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US Securities and Exchange Commission

SEC Commissioner Peirce Uses Rat Anecdote to Make Case for Longer Comment Period

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

SEC Commissioner Hester Peirce in a statement emphasized that the commission ought to allow ample time for the public to weigh in on rulemaking proposals.

Her views come as the SEC under Gary Gensler’s leadership has been pursuing an ambitious rulemaking agenda with about 50 items for the near term. In particular, Gensler’s agenda includes rulemaking that is intended to undo rules that were adopted during Jay Clayton’s tenure as chairman of the commission.

Clayton pursued a more business-friendly agenda. By contrast, Gensler has been much more sympathetic to demands made by investors, such as disclosure rulemakings related to environmental, social, and governance (ESG) matters.

“Essential to facilitating substantive input from a wide variety of interested parties is giving people enough time to comment,” Peirce said in a December 10, 2021, statement. “Analyzing a multi-hundred page rulemaking in the context of intricate markets and an already complicated set of securities and other relevant laws is not an easy task. Such analysis takes time.”

In her view, 30 days is typically not enough time. It should generally be at least 60 days, she said. For complicated rulemakings or when the commission has many outstanding rulemakings at the same time, she said a 90-day comment period is more appropriate.

While she did not explicitly cite recent rulemakings, the SEC gave 30 days to comment on broker-dealer and investment adviser digital engagement practices, reproposal of clawback rules, and proxy voting advice, among other rulemaking releases.

“Short comment periods are particularly problematic when they coincide with holidays, end-of-year operational obligations, or other periods in which commenters’ staff are likely to be unavailable or occupied with other time-sensitive obligations,” Peirce said.

She said public comments are invaluable because they help the SEC to see things that it otherwise would not.

The comments might identify better ways to solve a problem or point out flaws with rules. This is especially important because, in her view, rules can have unintended negative consequences.

“Such unintended consequences sometimes overwhelm the rules’ worthy objectives,” she said, offering up an example of historian Michael Vann. Peirce is well-known for providing colorful historical anecdotes to make her case.

At the beginning of the 1900s, the French administrators of Hanoi had a major rat problem because of a new sewer system. In addition to having staff exterminators, the colonial government offered people a bounty for each rat tail turned in.

But Vann explained that the authorities realized that some were catching rats, cut the tails off and let them go and perhaps to breed and produce more valuable tails. Others actually raised rats to collect bounty.

“One can only imagine the frustration of the municipal authorities, who realized that their best efforts at dératisation had actually increased the rodent population by indirectly encouraging rat-farming,” Peirce noted. “A shrewd commenter, given sufficient time, could have foreseen how people would game the rat bounty system and how the rat population would expand as a result of this gamesmanship.”

On December 15, the top Republican on the House Financial Services Committee, Rep. Patrick McHenry also issued a statement, asking Gensler to slow down with rulemakings by providing sufficient time for comment.

“This is part of an alarming trend of President Biden’s financial regulators running roughshod over rules and precedent to push their agenda,” McHenry said in a statement. “The public comment process is intended to give market participants and stakeholders a seat at the table to voice concerns over unintended negative consequences of potential regulations. Even President Obama’s White House appropriately held the view that public comment periods on most rulemakings should be at least 60 days. I call on Chair Gensler to immediately extend all comment periods on his proposed rules to at least 60 days, including those rulemakings whose comment files have closed prematurely.”

 

This article originally appeared in the December 21, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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