The “Secret Gardens” at the SEC: Commissioner’s Remarks on Staff-Level Guidance and the Unintended Consequence of “Secret Law”

SEC Commissioner Hester Peirce recently spoke at the 2019 PLI SEC Speaks conference in Washington, D.C.  The title of Peirce’s speech, “SECret Garden,” references the popular children’s novel, The Secret Garden, by Frances Hodgson Burnett.  In the novel, the protagonist discovers a secret garden that has previously been neglected and sealed off from public view.  After discovering the garden, the protagonist and her friends work together to restore the garden to a thriving state.  Peirce remarked that the novel caused her to think about “the secret gardens at the SEC,” and in particular, how SEC staff-level guidance may have the unintended effect of creating a “body of secret law.” 

As any legal practitioner and market participant knows, the federal securities statutes and rules are complex and often difficult to navigate.  Acknowledging this complexity, Peirce noted that the federal securities laws often raise complicated questions, “the answers to which reside in a tangled statutory and regulatory web.”  In an attempt to provide prompt and helpful answers to market participants, the SEC uses various tools, including staff-level guidance.  Two forms of staff-level guidance are public no-action letters and non-public guidance.  No-action letters are a type of relief that a market participant may request from SEC staff.  First, an individual or entity explains a specific set of facts and circumstances to SEC staff and requests a determination, in the form of a no-action letter, that its proposed course of action would not violate the federal securities laws.  If SEC staff decide to issue a no-action letter, the requester may conclude that SEC staff would not recommend that the SEC institute enforcement action against the requester based on the facts and representations in the original request.  Although no-action letters are not legally binding and may be subsequently withdrawn, they nevertheless can provide timely and practical guidance to a market participant. 

SEC staff may also provide non-public guidance to market participants in response to informal requests for clarification or guidance.  Unlike no-action letters, SEC staff non-public guidance is not published and instead may be given to inquiring market participants behind closed doors.  In her remarks, Peirce expressed concern that non-public guidance may foster a lack of transparency, which can result in a “fatal competitive disadvantage” for market participants who lack the resources or connections to align themselves with well-connected securities lawyers or other professionals who can often gain insight from SEC staff through informal conversations.  In addition to these fairness concerns, Peirce commented that any “secret law” within the SEC would run afoul of legislative and judicial safeguards, noting that “[t]his secret law, as a practical matter, binds market participants like law does but is immune from judicial—and even Commission—review.”

Since joining the SEC 15 months ago, Peirce noted that she has witnessed anecdotal accounts of secret SEC law.  During her speech, Peirce cited several examples, including that she has heard that “staff simply will not accept certain applications for entire categories of products or types of businesses for reasons not found in our rules” and that she has heard instances of “examiners and SROs…examining firms against the terms of draft no-action letters and notes of telephone calls with Commission staff.”  Peirce also noted hearing that one “particularly complex” set of SEC rules “does not matter much in practice” because firms tend to operate “under a set of published and unpublished letters and other directives from staff.”

Although Peirce did not propose any concrete solutions to remedy concerns about “secret law” at the SEC, she did encourage listeners to continue to seek accountability and transparency and to “work together to take down the walls of the secret gardens at the SEC, or at least to make doorways into these gardens.”

 

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