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ANALYSIS: SEC Signals Extensive Regulatory Review

Nov. 30, 2018, 6:43 PM

The SEC kicked off the long Thanksgiving weekend by publishing a list of rules that the agency will review under Section 610 of the Regulatory Flexibility Act. The statute requires administrative agencies to conduct periodic reviews of their rules issued that “have a significant economic impact upon a substantial number of small entities.” Agencies must review all rules within 10 years of adoption.

The statute directs agencies to review the following factors in the course of their reviews:

  • the continued need for the rule;
  • the nature of complaints or comments received concerning the rule from the public;
  • the complexity of the rule;
  • the extent to which the rule overlaps, duplicates or conflicts with other federal rules, and, to the extent feasible, with state and local governmental rules; and
  • the length of time since the rule has been evaluated or the degree to which technology, economic conditions, or other factors have changed in the area affected by the rule.

The public may comment on the rules list until December 27, 2018. The SEC is particularly interested in comments on whether the listed rules affect small businesses in new or different ways than when they were first adopted.

According to the Commission, the agency conducts a broader review than that required by the statute, with a view to identifying those rules in need of modification or rescission. The widened scope “may include rules that do not have a significant economic impact on a substantial number of small entities.”

It is important to note that the list is a result of a statutory mandate and, in many years, it results in no administrative action on many of the included rules. The inclusion of an item does not mean that the Commission will act on that rule in any way in the near future, and the exclusion of a provision from the list does not mean that the agency will not act in that space. In short, the list of SEC rules subject to Regulatory Flexibility Act review is often not an accurate reflection of the Commission’s regulatory agenda.

These annual postings usually generate little attention. As former SEC Commissioner Michael Piwowar stated in 2016, “in recent years the annual Rule List has prompted, on average, only one comment.” Commissioner Piwowar urged interested parties to “engage with the Commission and provide insights that will inform our retrospective reviews.”

His appeal must have worked, as the number of comments on the list skyrocketed from one the previous year to a grand total of 14 in 2016.

This year’s list may generate a different response from what we have seen in previous years. As an initial matter, the size of the list is impressive. In its previous posting, the SEC listed 11 rules to be reviewed. This year’s list includes more than 40 entries. The rules on the list also touch on many hot-button issues, including executive compensation and related party disclosures, short selling, shareholder proposals and proxy enhancements.

The Commission is also at full strength, with the addition of Commissioner Elad L. Roisman to the SEC in September 2018. When the agency published its last rules list in September 2016, two seats on the Commission had been vacant for an extended time. SEC Chairman Jay Clayton has also made no secret of the fact that he is committed to streamlining agency regulations to make registration as a public company a more attractive alternative.

Several of the items in the list are also related to matters currently of interest to the SEC. For example, the list includes several rules concerning the proxy process, including proxy disclosure enhancements, e-proxy delivery, electronic shareholder forums and shareholder proposal provisions. The Commission recently conducted a proxy roundtable featuring representatives from a wide variety of market participants, and appears willing to entertain some rulemaking activity in the space. The SEC will, however, face practical challenges as it confronts its statutory obligation to review the rules on the list in the face of budgetary and staffing issues.

The required Regulatory Flexibility Act review does give the SEC an opportunity to resurface and reconsider long-established rules in light of changing technologies and market conditions. For the time being, we are waiting and watching to see what, if anything, the SEC will do with the listed matters.

By the time the last eggnog cups and champagne flutes have been emptied this holiday season, the commissioners will have an idea of the public’s appetite for taking a hard look at the 40-plus rules on the list from the comments submitted by interested parties. It won’t be long before we see if the release is a blueprint for Commission action, or as in many previous years—just a list.