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Yesterday, Acting SEC Chair Mark Uyeda delivered remarks to the Investment Company Institute’s 2025 Investment Management Conference.  While much of his presentation was specific to investment companies, the theme of his remarks had a more general application: a revised—revived?—blueprint for SEC rulemaking processes.  This is certainly not the first time that Uyeda has been critical of the SEC’s rulemaking process (see, e.g., this PubCo post and this PubCo post), but now, as Acting Chair, his words may carry more weight as both a reflection of his intentions as Acting Chair and a harbinger of the Administration to come. Among Uyeda’s objectives—“to set forth a blueprint for restoring the Commission’s rulemaking processes to the ‘gold standard’ among regulatory agencies.” 

In particular, Uyeda has been critical of changes to the process implemented during the prior Administration that he considers to be “‘rulemaking shortcuts,’ often taken in the name of expediency. Unfortunately, these shortcuts have returned to haunt the Commission in subsequent litigation,” he observes.  The first point in his blueprint is the need to restore “historical rulemaking comment periods.” Under the Administrative Procedure Act, “notice and comment”  is a “key procedural requirement,” which requires that the public must have “‘a reasonable and meaningful opportunity to participate in the rulemaking process.’”  Although the APA does not prescribe minimum comment periods, “a comment period of at least 60 days has been endorsed by the Administrative Conference of the United States for significant regulatory actions,” and “executive orders issued by multiple past presidents from both political parties have all recognized the importance of a minimum 60-day comment period.” But during the prior four years, he points out, a number of proposals were not afforded 60-day periods—“45-day, and even 30-day, comment periods were the norm”—, which “represented a significant deviation from everything that I had been taught about rulemaking as a member of the staff in my nineteen years with the Commission.” Further, in his view, when the “rule proposal is dense and the scope of the rulemaking is over-broad,” it can be even more challenging for the public to offer thoughtful comments. That problem is just compounded when the SEC requests “public comment on multiple proposals affecting the same stakeholders at the same time.”

SideBar

In remarks in 2022 before the Asian Pacific American Bar Association, Uyeda was critical of recent SEC comment periods as a limitation on due process. He opened by movingly describing the impetus for his focus on due process under the Administrative Procedure Act—the historic failures of due process that had grievously injured the Asian Pacific American community, including his own family.  Specifically, he recounted that his grandparents and their families were held in internment camps during World War II, an action by the U.S. Government that was upheld as lawful under the shameful Korematsu decision. As a young lawyer, he said, he “thought that instances of inappropriate use of race and national origin by the federal government were largely in the past,” but soon learned otherwise when his law firm took on the pro bono representation of an Asian-American scientist, a U.S. citizen, who was arrested on allegations of espionage and held in solitary confinement in pretrial detention for more than nine months. As the prosecution’s case started to crumble, “allegations of targeting of Asian American employees at the lab began circulating.” When, in the end, the prosecution’s case failed, the judge was compelled to issue an “extraordinary apology.”  “These incidents,” Uyeda said, “have had a profound influence on how I think about the exercise of federal power.  While all Americans should be cognizant of these historical failures, it is particularly important for individuals that wield the authority of the federal government to do so in a manner that fully respects the due process rights enshrined in the Constitution.”

Shifting to the APA, Uyeda urged the SEC to “avoid taking any actions that diminish due process.”  The APA’s notice-and-comment process was a “key procedural requirement” that required the SEC (or other agency) to “afford[] interested persons a reasonable and meaningful opportunity to participate in the rulemaking process.” In evaluating compliance, the adequacy of the comment period is a consideration for the courts. He observed that Presidents Clinton, Obama and Biden all recognized the importance of a 60-day comment period in executive orders, and the Administrative Conference of the United States had endorsed a comment period of at least 60 days for significant regulatory actions.

In Uyeda’s view, the current SEC had frequently failed to satisfy this procedural requirement, both with respect to the duration of comment periods as well as “shortcuts with respect to reviving long-dormant rule proposals.” Many of the 30  proposals issued during the 2022 fiscal year had comment periods that were, in his view, inadequate—only 30 days after publication in the Federal Register—especially if they fell over the holidays or involved contemporaneous complex rule proposals. In addition, recently, the SEC had not followed the past practice of issuing a re-proposal through notice and comment if more than five years had elapsed since the original proposal, instead simply reopening the comment periods for the existing versions, even though they contained dated economic analyses.  An updated economic analysis was not available until the final rule release—i.e., not available for commenters. (See this PubCo post.)

The “failure to embrace robust compliance practices” under the APA was “troubling, “ he contended, and may “undermine the legitimacy of agency actions” and weaken an “important protection against regulatory overreach.” He found the SEC’s actions to be “particularly disappointing because the agency likely could have achieved the same substantive results while engaging in high-quality rulemaking practices.” Failure to respect procedural protections, he asserted, “can result in broad governmental actions that empower and enlarge an administrative state that contrasts with the limited role of government contemplated by our Nation’s founders…. The blueprint for restoring that legitimacy is straightforward: ensure that every regulatory action goes well above and beyond the bare minimum required by law.”

He concluded that the damage resulting from “unchecked government action is often based on a self-identified need for expediency, yet can take decades or more to cure.” The many decades it took for the government to apologize for the Japanese internment and the Korematsu decision attest to that fact.

In addition, he believes, the SEC has recently failed to seek additional input when appropriate through the use of re-proposals. For example, in his view, the SEC should have re-proposed the 2022 pay-versus-performance rule. (See this PubCo post.) By re-proposing a rule proposal or at least re-opening the comment file for a rule proposal where appropriate, the SEC can benefit by “taking into account issues that commenters have raised in iterating on the prior rule proposal. It also can respond to changed conditions in the markets. Re-proposal is also appropriate when significant time has passed since the original proposal.”  Generally, the staff has recommended a re-proposal if more than five years have elapsed since the original proposal. In addition, Uyeda believes that, when the SEC is contemplating significant changes to a proposal, a re-proposal would “focus attention on those changes.”  

Uyeda also advocates that the SEC take some “back-to-basics” steps to “help ensure that each rulemaking proposal is as well-reasoned as possible.” These steps “should begin with an identification of the rule’s purpose. What problem is the Commission trying to solve, and is it squarely within its statutory authority to engage in rulemaking to solve that problem?”  Here, Uyeda suggests that the answer to those questions can often be found through public engagement, including meetings between stakeholders and the staff or Commissioners, public roundtables, requests for information, concept releases, advance notices of proposed rulemaking, solicitation of particular data and investor testing.  Uyeda assures that “[u]nder this Administration, the Commission’s doors are open, and we are ready to have a productive dialogue.”

Following identification of the problem, SEC decision-making next involves assessment of the likely effectiveness and cost of the rule.  In his view, stockholder engagement and “a robust comment period” can help assess effectiveness. An economic analysis will help determine a proposal’s cost and efficiency. The Division of Economic and Risk Analysis has “developed robust procedures” regarding the statutory mandate to consider efficiency, competition and capital formation in rulemaking.  Uyeda believes that some areas could be improved, such as updating the estimates for compliance, attorney and other professional costs, which have evolved substantially over time, and considering in particular the rules’ impacts on small entities. 

SideBar

In remarks in 2023 on the rulemaking process, Uyeda looked, rather painfully, at the pay-versus-performance rule, a rule that was mandated under Dodd-Frank in 2010, initially proposed in 2015 and then adopted in 2022, two months after he became a commissioner.  Although the proposal was over seven years old, the SEC reopened the comment period in January 2022 for only 30 days, and without an updated economic analysis.

He also panned the SEC’s tendency to underestimate—to put it mildly—the additional hours and costs that the new requirements will impose. Here’s a good example: the hourly rate the SEC uses in its cost estimates for law firms is $600. (It was increased in the prior year from $400, which was the rate used for the preceding 16 years.) “Aggregating the hours and costs across the five recently adopted rulemakings,” Uyeda advised, the SEC “estimates that the new rules will impose a mere 120 additional internal hours and about $24,000 of outside advisor fees, annually per company. These estimates represent a worst-case scenario where all possible disclosure requirements are triggered, including having a material cybersecurity incident required to be reported on Form 8-K, engaging in share repurchases, adopting or terminating rule 10b5-1 plans, and clawing back compensation.” Presumably, plus PVP. Seem plausible? And, he pointed out, “drafting high-quality disclosure also imposes more time and costs on companies compared to preparing boilerplate disclosure. If the Commission expects to be served non-boilerplate disclosure,…then it should ensure that its disclosure rules’ hours and cost estimates reflect that quality.” (See this PubCo post.)

Going forward, Uyeda advocates, the SEC’s rulemaking must “respect the limits of our statutory authority. We must be clear-eyed about how existing proposals fare under this rubric. Using this framework for analysis, the Commission could consider options that include withdrawing or re-proposing existing rule proposals.” Changed circumstances may also impact some recently adopted rules, “weigh[ing] in favor of taking a pause.” In that regard, he said, they are “reviewing and considering further action on whether certain rules that the Commission has adopted, but which are not yet effective, is appropriate.” (While, in this context, his examples refer specifically to Investment Management rules, presumably his statement could have a broader application?) “Turning to future rulemaking,” Uyeda emphasizes, the SEC “should act like a super-sized freighter, not a speed boat—and that means returning to a smoother regulatory course than the rapid changes that have been promulgated over the last four years. Investors and the industry must be able to rely on us to act consistent with precedent and through an informed and thorough public process. Above all, we should be guided by our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

He also asks how the SEC can “be more flexible in our regulatory approach to facilitate appropriate innovation? As an agency we should be asking, how can this innovation best serve the interests of American investors, and how can innovation help meet the particular challenges these investors face today? The last four years have been marked by an inflexible approach to innovation. We are not merit regulators. Not all products will succeed, but that does not make them inappropriate.”

Finally, he advocated that the SEC “take the time to do things carefully and methodically, rather than rush and risk actions that are not fully thought through,” which may help to “minimize[e] our risk to future litigation challenge.”

Posted by Cydney Posner

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