Is the Public Comment Process on Rulemaking Working?

When the Securities and Exchange Commission proposed rulemaking on the Volcker rule provision of the Dodd-Frank Act, it attached nearly 400 questions asking stakeholders for their views on how the rule might be implemented and how other details might be resolved.

Feedback poured in, with nearly 19,000 comment letters including everything from letters in support of the rule to suggestions on how the rule might work better to unvarnished opposition of the rule in any form. When the final version of the rule was issued, however, critics accused the SEC of ignoring their concerns and not considering their suggestions. The final rule released last year was substantially different than the 2011 version, but the comment process was not re-opened.

Indeed, the public comment process, used by rulemakers such as the SEC, the Commodities Futures Trading Commission, and the Financial Accounting Standards Board, is meant to be an important part of the rulemaking and standard-writing process, providing companies and concerned citizens alike an opportunity to help shape rules. Recently, however, concerns have been raised over whether government agencies are getting all the input they need or that they are properly considering the feedback they do get.

“A cynic might say that the public comment process has been commandeered by interested parties, lobbyists, and trade associations, not the people truly affected by the regulation—the public,” says Jay Gould, a partner at the law firm Pillsbury Winthrop Shaw Pittman and a former SEC attorney who was often involved in considering public comments. “Is [the process] working? Yeah, but who is it working for?”

The problem may lie as much with those providing comments as it does with those considering them. An increasing number of form letters, sometimes numbering in the hundreds of thousands, offer more rhetoric than substance and threaten to clog the comment-gathering process. For example, proposal to amend rules that govern money market funds—rulemaking that proved particularly contentious for SEC commissioners—received 227 individualized comments and 1,227 form letters, 1,163 of which were identical aside from the signature.

A 2013 study by the Government Accountability Office raised a host of concerns about the public comment process at several government agencies. The report criticized how they incorporate public comments and found many bypass the process altogether. Agencies did not publish a notice of proposed rulemaking (NPRM) inviting public comment, for about 35 percent of “major rules” (with an annual effect on the economy of $100 million or more), and 44 percent of non-major rules published between 2003 and 2010, the study found. Agencies published a total of 568 major rules and about 30,000 non-major rules during that time period.

According to the GAO, agencies frequently cited a “good cause” exception for publishing final rules without first issuing an NPRM. Agencies use this exception, included in the original Administrative Procedure Act which governs the regulation-making process,  when they find that notice and comment procedures are “impracticable, unnecessary, or contrary to the public interest.” The sampling of agencies reviewed by the GAO used the good cause exception for 77 percent of major rules and 61 percent of non-major rules that were published without an NPRM. Agencies also used other statutory exceptions, such as claiming a necessary deadline didn't allow sufficient time to issue one. The GAO also found agencies that did requested comments on major final rules issued without an NPRM, often failed to respond to them.

“The opportunity to comment is meaningless unless the agency responds to significant points raised by the public,” the GAO report warned.

Many former SEC staffers, however, insist the SEC treats the comments it receives with great care. Even before it set to work on the truckload of new rules demanded by Dodd-Frank, it made a public plea for comments to aid the process. Since that time, meetings devoted exclusively to those comments take place repeatedly throughout the week, say former SEC staff members. Summary reports of those comments received can run hundreds of pages and do, in fact, influence everybody in the rulemaking food chain, from staffers to commissioners.

“A cynic might say that the public comment process has been commandeered by interested parties, lobbyists, and trade associations, not the people truly affected by the regulation—the public.”

—Jay Gould,

Partner,

Pillsbury Winthrop Shaw Pittman

“Commission and staff are looking for people's input because they don't have all the answers or information,” says Wayne Carnall, PwC partner and former chief accountant in the Division of Corporation Finance at the SEC. They are looking for help. Are there better, less costly ways we can do it? Sometimes people ask, ‘Why should I spend the time? No one looks at it, no one cares about it, and they aren't going to listen to me.' That couldn't be further from the truth. The comment letter process is very important, and regulations do get changed as a result of public input.”

A Flawed Process?

That dedication, however, doesn't eliminate flaws in the system. Strides to democratize the process by facilitating online submissions, for example, make it easy for stakeholders to weigh in, but also easier for anyone to submit form letters or quick, politicized views  that add little to the debate. Some submissions grumble with a disdain typically found on the comment forums of blogs. You learn a lot about whether submitters agree or disagree with a rule's philosophy, but there is little of the insight regulators want and need.

A proposal on a pay ratio rule that will require companies to disclose CEO compensation as a ratio to the median pay of their global workforce, for example, highlights the best and worst of the comment process. Early public comments, even ahead of the proposed rule, influenced the SEC to allow the use of statistical sampling when calculating the ratio. More recently, trade associations such as the American Benefits Council, Society for Human Resource Management, and American Apparel & Footwear Association offered detailed, thoughtful suggestions. State officials and Congressmen spoke their peace, and a smattering of top companies weighed in, among them Best Buy, Chesapeake Utilities, Microsoft, Johnson and Johnson, General Mills, and Intel.

GAO REVIEWS RULEMAKING

In December 2012, the Government Accountability Office undertook a study of the rulemaking process; looking at how often agencies issued final rules without a Notice of Proposed Rulemaking. It reviewed 1,338 final rules published during calendar years 2003 through 2010, a sample that included rules by 52 agencies, including all cabinet departments issuing regulations. An excerpt from that report:

Agencies did not publish a notice of proposed rulemaking, enabling the public to comment on a proposed rule, for about 35 percent of major rules and about 44 percent of non-major rules published during 2003 through 2010. A major rule has significant economic impact and may, for example, have an annual effect on the economy of $100 million or more. Agencies published a total of 568 major rules from 2003 through 2010. Agencies also published about 30,000 non-major rules during this period, which have less economic significance and can involve routine administrative issues.

Agencies frequently cited the “good cause” exception and other statutory exceptions for publishing final rules without an NPRM. Agencies in GAO's sample used the good cause exception for 77 percent of major rules and 61 percent of non-major rules published without an NPRM. Agencies may use the good cause exception when they find that notice and comment procedures are “impracticable, unnecessary, or contrary to the public interest.” In practice, agencies may find an NPRM “impracticable” when the rule must be issued by a statutory deadline, “unnecessary” when the rule pertains to technical corrections, and “contrary to the public interest” in an emergency situation.

GAO found that agencies, though not required, often requested comments on major final rules issued without an NPRM, but they did not always respond to the comments received. Agencies may solicit comments through the Federal Register when publishing a final rule without an NPRM, but the public does not have an opportunity to comment before the rule's issuance, nor is the agency obligated to respond to comments it has received.

For example, agencies requested comments on 77 of the 123 major rules issued without an NPRM in GAO's sample. The agencies did not issue a follow-up rule or respond to comments on 26 of these 77 rules. This is a missed opportunity, because GAO found that when agencies did respond to public comments they often made changes to improve the rules. In addition, each of these 26 rules is economically significant and some of these rules have an impact of a billion dollars a year or more.

Source: Government Accountability Office.

That's the good. The bad: More than 127,200 comments as of Jan. 30 were duplicative form letters and, of the 930 letters that weren't, many were generalized comments urging the Commission to “do the right thing,” as several writers put it, and stand up to Big Business and defend workers.

Those who have been involved in the SEC's rulemaking process don't agree that the comment process is broken, but do see room for improvement. Pillsbury Winthrop's Gould says he would like to see more investor advocacy through the comment process. “In the securities world, your end users are your investors,” he adds. “We saw letters from industry groups and law firms, but rarely did we see actual investors or investor advocate groups. That's not to say the concerns of those groups weren't addressed, but they weren't addressed directly.”

“Which comments do people in rule writing groups pay attention to, and which ones do they throw in the trash?” Gould asks. The answer depends on who at the agency oversees a particular rule and who weighs in. If the Division of Investment Management, for example, has a rule that affects the mutual fund industry and comments arrive from a trade group like the Investment Company Institute, they will be carefully parsed and rise to the top of the pile.

“You give their commentary a little more weight than you would for Fred Jones from Washington State,” Gould says. “You look at where the comment came from and who they represent. Law firms sending letters on behalf of clients and the kinds of comments, rightly or wrongly, are given a lot of attention.”

Form letters are considered and documented, but don't expect much more than that. “They are duly noted, but they are given the weight they should be afforded,” Gould says. Direct, targeted commentary is appreciated, but “if somebody says, ‘I think it's a stupid rule' and they don't say much more than that, they are not going to get much consideration.”

The Influence of Trade Associations

It is not as common to see individual companies respond, as it is to have their thoughts filtered through trade associations, says Jay Knight, a partner at the law firm Bass, Berry & Sims. As former special counsel in the Office of Structured Finance at the SEC, he headed various rulemaking projects. “There is probably less risk to the company, depending on the topic, and a group can sometimes carry more weight,” he says.”The staff also knows it has been vetted internally.”

Nevertheless, Knight urges individual companies to write in, as their thoughts “are tremendously helpful.” Given increased demands for a cost-benefit analysis of new rules, companies can “run the numbers internally and determine what the cost of compliance will be. That more direct feedback is what the SEC craves and critics want to monitor.

Knight agrees that too many comments support or condemn the rationale of a rule, rather than arm the SEC with the data it needs. “Look at the questions in the release itself,” he suggests. “Reading those gives the commenter a picture of what staff is looking for and the issues they are really struggling with. It also helps to focus the commenters, so it's not just, ‘I agree or disagree.' How do you fix it? Supplying that solution is very important to the process.”