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CALIFORNIA CORPORATE & SECURITIES LAW

“Interim Final Temporary Rules”, Say What?

Visitors to the Securities and Exchange Commission’s website will find a pull-down menu entitled “Regulation”.  One of the items on that menu has the oxymoronic title of “Interim Final Temporary Rules”.  How can a rule be both interim (meaning provisional or for an intervening time period) and final (meaning, coming at the end)?  The nomenclature makes no sense, but there is at least an explicable rationale for the terminology.

The Administrative Procedure Act generally requires agencies to publish notice of proposed rulemaking in the Federal Register.  5 U.S.C. § 553(b).  There is a “good cause” exception to this requirement.  Thus, an agency may adopt a rule without publication of a proposed rule when “the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”  5 U.S.C. § 553(b)(3)(B).  Rules adopted pursuant to this “good cause” exception generally become effective upon publication in the Federal Register.  Usually, however, an agency will provide a post-publication public comment period; thereby, leaving the door open to a future revision to the rule.

For example, the SEC recently adopted an “interim final amendment” to Form 10-K in response to Section 72001 of the Fixing America’s Surface Transportation (“FAST”) Act.  Section 72001 gave the SEC 180 days to issue regulations permitting issuers to submit a summary page on Form 10–K, but only if each item on such summary page includes a cross-reference (by electronic link or otherwise) to the material contained in Form 10–K to which that item relates.  The amendment became effective on June 9, 2016 (the date of publication in the Federal Register) and the comment period expired July 11, 2016.  Despite the fact that the rule introduces an entirely novel disclosure standard, I am the only person thus far to have commented on the rule. 

In adopting the interim final amendment to Form 10-K, the SEC met Congress’ 180 day deadline by the skin of its metaphorical teeth (See Job 19:20).  However, the SEC cannot credibly maintain that compliance with the publication requirement was “impracticable” because it certainly would have been possible to have published a proposed rule, received comments and adopted a final rule within 180 days. Courts have held that a deadline constitutes “good cause” only when it “requires agency action in a timespan that is too short to provide a notice and comment period”. United States v. Reynolds, 710 F.3d 498, 511 (3d Cir. 2013).  The argument that forgoing the regular statutory process would have been “contrary to the public interest” strains credibility.  Thus, the SEC’s only argument seems to be that public comment was “unnecessary”.  However, the SEC cannot plausibly argue that public comment was “unnecessary” because the adopting release requested comment on several issues.  In any event, the APA’s “good cause” exception must be “narrowly construed and reluctantly countenanced”.  State of New Jersey v. Environmental Protection Agency, 626 F.2d 1038, 1045 (D.C. Cir. 1980).

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