On September 13, Securities and Exchange Commission Chairman Jay Clayton issued a public statement reiterating the Commission’s longstanding position that “all staff statements are nonbinding and create no enforceable legal rights or obligations of the Commission or other parties.” While the statement accurately reflects where staff communications measure up (or down) on the legal totem pole, one has to wonder what prompted Chairman Clayton to issue such a statement and what, if any, future implications it may have. This article reviews how Clayton’s statement fits in with broader themes of regulatory reform that have been enunciated by the White House, the Congress, and numerous federal agencies.
Review of Proxy Voting Issues
The most obvious and immediate rationale for Clayton’s statement is his decision to review proxy voting issues. At the same time Clayton issued his statement, the SEC’s Division of Investment Management issued an “IM Information Update” that: (1) describes the staff’s announced Roundtable on the Proxy Process; (2) withdraws two no-action letters issued in 2004 relating to proxy advisory firms; and (3) echoes Chairman Clayton’s statement by explicitly noting that the IM Information Update “does not constitute staff legal guidance and is not a rule, regulation, or statement of the Securities and Exchange Commission.”
At first blush, the withdrawal of the no-action letters seems potentially momentous, but on further examination, the better view is that the withdrawal of the letters does not appear to have any practical effect at this time on the proxy voting obligations of investment advisers. Indeed, immediately following the statements by Chairman Clayton and the Division of Investment Management, SEC Commissioner Robert Jackson issued a statement, expressing the view that “…the law governing investor use of proxy advisors is no different today than it was yesterday.” During her September 26 testimony before the House Subcommittee on Capital Markets, Securities, and Investment, Dalia Blass, Director of the SEC’s Division of Investment Management, stated that the decision to withdraw the two no-action letters would allow the staff to focus attention during the upcoming roundtable on issues other than those raised by the earlier no-action letters (which dominated the discussion at the SEC’s 2013 roundtable on proxy advisory firms).
In short, Chairman Clayton’s pronouncement on staff communications, in tandem with the withdrawal of the no-action letters, sets the stage for a wide-ranging examination of the proxy process while emphasizing that any final decisions to alter the process and to set final rules ultimately will be within the purview of the Commission, not the staff.
Consistency with Prudential Regulators
Clayton’s statement was released two days following a similar statement from the Federal Reserve, Federal Deposit Insurance Corporation (“FDIC”), National Credit Union Administration, Office of the Comptroller of the Currency (“OCC”), and Consumer Financial Protection Bureau (“CFPB”) (referencing themselves as the “prudential agencies”). The September 11 interagency statement spells out the difference between supervisory guidance and laws or regulations as follows:
“The agencies issue various types of supervisory guidance, including interagency statements, advisories, bulletins, policy statements, questions and answers, and frequently asked questions, to their respective supervised institutions. A law or regulation has the force and effect of law. Government agencies issue regulations that generally have the force and effect of law. Such regulations generally take effect only after the agency proposes the regulation to the public and responds to comments on the proposal in a final rulemaking document. Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance. Rather, supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area. Supervisory guidance often provides examples of practices that the agencies generally consider consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers. Supervised institutions at times request supervisory guidance, and such guidance is important to provide insight to industry, as well as supervisory staff, in a transparent way that helps to ensure consistency in the supervisory approach.”
This statement from prudential regulators is linked to concerns expressed by Members of Congress, and, in particular, Sen. Pat Toomey (R-PA), about the legal status of supervisory or agency guidance. Last year, Sen. Toomey requested reports from the Government Accountability Office asking if guidance issued by prudential regulators were in fact regulations, and thus subject to the Congressional Review Act (“CRA”).
In October 2017, the U.S. Government Accountability Office (“GAO”) issued a decision on whether the Interagency Guidance on Leveraged Lending, issued jointly by the OCC, the Federal Reserve, and the FDIC should be considered a rule for purposes of the CRA. GAO concluded that the Interagency Guidance is a general statement of policy and is a rule under the CRA, which must be submitted to the Congress for review. Similarly, in response to a request from Sen. Toomey, GAO subsequently issued an opinion on whether the Bulletin issued by the Consumer Financial Protection Bureau on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act on March 21, 2013, should be considered a rule for purposes of the Congressional Review Act. GAO concluded that the Bulletin is a rule under the CRA, which requires that it be submitted to Congress for review. Following the interagency statement, Sen. Toomey issued a press release, citing the GAO reports and stating:
“I welcome the announcement by financial regulators, including the Fed, FDIC, and BCFP [sic], clarifying that guidance documents do not carry the weight of law. It is Congress, not the bureaucracy, that is empowered and elected by the American people to enact legislation. The announcement reaffirms this important constitutional principle.”
Chairman Clayton and the SEC certainly were aware of these developments and it does not defy imagination that Clayton and his fellow regulators may have had discussions about the role of staff communications and the concerns expressed by Sen. Toomey. At any rate, the timing of the interagency statement and Clayton’s statement strongly suggests that financial services regulators believe that the time has come to reiterate and underscore the legal differences between staff guidance and agency-approved regulations.
The Bigger Picture
Questions surrounding the legal status of staff interpretive guidance, staff views, and other staff pronouncements have been the subject of vigorous debate for many years. Judicial decisions relating to these issues have been described as “enshrined in considerable smog.” Since early in 2017, however, president Trump has issued a number of executive orders and presidential memoranda that make it crystal clear that his Administration supports actions to reduce regulatory burdens and reform regulatory processes. For example, one of president Trump’s first executive orders states that U.S. policy is “to alleviate unnecessary regulatory burdens placed on the American people” and directs federal agencies to take action to implement extensive regulatory reform, including regulations that are “outdated, unnecessary, or ineffective.” Pursuant to this executive order, Attorney General Jeff Sessions issued a memorandum that prohibits certain guidance documents and sets forth the following principles for issuing appropriate guidance documents:
• Guidance documents should identify themselves as guidance, disclaim any force or effect of law, and avoid language suggesting that the public has obligations that go beyond those set forth in the applicable statutes or legislative rules.
• Guidance documents should clearly state that they are not final agency actions, have no legally binding effect on persons or entities outside the federal government, and may be rescinded or modified in the Department’s complete discretion.
• Guidance documents should not be used for the purpose of coercing persons or entities outside the federal government into taking any action or refraining from taking any action beyond what is required by the terms of the applicable statute or regulation.
• Guidance documents should not use mandatory language such as “shall,” “must,” “required,” or “requirement” to direct parties outside the federal government to take or refrain from taking action, except when restating-with citations to statutes, regulations, or binding judicial precedent-clear mandates contained in a statute or regulation. In all cases, guidance documents should clearly identify the underlying law that they are explaining.
• To the extent guidance documents set out voluntary standards (e.g., recommended practices), they should clearly state that compliance with those standards is voluntary and that noncompliance will not, in itself, result in any enforcement action.
Essentially the same admonitions were set forth in a subsequent memorandum from the Associate Attorney General, who extended the U.S. Department of Justice (“DOJ”) prohibition to other agencies’ guidance documents, thus making it clear that non-binding staff guidance may not be used as the basis for enforcement actions.
While, as a strict legal matter, the mandates of the president’s orders do not apply to independent regulatory agencies – like the SEC and Commodity Futures Trading Commission (“CFTC”) – it is not a stretch to conclude that presidential appointees will at least give a nod to major policy objectives enunciated by the White House.
For example, while acknowledging that executive order 13777 technically does not apply to the CFTC, Chairman Christopher Giancarlo launched an initiative called Project KISS (for “Keep It Simple Stupid”) after the executive order was published. He designated his chief of staff as the agency’s Regulatory Reform Officer (as required by the executive order) and the agency subsequently released a request for public comment on simplifying CFTC rules. As described in Giancarlo’s testimony before the House Agriculture Committee, the CFTC is continuing to review its regulations and collecting ideas on how the CFTC can be a more effective regulator.
At the same time, legislation has been floating around Capitol Hill for some time that would impose greater restrictions on issuing regulations, including requiring strict cost/benefit analyses, and allowing for greater involvement by the Congress, including the ability to rescind regulations under certain circumstances. Capitol Hill’s interest in regulatory reform also has included the desire to curb staff guidance. In 2016, for example, House Speaker Paul Ryan issued a wide-ranging policy document that criticized specific staff guidance from a variety of departments and agencies and included the following recommendation:
“Rein in the use of ‘guidance’ to advance significant regulatory changes. House Republicans will work to prevent federal agencies from issuing sub-regulatory guidance that has a significant impact on the economy without public notice or an opportunity for the public to comment. While there may be a need for more informal guidance in order to keep pace with the changing environment in one particular industry or another, federal bureaucrats must not be permitted to create brand new requirements and standards through this opaque process.”
The bottom line is that, at least under the current Administration and Congress, the regulatory pendulum is definitely swinging toward the deregulatory side. Chairman Clayton’s recent statement is fully consistent with the general deregulatory environment and, more specifically, with efforts to curb the use of staff guidance.
These efforts also extend to interest groups that support limiting staff guidance. For example, in the category of “only inside the Beltway,” the New Civil Liberties Alliance – a self-described “nonprofit civil liberties organization dedicated to protecting constitutional rights from the administrative state” – recently filed a petition for rulemaking with the SEC asking the agency:
"…to cease its ad hoc promulgation of guidance by which SEC seeks to bind private parties with the force of law. As the November 2017 Sessions Memo and the January 2018 Brand Memo from the U.S. Department of Justice explain, such a practice is unlawful. All externally binding rules must implement statutory instructions and be adopted through notice-and-comment rulemaking. By adopting the rule outlined in this petition, SEC can bring its rulemaking practices into conformity with the Constitution, as well as help its rules withstand court challenges and endure beyond the preferences of the current administration.”
Taking all of this into consideration, it would be a mistake to view Clayton’s statement in a vacuum. Instead, his statement is only one part of a broad and concerted effort to reduce the degree to which federal agency staff pronouncements are viewed as formal policies.
So What Does It All Mean for SEC Staff Guidance?
There are four major takeaways:
• First, as noted above, the SEC will be reviewing various issues relating to proxy voting. The November 15, 2018 Roundtable will explore a number of issues, including a review of staff pronouncements on this topic, as reflected in the recent withdrawal of the two no-action letters. In the end, expect the Commission to take action to alter and amend current rules and to address staff guidance in this area.
• Second, Chairman Clayton’s statement is significant for those engaged in SEC enforcement and examination activities. In his September 13 statement, Clayton stated that “[s]everal weeks ago, I instructed the directors of the Division of Enforcement and the Office of Compliance Inspections and Examinations to further emphasize this distinction to their staff.” While this statement suggests that SEC enforcement proceedings and examinations by SEC staff will not rely on staff guidance and pronouncements, and instead will be based solely on Commission rules and regulations, it is probably wise to take a wait-and-see posture to understand what the exact effect of this directive will be. While some enforcement and examination matters are clearly based on settled laws and Commission rules, the extensive staff guidance that has grown through many years will likely play some type of continuing role in the future. At a minimum, it will take time to sift through relevant staff guidance to determine whether it applies to the specific facts and circumstances of particular enforcement and examination activities and whether it should be accorded any legal significance.
• Third, while the Clayton statement strongly states that staff guidance is nonbinding and unenforceable, do not expect that big chunks of SEC staff pronouncements will be modified, rescinded, or supplemented in the near future. Clayton has suggested that SEC divisions and offices should be examining all staff communications to determine if they should be altered. But this will be a process that will take months and years to play out. Clayton has consistently demonstrated his commitment to orderly notice-and-comment processes as the Commission considers various matters. This commitment to an open and public process is reflected in his September 13 statement: “I believe that public engagement on staff statements and staff documents is important and will assist the Commission in developing rules and regulations that most effectively achieve the SEC’s mission. I encourage such engagement, with the recognition that it is the Commission and only the Commission that adopts rules and regulations that have the force and effect of law.” Thus, while it appears that SEC staff is and will be working to review at least parts of the vast number of staff pronouncements, it is very unlikely that action will be taken to modify or rescind staff communications in a wholesale manner. Instead, specific topics – such as proxy voting – will be teed up for consideration, including the opportunity for public notice-and-comment. Certainly, Clayton and other regulators would acknowledge that staff guidance has played a key role in helping the regulated community to understand their obligations, to suggest best practices, and to help interpret ambiguous laws or regulations. Accordingly, it is likely that the process of reviewing selected staff guidance will proceed deliberately at the SEC and will follow provisions of the Administrative Procedures Act.
• Finally, Clayton’s statement on staff communications is a clear indication that he intends to exert the Commissioners’ rightful control of SEC policy decisions. Other Commissioners have taken steps that could be viewed as consistent with Chairman Clayton’s statement, including Commissioner Hester Peirce’s recent actions resulting in the Commission’s reconsideration of the SEC staff’s rejection of several bitcoin ETF applications. While these statements and actions simply reiterate the respective role of Commission decisions versus staff communications, some may wonder if these relatively new developments denigrate the role of SEC staff in any significant way. In observing how Chairman Clayton and other Commissioners consistently praise and work closely with SEC staff, my conclusion is that there is no intent to malign or diminish the important work of the SEC staff. Rather, these recent developments simply reflect the policies of the current Administration, members of Congress, executive departments, and independent regulatory agencies to give emphasis to the appropriate responsibilities of duly appointed regulators and the staffs that serve them.
David Tittsworth is a Counsel in the Washington, DC office of Ropes & Gray, LLP. Prior to joining the firm, David was president and CEO of the Investment Adviser Association for (IAA) 18 years. Before his long tenure with the IAA, David worked in various positions on Capitol Hill, including serving as Counsel to the House Energy & Commerce Committee, chaired by Rep. John Dingell.
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