SEC Commissioner Fears that Non-Public Guidance from Agency Staffers May Amount to “Secret Law”

In a recent speech, an SEC Commissioner took the opportunity to voice her concern that the prevalence of non-public guidance now being conveyed by SEC staffers to certain market participants and their counsel is tantamount to what she terms “secret law” which, in her opinion, “crosses the line” of propriety.

SEC Commissioner Hester M. Peirce’s well-crafted speech, given in Washington at the recent SEC Speaks 2019 event, invokes imagery of the children’s novel The Secret Garden to posit her belief that the abundance and importance of non-public guidance being provided and relied upon by certain of the SEC’s divisions and offices has created a secret garden of its own within the SEC’s walls. As an example, she cites her hearing that “staff simply will not accept certain applications for entire categories of products or types of businesses for reasons not found in our rules.” Additionally, she notes hearing that “one particularly complex set of Commission rules does not matter much in practice because firms operate instead under a set of published and unpublished letters and other directives from staff.” She also references firms being examined “against the terms of draft no-action letters and notes of telephone calls with Commission staff.” In all of these cases, Peirce fears that the “line has been crossed” and that such activities amount to “secret law.”

That such “sub rosa guidance,” as she terms it, amounts to “secret law,” is in Peirce’s opinion undeniable. As she points out, while it is true that courts would be reluctant to defer to such staff guidance in a legal proceeding, it nonetheless does “as a practical matter, bind market participants, affecting the scope of their rights and obligations and limiting the range of permissible activities.”

In Peirce’s view, the harm of creating this secret law is obvious. According to Peirce, “it is not subject to processes to ensure that it conforms to our legislative authority; it is impossible to determine whether it applies to all similarly situated parties equally; and it is insulated from effective oversight or review, whether by the Commission or the courts.” Moreover, she highlights the unfairness of only those firms with “access to the high-priced lawyers who have gained a sight into the secret garden” obtaining a distinct competitive advantage vis-à-vis their dealings with the SEC.

Commissioner Peirce’s analysis of the matter is thorough and well worth the read. She begins her discussion with the ready admission that the securities markets—and the regulatory regimes which govern them—are extraordinarily complex and in need of both Commission-level and staff-level guidance. She is careful to distinguish the staff’s public “no-action letter” process, which has been fully transparent for the last 50-plus years, referring to such letters as “extraordinarily helpful” when public. No-action letters are, of course, written staff responses to specific fact pattern inquiries submitted by interested persons, wherein the staff will opine on the fact pattern and state whether or not the staff would recommend enforcement or other disciplinary “action” based upon the fact pattern. Indeed, Peirce spends a fair amount of time in her speech discussing the early history of the no-action letter process (when they were issued privately), and the inherent unfairness of such non-public guidance.

Peirce cites the benefits of a fully-transparent no-action letter process as including enhanced consistency across time and across similarly-situated market participants. She also believes that it keeps the staff accountable to both the public and the Commission itself. And importantly, she argues that it “sheds public light on areas where our rules may be clunky or ambiguous or where they are producing unintended results.”

In this light, it is clear where Commissioner Peirce’s caution is placed, and we tend to agree with her warning. She is basically saying that guidance akin to that provided in public no-action letters is being privately and selectively applied. It is easy to see how this would advantage those “in-the-know” participants while distinctly disadvantaging those participants not privy to these private (and potentially frequent) interactions with SEC staffers. At this point, it is unclear as to what if any policy recommendations or rule-making Peirce may ultimately advance on this topic—or if she has any additional advocates on the Commission in this regard. In any event, this is an interesting policy initiative within the executive suite of the SEC, and one that we will continue to monitor for future developments.


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