Thursday, February 19, 2009

Chamber Issues Report on the SEC

the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness has issued a report authored by Jonathan Katz, the SEC's former Secretary, that "examines the efficiency and effectiveness of three core functions of the U.S. Securities and Exchange Commission (SEC) along with several broad issues related to the organizational structure and management of the agency."

The Chamber's report praises the SEC's "ability to act creatively and informally without the need to initiate a rulemaking process or require official agency action by the Commission," but is critical of factors that contributed to delay or unwillingness to provide guidance or warranted exemptions.
  • The lack of strong agency-wide management principles that promote and reward prompt action;

  • A rewards system in which prompt and well-reasoned regulatory action does not outweigh the consequences of a mistake or an unintended outcome; and

  • A perception that the SEC staff is expected to “know the unknowable” and must not only answer the question presented, but must also identify and consider the implications of related questions not directly presented.
The report recommends strengthening the agency's management, structure, and oversight in seven ways:

  1. The Division of Trading and Markets and the Division of Investment Management should be realigned into a Division of Investor Protection and Retail Financial Services Regulation and a Division of Market Oversight and Operations. The Examination Programs of the Office of Compliance, Inspections, and Examinations (OCIE) should be assigned to these new divisions.

  2. The SEC should create an accelerated conditional approval process for new investment products or services.

  3. The five-member Commission should play a greater ongoing role in the interpretation and application of regulatory policy. This may require Congressional action to amend the Government in the Sunshine Act (Sunshine Act) that was passed in 1976 that, among other requirements, mandates that every portion of every meeting of an agency shall be open to public observation. Although the Act was developed to create greater openness in government, it has had the unintended consequence of restricting valuable communications between Commissioners and SEC Staff.

  4. The SEC should create a Chief Operating Officer (COO) position with sufficient authority to oversee daily operations throughout the SEC.

  5. The SEC should establish a coordinating council, chaired by the COO, to resolve issues or disagreements involving more than one division or office.

  6. The SEC should expand the breadth of its staff expertise. Legal and accounting expertise should be complemented with staff experts in capital markets operations and the business operations of regulated entities as well as financial economics.

  7. The SEC should develop a knowledge management program to transfer information and expertise between divisions, preserve the knowledge and experience of departing staff, and provide future staff with ready access to materials explaining and documenting the analysis and reasons for actions taken or not taken.
The Chamber's report also suggests a number of ways to improve the Division of Investment Management's exemptive order process, particularly with respect to reducing the time necessary to obtain an exemption. 

  • An expedited process should be created for routine exemptive applications that mirror prior exemptive orders.

  • Incomplete applications should be rejected with standard rejection letters, or “bedbug letters,” consistent with published standards explaining the grounds for rejecting deficient filings.

  • Internal compliance deadlines should be adopted for staff review and action, and apply to applicant responses or revisions based upon staff comments.

  • Expanding the use of exemptive rules could substantially reduce the number of routine applications. Rule-writing authority for exemptive rules should be reassigned to the same staff that acts on exemptive applications.
In addition, the report provides some recommendations on improving the self-regulatory agency rule filing process, which has been criticized as too slow and intrusive, and a barrier to exchange's ability to compete with non-SEC regulated trading platforms.

  • The division should formulate a standard that articulates the grounds for rejecting a filing as improperly filed. The division should also require its staff to send a rejection letter to the SRO identifying which items on Form 19b-4 are deficient.

  • Waivers of statutory time limits should be the exception, not the norm. All requests for waivers of statutory deadlines should require senior-level approval and should be time limited.

  • The five-day pre-filing requirement should be eliminated.

  • The Commission should re-delegate to the staff the authority to abrogate SRO filings that are deemed effective upon filing.

  • The SEC should order hearings on SRO filings that raise complex issues that cannot be resolved following the notice and comment period. Division staff should have responsibility for reviewing all papers submitted in response to the order for hearing and for submitting a recommendation to the Commission. An administrative law judge should be assigned only for exceptionally complex matters.

  • The SEC should create an optional conditional approval process to encourage SRO innovation.
The Commission's no-action letter process was also criticized by the report for inconsistencies in significance and use
between SEC divisions, suggesting that the process could be improved agency-wide.
  • The Commission should rationalize the current system of informal guidance by reducing the number of vehicles it uses to provide guidance. Each operating division should develop a web-based system of Compliance and Disclosure Interpretations (CDI), which should replacen Staff Legal Bulletins, FAQs, summaries of staff comment letters, small entity compliance guides, and interpretive letters.

  • The Commission should publish guidelines distinguishing the use of no-action letters and exemptive orders.

  • The practice of issuing no-action letters of general applicability should be discontinued in favor of exemptive orders or emergency orders, as appropriate.

  • Each division should post on the SEC Website a list of the staff members, with e-mail addresses and phone numbers, who are authorized to provide informal assistance on specified topics, with all substantive responses promptly posted on the web-based CDI system, following supervisory review.

  • Each division should attempt to provide a final response to a no-action request within 90 days of receipt. To promote compliance, each division should be required to send a quarterly advice memorandum to the Commission identifying all requests pending for 90 days or longer. The memo would identify the issues presented that must be resolved and provide a target date for resolution. The division should also indicate if it is unlikely that a no-action letter will be issued.

  • A no-action letter should be viewed as informal guidance rather than a method of setting regulatory policy. Because it is often difficult to distinguish interpretation from policy on a prospective basis, the Commission should annually issue interpretive statements that review, adopt, and codify significant staff positions contained in no-action letters. These releases could also be used to withdraw or revise a no-action position previously taken, based upon new facts or an analysis of how it has been interpreted. The Commission should issue these interpretive statements following an opportunity for public notice and comment. The original recipient of a no-action letter could continue to rely upon the assurances provided in the letter. Any revisions or changes reflected in the Commission interpretative release would apply prospectively to third parties.
Each of the Chamber's suggested changes is examined in more detail in the 90-page report.  The full text is available at: