Wednesday, April 10, 2019

Commissioner Peirce fears that overuse of staff guidance creates “secret law”

By Lene Powell, J.D.

SEC staff guidance performs a “critical function” by helping market participants navigate the complexity of the federal securities laws, said Commissioner Hester Peirce in remarks at the PLI “SEC Speaks” conference in Washington, D.C. But the current proliferation of no-action relief and other staff guidance is dangerous because it creates a body of “secret law” beyond judicial or even Commission review.

Likening staff guidance to the hidden, walled garden in the children’s book “The Secret Garden,” Peirce said that highly intricate securities laws create fascinating puzzles for legal practitioners, but a “compliance minefield” for those with “real skin in the game.” Staff no-action letters can help make the minefield passable by allowing for flexibility in areas where the SEC’s rules are newly developing or clunky, and can also provide for a quicker response than the Commission can offer. Yet staff guidance can also perpetuate the problem of complexity by adding to a sprawling, inconsistent patchwork.

Peirce noted that staff no-action letters were not always public. In the 1960s, before staff guidance was routinely made public, a law professor named Kenneth Davis characterized the body of staff no-action letters as “law.” Then-SEC Chairman Manuel Cohen retorted that staff letters might be lore, but they were not law. However, the point was taken, and the SEC subsequently decided to make staff guidance public.

Peirce said she does not want to make the no-action process overly burdensome. But when she hears that staff will not accept questions on whole categories of issues, or practitioners half-jokingly say that the patchwork of public and private rulemaking is so vast that half of it could be tossed out without any effect, she is “concerned that a line has been crossed.” As a practical matter, said Peirce, staff guidance does bind market participants, yet it is often impossible to tell if it applies to all similarly situated registrants equally.

Peirce closed by suggesting that unless there is some confidentiality requirement, “all of our regulatory gardens should be subject to public review.”

“Let’s work together to take down the walls,” said Peirce. “Or at least make a doorway.”