The Chamber of Commerce and Reforming the SEC (The No Action Process and a Reduction in Flexibility)

The Center for Capital Markets of the Chamber of Commerce issued a report recently titled "Examining the Efficiency and Effectiveness of the US Securities and Exchange Commission."  Among the proposed reforms were changes to the system of issuing no action letters.

We have listed the recommendations from the report below.  We make this general observation, however.  While we have no doubt there can be problems with the current system (particularly delay), it represents an informal way to obtain the written views of the staff.  The suggested reforms (adoption of guidelines, the discontinuance of no action letters of general applicability, responses within 90 days, and the annual adoption by the Commission of "significant staff positions") would rigidify the no action letter process.

Ultimately, it would make it harder to get answers and would probably cause the staff to insist on far more supporting analysis, dramatically increasing the costs associated with the process.  What would be gained in certainty would be lost in flexibility.  It is always a temptation to want rigid rules for every process, something that essentially ties the hands of the bureaucracy by reducing its procedural discretion.  But at the same time, the system provides a mechanism for informal written advice, with the advice available to others with the same issue.  The proposed reforms take into account the need for certainty and consistency but do not take into account the impact on cost and flexibility.

Recommendation 1—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 replace Staff Legal Bulletins, FAQs, summaries of staff comment letters, small entity compliance guides, and interpretive letters.

Recommendation 2—The Commission should publish guidelines distinguishing the use of no-action letters and exemptive orders.

Recommendation 3—The practice of issuing no-action letters of general applicability should be discontinued in favor of exemptive orders or emergency orders, as appropriate.

Recommendation 4—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.

Recommendation 5—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.

Recommendation 6—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.