The Securities and Exchange Commission makes available on its website information on how members of the public may request that the Commission issue, amend or repeal a rule of general application. Not too many people take advantage of this right. Last year, a total of nine petitions were filed. Six have been filed so far this year. Petitioning the Commission may seem to be an exercise in the obscure, but one petition filed last year has engendered a massive response.
Last August, Harvard Law School Professor Lucian Bebchuk and nine other academics submitted this petition to require public companies to disclose to shareholders the use of corporate resources for political activities. In May, Professor Bebchuk reported in this posting on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog that over 250,000 thousand comments had been submitted to the Commission in response to this petition. I actually submitted the first comment in response to the petition. While I enjoy the priority of place, my opposition was countered by a quarter of a million form letters in support. I feel a bit like the first King Leonidas.
But must the Commission act on the petitions that are submitted? Rule 192 of the Commission’s Rules of Practice requires only that the Commission acknowledge receipt and give notice of any action taken by the Commission:
The Secretary shall acknowledge, in writing, receipt of the petition and refer it to the appropriate division or office for consideration and recommendation. Such recommendations shall be transmitted with the petition to the Commission for such action as the Commission deems appropriate. The Secretary shall notify the petitioner of the action taken by the Commission.
At least three fundamental requirements are absent from Rule 192. First, the rule doesn’t require the Commission to take action. Second, the rule doesn’t require the Commission to act promptly. Finally, the rule doesn’t require the Commission to explain its reasons for denying a petition. Indeed, Rule 192 falls far short of the requirements of the Administrative Procedure Act as explained by then Circuit Court Judge Ruth Bader Ginsberg:
Section 4(e) of the Administrative Procedure Act, 5 U.S.C. § 553(e), commands that “[e]ach agency shall give an interested person the right to petition for the issuance … of a rule.” Section 6(a), 5 U.S.C. § 555(e), requires “prompt notice” in the event an agency denies such a petition. Further, section 6(a) directs that when a denial is not self-explanatory, “the notice shall be accompanied by a brief statement of the grounds for denial.”
Ass’n of Investment Bankers v. Securities and Exchange Commission, 676 F.2d 857, 864 (1982). These are minimal, yet important legal requirements that should not be ignored.
Three years ago, I submitted two petitions for rule making to the Commission. One requested the Commission to amend Rule 3a-5(b)(1) under the Investment Company Act of 1940 to include a reference to limited liability companies and business trusts. The other requested an amendment to Rule 146(b) under the Securities Act of 1933 to correct a reference. Like Penelope, I’ve had a long wait.
In a future post, I’ll discuss California’s much more prescriptive statutory requirements for rule making petitions.