Ex Parte Communications And SEC Rulemaking

by Allen Matkins

In this recent post, I discussed a petition submitted by Professor Lucian Bebchuk and nine other academics asking that the Securities and Exchange Commission adopt rules requiring public companies to disclose to shareholders the use of corporate resources for political activities.  The Commission has received over a quarter of a million comments in response to this petition.  In the last three months, Chairman Mary L. Schapiro or members of her staff met privately on three different occasions with supporters of the petition.  Are these ex parte contacts legal?

It turns out that the Commission has adopted several rules governing ex parte contacts.  17 C.F.R. § 200.62 (on the record Commission proceedings), §§ 200.110 – 114 (code of behavior of persons outside the Commission and decisional employees), and § 201.120 (persons presiding over evidentiary hearings).  However, these rules are directed at “on the record” or evidentiary proceedings and not “informal rulemaking”.  For those not familiar with the Federal Administrative Procedure Act (APA), the terminology can be a little confusing.  Most of the Commission’s rulemaking is “informal” even though it involves the formalities of giving notice, receiving comments and publication in the Federal Register.  Informal rulemaking is governed by Section 553 of the APA.  Formal rulemaking under the APA involves an adjudicatory procedure much like a trial and is governed by Sections 556 and 557 of the APA.

Section 551(14) of the APA defines an ex parte communication as “an oral or written communication not on the public record with respect to which reasonable prior notice to all parties is not given, but it shall not include requests for status reports on any matter or proceeding covered by this subchapter”.  Clearly, the meetings with the Chairman or her staff regarding the petition fit this definition, but are they proscribed by the APA?

It turns out that the APA only restricts ex parte communications with respect to communications “on the record” (i.e., formal adjudications and formal rulemakings)  5 U.S.C. § 557(d)(1).  Even though the APA does not prohibit ex parte communications in informal rulemaking, courts have occasionally objected to them.  See, e.g., Sangamon Valley Television Corp. v. U.S., 269 F.2d 221 (D.C. Cir. 1959) and Home Box Office v. Federal Communications Commission, 567 F.2d 9 (D.C. Cir. 1977).  However, subsequent decisions have limited the application of those cases when general policy making is involved.

Whether permitted or not, ex parte contacts are problematical.  On the one hand, these contacts can improve agency policy making.  As Judge Patricia Wald observed in Sierra Club v. Costle, 657 F.2d 298, 400-01 (D.C. Cir. 1981):

The very legitimacy of general policymaking performed by unelected administrators depends in no small part upon the openness, accessibility, and amenability of these officials to the needs and ideas of the public from whom their ultimate authority derives, and upon whom their commands must fall.

On the other hand, ex parte communications raise the specters of agency capture, secrecy, and corruption.  They also create the possibility that of dual administrative records – one public, and the other for those “in the know”. This can prevent members of the public from responding effectively to information supplied by third parties and upon which an agency may base its decisions.

Docketing meetings, as the Commission does with only the briefest of summaries of what was discussed, does not provide ”the full administrative record that was before [an agency official] at the time he made his decision,” Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971).  For example, the SEC has posted this memorandum memorializing a meeting between Chairman Schapiro and the following individuals:

  • John Keenan, AFSCME (American Federation of State, County and Municipal Employees)
  • Bob Daley, Main Street Alliance
  • Bob Edgar, Common Cause
  • Steven Spaulding, Common Cause
  • Lisa Gilbert, Public Citizen
  • Blair Bowie, PIRG
  • Bill de Blasio, NY City Public Advocate
  • Kate Coyne-McCoy and Jeff Merritt, CAPS (Coalition for Accountability in Political Spending)

However, we have only this very spare description on the Commission’s website of what was said:

The representatives from CAPS discussed their concerns about corporate political spending and recommended that the Commission take action to require disclosure to shareholders of the use of public company resources for political activities.

Apparently the others participating in the meeting said nothing.  The public can only guess as to the legal and factual matters presented.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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