SEC Chair Gary Gensler has certainly heard from Republicans with some frequency about proposal comment periods that they consider too abbreviated. The charge is that, under Gensler's tenure, the time periods allowed for public responses to voluminous and complex proposals—which were initially set at 30 days, and then, in response to complaints, extended for a longer period under a slightly more complex formulation—just don't leave enough time for public review and comment. (Of course, the not-very-secret secret is that the SEC typically accepts comments submitted well after the deadlines.) SEC Commissioners Hester Peirce and Mark Uyeda, as well as former Commissioner Elad Roisman, have all taken on the issue (see the SideBar below). And it's not just commissioners that have tackled the comment period issue— Republicans in Congress have also voiced disapproval. Now, as reported by Politico, in a September 13 letter that has recently surfaced, a group of 12 Senate Democrats have joined the chorus. Although the letter is focused on the duration of comment periods, according to Politico, "Senate Democrats are privately urging SEC Chair Gary Gensler to slow work and take more time for feedback on a slew of regulations rattling Wall Street, as tensions surrounding the agency's Biden-era agenda reach a boiling point." Are problems with the comment period signaling a larger issue?
SideBar
Republican SEC commissioners have repeatedly made their views known about comment periods that they viewed as inadequate during Gensler's tenure. For example, in Peirce's remarks in 2021, she observed that the
"notice and comment process is intended to be a dialogue. The regulatory conversation flows only when the Commission affords the commenting public sufficient time both to review and analyze proposals thoroughly and to formulate fully articulated opinions and suggestions. Analyzing a multi-hundred page rulemaking in the context of intricate markets and an already complicated set of securities and other relevant laws is not an easy task. Such analysis takes time. Thirty days is typically not enough time to get feedback on a rule proposal. In fact, 'a comment period . . . should generally be at least 60 days.' For complicated rulemakings or at times when we have many rulemakings outstanding simultaneously, 90-day comment periods are likely more appropriate. Short comment periods are particularly problematic when they coincide with holidays, end-of-year operational obligations, or other periods in which commenters' staff are likely to be unavailable or occupied with other time-sensitive obligations. Public commenters help the Commission to look at rules in light of their unique experiences. They bring a broad range of perspectives, technical expertise, and deep, personal experience to their comments. In so doing, they help us to see things we otherwise would not. Sometimes they identify better ways to tackle a problem or point out flaws with rules that we might not have found on our own."
Roisman, commenting on the Rule 10b5-1 proposal, objected that, not only was the 45-day comment period "shorter than our customary comment periods, which have typically been 90 or at least 60 days, these brief comment periods fall over the course of several major holidays. They also overlap with comment periods for five other proposed Commission rules. If the Commission votes to propose all four of the new proposals which we are considering at this meeting, the public will be left with hundreds of questions on which we are seeking input in this short amount of time. I worry that we are not allowing enough time to receive the substantive kind of feedback we will need from the many types of market participants whom these rules will affect in order to adapt each of these proposals into workable rules."
In recent remarks before the Asian Pacific American Bar Association, Uyeda was critical of recent SEC comment periods as a limitation on due process. He opened by movingly describing the impetus for his focus on due process under the Administrative Procedure Act—the historic failures of due process that had grievously injured the Asian Pacific American community, including his own family. Specifically, he recounted that his grandparents and their families were held in internment camps during World War II, an action by the U.S. Government that was upheld as lawful under the shameful Korematsu decision. As a young lawyer, he said, he "thought that instances of inappropriate use of race and national origin by the federal government were largely in the past," but soon learned otherwise when his law firm took on the pro bono representation of an Asian-American scientist, a U.S. citizen, who was arrested on allegations of espionage and held in solitary confinement in pretrial detention for more than nine months. As the prosecution's case started to crumble, "allegations of targeting of Asian American employees at the lab began circulating." When, in the end, the prosecution's case failed, the judge was compelled to issue an "extraordinary apology." "These incidents," Uyeda said, "have had a profound influence on how I think about the exercise of federal power. While all Americans should be cognizant of these historical failures, it is particularly important for individuals that wield the authority of the federal government to do so in a manner that fully respects the due process rights enshrined in the Constitution."
Shifting to the APA, Uyeda urged the SEC to "avoid taking any actions that diminish due process." The APA's notice-and-comment process was a "key procedural requirement" that required the SEC (or other agency) to "afford[] interested persons a reasonable and meaningful opportunity to participate in the rulemaking process." In evaluating compliance, the adequacy of the comment period is a consideration for the courts. He observed that Presidents Clinton, Obama and Biden all recognized the importance of a 60-day comment period in executive orders, and the Administrative Conference of the United States had endorsed a comment period of at least 60 days for significant regulatory actions.
In Uyeda's view, the current SEC had frequently failed to satisfy this procedural requirement, both with respect to the duration of comment periods as well as "shortcuts with respect to reviving long-dormant rule proposals." Many of the 30 proposals issued during the 2022 fiscal year had comment periods that were, in his view, inadequate—only 30 days after publication in the Federal Register—especially if they fell over the holidays or involved contemporaneous complex rule proposals. In addition, recently, the SEC had not followed the past practice of issuing a re-proposal through notice and comment if more than five years had elapsed since the original proposal, instead simply reopening the comment periods for the existing versions, even though they contained dated economic analyses. An updated economic analysis was not available until the final rule release—i.e., not available for commenters. (See this PubCo post.)
The "failure to embrace robust compliance practices" under the APA was "troubling, " he contended, and may "undermine the legitimacy of agency actions" and weaken an "important protection against regulatory overreach." He found the SEC's actions to be "particularly disappointing because the agency likely could have achieved the same substantive results while engaging in high-quality rulemaking practices." Failure to respect procedural protections, he asserted, "can result in broad governmental actions that empower and enlarge an administrative state that contrasts with the limited role of government contemplated by our Nation's founders.... The blueprint for restoring that legitimacy is straightforward: ensure that every regulatory action goes well above and beyond the bare minimum required by law."
He concluded that the damage resulting from "unchecked government action is often based on a self-identified need for expediency, yet can take decades or more to cure." The many decades it took for the government to apologize for the Japanese internment and the Korematsu decision attest to that fact.
Several Republicans in Congress have made arguments similar to those expressed by Republican SEC commissioners. For example, in this letter to Gensler, Senator Pat Toomey and Representative Patrick McHenry complained that proposals under Gensler's tenure have "consistently provided unreasonably short comment periods, which will harm the quality of public comment and may run afoul of the Administrative Procedure Act." Further, they contended that the
"notice-and-comment process is critical to effective SEC rulemaking. The opportunity to comment on proposed rulemakings ensures the public can provide substantive analysis, warn of unintended negative consequences, and suggest alternative approaches with rationale for the SEC to consider. This commentary helps refine and improve adopted rulemakings—and in some cases provides a basis for the SEC to rethink or scrap imprudent rulemakings entirely. Moreover, properly scrutinizing a proposed rulemaking often requires a significant investment of time and resources. This is especially true when a proposal consists of several hundred pages and is intended to interact with complicated financial markets and existing securities laws. Truncated comment periods pose particular difficulties—and are of particular concern—when overlapping with holidays, year-end operational or regulatory obligations, or other times when commenters' staff are expected to manage other deadlines."
While this criticism from the Republican camp is nothing new, what is new and somewhat surprising is the pushback from the dozen Democratic Senators. In this letter, albeit a mild one, the 12 Senators, led by Senator Jon Tester, encourage Gensler to "provide a sufficient period for notice and comment as you consider rules that will impact our constituents. Adequate input and public comment is central to ensuring that the SEC's rules and regulations reflect the perspectives and needs of all stakeholders." (See this PubCo post, describing Tester's colloquy with Gensler regarding the SEC's climate proposal.) There were a number of important proposed rulemakings on the agenda, they wrote, and it "is critical that, as the SEC moves through the rulemaking processes, there is adequate time to evaluate each individual rule as well as how those rules interact with existing and other proposed rules....As the Commission continues work on this ambitious rulemaking agenda, assessing the collective impact of these proposed rulemakings will be particularly important to achieving your goals and ensuring our markets remain the world's best. It is our belief that a thorough and thoughtful comment process will only yield better results for investors and our economy."
According to Politico's analysis, the letter from the Dems "underscores the growing tensions between Gensler and moderate Democrats on Capitol Hill at an especially contentious time for the regulator, as the agency's upcoming rules face a growing risk of litigation from industry as well as potential investigations from Republican lawmakers. The letter hits on what has become a growing sore point for business groups: the length of comment periods in which the agency lets the public send feedback on proposed regulations."
In addition, if the SEC did provide for longer comment periods, "it would ultimately result in the proposed market safeguards taking longer to go into effect," Politico speculated, "possibly spelling good news for corporate executives hoping to wait out Gensler for a change in administration."
Gensler has rebuffed these arguments, Politico reports, contending "that the law only requires the SEC to provide 30 days for comment. Even then, comment periods typically start when the proposal is published on the Federal Register, which is running on a lag of several weeks. In the meantime, comments can still be submitted to the SEC." (The article notes that, during his tenure, former SEC Chair Jay Clayton faced, to a limited extent, some of the same criticisms.) Politico reports that "Gensler has come under fire for the pace of rulemaking coming out of the agency, with critics claiming that dissecting the flood of new proposals in such short periods of time is impractical. Gensler has pointed out that the number of proposals [is] largely on par with what former SEC chairs like Clayton have done. The latest proposals have just been more clustered than in the past, Gensler said."
Poor Chair Gensler, no one is ever happy! The Republicans complain about his "ambitious agenda" (see this PubCo post), and critics like Jon Stewart express their frustration with what the SEC is not doing and ask why the SEC isn't doing more to fix inequities. (See this PubCo post.)
SideBar
On a related topic, another group of House Republicans have raised questions about the "technical glitch" the SEC experienced earlier this month. You probably remember that the SEC announced that, as a result of a technical error, it had not received a number of electronically submitted comments for at least 11 rulemaking proposals. Accordingly, it was reopening the comment periods for those identified proposals for an additional two weeks. (See this PubCo post.) The letter observes that the majority of affected comments were submitted in August 2022, a time period that "overlaps with the recently adopted amendments to proxy rules governing proxy voting advice (the 'proxy advisor rule'), which was proposed in November 2021 and adopted later in July 2022." While the SEC identified 11 affected proposals, the letter continues, it "did not cite any adopted final rules. Additionally, the announcement did not describe how the SEC determined which specific rulemaking releases were impacted by the glitch. Given the scope and magnitude of this technical error, we are concerned that comments for the proxy advisor rule may have been affected as well as other rulemaking releases not listed." Will this turn into another potential imbroglio?
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