The SEC, Social Change, and the Power to Petition
J. Robert Brown | Wednesday, September 19, 2007 at 11:00AM We have been writing about the petition submitted by the Investor Network on Climate Risk concerning the need for the Commission to improve the disclosure regime in the area of climate change and global warming. The Petition filed by the Network is here.
We digress for a moment to talk about rulemaking petitions. Section 4(e) of the APA requires that agencies "shall give an interested person the right to petition for the issuance, amendment, or repeal of a rule." 5 USC 553(e). The provision is often characterized as the citizen petition provision. The agency must provide "[p]rompt notice" of any denial and "a brief statement of the grounds for denial." 5 USCS § 555(e).
The Commission has implemented this provision through the adoption of Rule 192 of the Rules of General Practice. See 17 CFR 201.192. The provision provides that any person "may file a petition therefore with the Secretary. Such petition shall include a statement setting forth the text or the substance of any proposed rule or amendment desired or specifying the rule the repeal of which is desired, and stating the nature of his or her interest and his or her reasons for seeking the issuance, amendment or repeal of the rule." Rule 192(a), 17 CFR 201.192(a). The rules merely provide that the petition shall be acknowledged in writing and referred to the appropriate division "for consideration and recommendation", with the recommendation ultimately sent to the Commission "for such action as the Commission deems appropriate." A number of petitions filed with the Commission are listed on the agency's web site.
Until recently, there was substantial doubt about the appeal ability of any denial of a rulemaking petition. Administrative law generally provides that certain types of discretionary decisions by agencies are not subject to judicial review. This generally includes a decision not to bring an enforcement proceeding, for example. In the case of a denial of a rulemaking petition, there was some doubt about whether it too was discretionary and unreviewable. That was resolved in the last Supreme Court term. See Massachusetts v. EPA, 127 S. Ct. 1438, 1459 (2007)("Refusals to promulgate rules are thus susceptible to judicial review, though such review is 'extremely limited' and 'highly deferential.'").
The main problem with the provision, however, is that it contains no time limits. Thus, an agency can engage in considerable delay and there is largely nothing the petitioners can do. Nonetheless, in the same way that shareholders often submit proposals under Rule 14a-8 on issues of social importance knowing they will be defeated, expect, in the aftermath of Massachusetts v. EPA to see increased use of the petition process, particularly with the SEC and particularly with respect to disclosure issues relating to matters of social importance.
Reader Comments (1)
Ten years ago the Public Investors Arbitration Bar Association (PIABA) petitioned the SEC under section 192 to: (1) establish the American Arbitration Association as an alternative venue for customer arbitrations; (2) change the composition of arbitration panels hearing customer arbitrations; and (3) provide for a rotational system for the selection of arbitrators.
The rule requires the Secretary to refer such petitions to the appropriate division or office for consideration and recommendation to the Commission. From documents obtained through a FOIA request by Les Greenberg, it appears the SEC's willingness to defer to SROs has no time limit, despite the legal requirement that recommendations are required. After 10 years, SEC staff has not made the required recommendation. The Staff wants what it is doing to be considered "normal," but how long should the rights of non-SRO sponsors be deferred? A pdf copy of those documents is available at http://www.lgesquire.com/PIABA%20Petition%204-403.pdf. One no longer has to wonder why securities arbitration rule reform (to level the playing field) has not occurred.
Greenberg has written extensively on how to improve the securities arbitration process. See his Petition for Rulemaking (SEC File No. 4-502 at http://www.sec.gov/rules/petitions/petn4-502.pdf) (severe problems with NASD arbitration and questionable SEC oversight). The Petition has received favorable media coverage, e.g. 9/1/05, Registered Representative Magazine, "The Real Arbitration Nightmare"; 7/31/05, San Diego Union-Tribune, "Stockbroker losses bring no trials, lots of tribulations"; 7/17/05, Pittsburgh Post-Gazette, "Systems for resolving disputes may need an overhaul." However, the SEC has failed to act on it as well. We may see international arbitration first (see http://www.cipe.org/publications/fs/pdf/062907.pdf).
However, I can't say the petition system is all bad. Greenberg and I petitioned the SEC for proxy access in 2002, see http://www.sec.gov/rules/petitions/petn4-461.htm .
As the Council of Institutional Investors said, our proposal "re-energized" the "debate over shareholder access to management proxy cards to nominate directors." Of course that debate continues to this day. AFSCME v. AIG gave us what we were looking for. Now the SEC wants us to trade access with a much higher bar in return for the right to submit nonbinding resolutions.