC’s vantage point and to learn from staff’s concerns, but push back when those concerns are not legally grounded. Dealing with an agency that will not give you clear, legally sound answers is frustrating. Agencies, however, are not monoliths; even now, people within the agency may share your frustration and may be making arguments similar to your own in internal SEC conversations.”
