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Rulemaking Process

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RULEMAKING PROCESS

Audit No. 347
July 12, 2002

EXECUTIVE SUMMARY1

The Commission's rulemaking process was generally effective and in compliance with statutes, regulations and Commission policies. Also, the Commission's consideration of public comments and its communication and coordination with outside parties (e.g., the Office of Management and Budget) were effective. The files maintained by the Secretary's office were generally complete.

We are suggesting certain improvements to the rulemaking process. These relate to cost-benefit analyses of rules; internal communication and coordination among the divisions and offices that participate in the rulemaking process; and organization and retention of supporting documentation and public comments.

Other recommendations include updating the rulemaking compliance handbook; developing a rulemaking calendar to track rules under development; and posting all comment letters on the Commission's Internet site.

During the audit, Commission officials took steps to address our recommendations. We commend them for their attentiveness and timely responses.

The Divisions of Market Regulation, Investment Management and Corporate Finance and the Offices of Economic Analysis, General Counsel, the Secretary, Information Technology, and Filings and Information Services provided comments on the draft report. We modified the report as appropriate to reflect these comments.

SCOPE AND OBJECTIVES

The audit objectives were to (1) determine compliance with applicable statutes, regulations, and Commission policies by reviewing a sample of final rules; (2) evaluate internal and external communication and coordination by interviewing Commission officials and outside parties involved in rulemaking; (3) review the adequacy of rule documentation maintained by the Commission; and (4) evaluate the overall effectiveness of the Commission's rulemaking process.

We reviewed twelve rules that were finalized between fiscal year (FY) 1999 and FY 2001.2 In addition, we reviewed other relevant documentation and interviewed Commission officials, members of the public, and officials at other agencies, among other procedures.

The audit was performed from October 2001 to February 2002 in accordance with generally accepted government auditing standards.

BACKGROUND

The Commission's rulemaking process, like that of other Federal government agencies, is intended to ensure that aspects of regulatory changes are analyzed before a change takes effect. A need for rulemaking can be identified internally by the Commission or externally by Congress, another government agency, private industry or the general public.

The rulemaking process usually begins with a rule proposal, but if an issue is unique or complicated, the Commission may first seek out public input on which, if any, regulatory approach is appropriate. In this case, a concept release is issued describing the area of interest and the Commission's concerns. It usually identifies different approaches to addressing the problem, followed by a series of questions that seek the public's views on the issue. The public's feedback is taken into consideration as the Commission decides which approach, if any, is appropriate. In lieu of a concept release, the Commission may have roundtable discussions or hold hearings. Members of the Commission's staff then draft a detailed rule proposal and present it to the full Commission.

If the Commission approves the rule proposal, it is then presented to the public (through publication in the Federal Register and on the Commission's website) for a specified period of time, typically between 30 and 60 days, for review and comment. The public's input is considered as a final rule is crafted. Rules are adopted by a vote of the full Commission.

A Commission rule usually originates in Market Regulation (MR), Corporate Finance (CF) or Investment Management (IM), the rulemaking divisions. They normally draft the proposed and final rules, but are assisted by other offices such as the Office of General Counsel (OGC) and the Office of Economic Analysis (OEA) during the rulemaking process.

OGC helps ensure that the rules have complied with applicable statutes, regulations, and Commission policies. OGC occasionally assists the divisions in drafting a proposed or final rule. The rulemaking divisions also consult OGC and OEA regarding their determination as to whether a rule is "major" or "not major;"3 OGC then seeks the Office of Management and Budget's (OMB) approval of this determination.

OEA reviews the rules, including the regulatory flexibility and cost-benefit analysis sections for compliance with various statutes, regulations and Commission policies. OEA provides advice and technical assistance on the likely economic impacts of rules, on whether the proposed regulatory approach makes economic sense, and on whether proposals and determinations are supported by sound economic reasoning and relevant empirical data. OEA also provides an economic rationale in determining whether a rule is major or non-major.

The Office of the Secretary (OS) reviews rules for compliance with Federal Register requirements, sends related documents to various agencies involved in the process, issues official rulemaking documents, coordinates Commission approval of rules, and maintains certain rule related files. OS also receives and organizes public comments and then forwards them to the Office of Filings and Information Services (OFIS) and to the relevant division staff.

OFIS files one set of comment letters in the Commission's public reference room and an official set in its Branch of Records Management. It also maintains original, signed copies of proposed and final rules, and related OMB correspondence.

The Office of Information Technology (OIT) assists the rulemaking staff in getting OMB's approval of paperwork burdens, which is required under the Paperwork Reduction Act (PRA).

A summary of statutes, regulations and Commission policies affecting rulemaking is presented in an appendix of this report.

AUDIT RESULTS

Based on the twelve rules reviewed, we found the Commission's rulemaking process to be generally effective and in compliance with applicable statutes, regulations and Commission policies. Some "best practices" have not been explicitly followed in Commission rules due to practical constraints, limited data and timeliness concerns. Commission officials noted that they would like to incorporate these best practices as resources permit.

We are making recommendations to enhance the process in several respects. Our recommendations are presented under four headings: Compliance, Communication and Coordination, Overall Effectiveness of Rulemaking, and Document Retention.

COMPLIANCE

Cost-Benefit Analysis

Regulatory Alternatives

According to Commission officials, the cost-benefit analysis section of a rule is becoming increasingly significant and they intend to more consistently follow the best practice principles in Executive Order 128664 relevant to this section. Consistent with this Order, officials said this analysis should further analyze a rule's effects on efficiency, competition, and capital formation, where practicable.

Executive Order 12866 states that agencies should assess costs and benefits of regulatory alternatives. The rules we reviewed discussed policy alternatives (where applicable) and requested comments on the related costs and benefits. However, most of the rules reviewed did not discuss the costs and benefits of proposed alternatives.

OEA encourages the rulemaking divisions to discuss possible policy alternatives in the proposing release. These discussions could enhance the comment process because commentators would have ideas in front of them that they could readily comment on.

Some Commission officials, including those in rulemaking divisions, expressed a desire to conduct more rigorous analyses and analyze proposed alternatives. However, officials also indicated that expanding this analysis is difficult because of a lack of data and the unpredictable nature of some costs. Some officials said that additional analyses could delay rulemakings without corresponding benefits and that requiring a rigorous qualitative analysis where data are not available could even preclude necessary rule changes. Finally, a federal agency can readily contact no more than nine members of the public for cost estimates.5

Recommendations A, B, C

    Each rulemaking division (i.e., MR, IM, and CF) should ensure that, to the extent practicable, the cost-benefit analysis contains a discussion of the costs and benefits of possible regulatory alternatives.

Stand-Alone Section

OGC's rulemaking manual states that "Every Commission proposing and adopting release should contain an independent stand-alone cost-benefit section"6 but "may cross-reference data contained elsewhere in the release." This enables readers to quickly review a synopsis of the rule and its potential financial or economic impact. OEA officials encourage the rulemaking divisions to do this because Congress focuses on this section. Many rules already incorporate this concept.

Several Commission officials in two rulemaking divisions said that making the cost-benefit analysis a stand-alone section increases the risk of inconsistent explanations, duplicates prior portions of the release, increases the burden of preparing the release and adds to delays.

Presentation

A Commission official said the cost-benefit analysis would be more readable if it included tables, graphs and bullet points where appropriate. Currently, this section consists of straight text in paragraph format.

Recommendations D, E, F

    Each rulemaking division (i.e., MR, IM, and CF) should incorporate tables, graphs and bullet points, where practicable, into the cost-benefit analysis section.

Small Business Administration Recommendations

Pursuant to the Regulatory Flexibility Act, the Small Business Administration (SBA) recommends that, as part of the rulemaking process, an Agency (1) compare costs of compliance for small and large entities, (2) analyze the ability of small entities to pass on costs in the form of price increases, and (3) analyze its potential effect on a small business's profitability and its ability to provide services. These recommendations are mentioned in OGC's Compliance Handbook.

These analyses were not consistently included in the rules we sampled that required a Regulatory Flexibility analysis7. The rules (as published in the Federal Register) requested comments from small businesses, but Commission officials said they rarely received comments from small businesses. Additionally, the PRA, as a practical matter, generally makes it difficult for officials to contact more than nine people from the public for cost estimates (see footnote 5). Therefore, they said it is often difficult to satisfy the above recommendations. Officials indicated they would incorporate SBA's recommendations where practicable.

COMMUNICATION AND COORDINATION

Internal

The rulemaking process involves communication and coordination among many divisions and offices, as well as with outside parties. For each rule, the rulemaking division typically communicates and coordinates with OEA, OGC, OS, OFIS and OIT, as well as OMB and the general public.

OEA has played an increasingly significant role in the rulemaking process over the past few years, requiring increased agency communication and coordination. OEA officials believe the rulemaking divisions' communication and coordination with their office has improved over the past few years, but several improvements are still possible. OEA officials raised the following concerns:

  • They are not always aware at a sufficiently early stage of rules being drafted by the rulemaking divisions;

  • They do not know when they will be brought into the rulemaking process for each rulemaking project;

  • They are sometimes brought into the rulemaking process too late;

  • They do not always have enough time to review and comment on a draft rule; and

  • They are not always informed of relevant meetings during a rulemaking.

OEA officials said these issues affect their ability to critically review the rules, ensure that potential problems are identified early, and manage their workflow. They indicated that sometimes their first exposure to a rule is when the rule has already been drafted. In these instances, they may identify substantive problems requiring new analyses and additional work.

OEA officials believe that if they were informed of rulemakings at the beginning stages, the efficiency and effectiveness of the entire process would be enhanced. They stressed the need to work collegially with other divisions and offices, and said that increased communication with their office would be desirable. Officials from the rulemaking divisions and OGC agreed that the process works best when both OEA and OGC are involved early.

According to OGC's rulemaking manual, the rulemaking divisions are supposed to involve OEA at the beginning stages of a rulemaking.

Commission officials in one of the rulemaking divisions said that to avoid delays in rulemaking projects, OGC and OEA should be given adequate resources to perform their functions on a timely basis, and they should be notified of rulemakings at an early enough stage in a rulemaking to allow them to participate meaningfully. However, these officials were concerned that involving other offices in a rulemaking too early, before ideas were fully thought through, could result in an inefficient use of Commission resources. These officials also said that the Commission, in consultation with the rulemaking divisions, should clearly delineate the roles of OEA, OGC and other relevant offices in rulemaking projects.

We believe that a balance between working on a rule within a rulemaking division and engaging other offices in a rulemaking is necessary. Different rules likely require varying amounts of legal, economic, and other technical analyses from offices outside the rulemaking divisions. Although the rulemaking divisions should inform outside offices of proposed rulemakings and related events, outside offices should recognize that there may be practical constraints to their being actively involved in every rulemaking from the beginning.

Recommendations G, H, I

    At an early stage in the rulemaking process, each rulemaking division (i.e., MR, IM, and CF), should consult with OEA and OGC to decide when these offices should be involved in the rulemaking and the extent of their involvement in rulemaking projects.

Recommendations J, K, L

    Each rulemaking division (i.e., MR, IM, and CF) should timely inform OEA and other relevant offices and divisions of pertinent events and issues during a rulemaking, including meetings, deadlines, and proposed timeframes.

An official in one of the rulemaking divisions said it would be useful if the different divisions shared their general knowledge about the rulemaking process with each other. This idea appears sensible.

Recommendations M, N, O

    Each rulemaking division (i.e., MR, IM and CF) should explore ways to share their experiences and insights with each other (e.g., a series of meetings or "brown bag lunches" to discuss rulemaking issues or exchange internal guidance and templates).

Office of Management and Budget

An OMB official indicated that the Commission's Paperwork Reduction Act submissions were generally complete and compared favorably with those of other agencies' submissions. This official also said that OMB generally received adequate supporting documentation and agreed with the Commission's determinations as to whether rules were major or not major.

Based on a review of several OMB approvals and related Commission documents, we found that the Commission timely contacted OMB and received approvals when required.

Public Comments

We reviewed a sample of comment letters. We also spoke with several people who filed comments on Commission rules. They represented financial services companies, associations, accounting firms, law firms, self-regulatory organizations, the North American Securities Administrators Association, industry groups, a bank, and a university.

Most of the people we contacted believed the Commission gave sufficient consideration to their comment letters. Some praised the Commission for its consideration of public comment letters and said the Commission made changes to final rules based on concerns raised in the comments. Others said they were unable to determine if the Commission had considered their comment letters. One person, who disagreed with a Commission rule, said the Commission did not give his comment fair consideration. This person has had several conversations with Commission officials about his concerns.

Based on our conversations with commentators and Commission staff, and our review of rules, we believe that the Commission adequately considered public comment letters.

OVERALL EFFECTIVENESS OF RULEMAKING

Policies and Procedures

The Commission's rulemaking policies and procedures and an overview of regulatory requirements are included in the "SEC Compliance Handbook," which was revised by OGC in October 1999. We found this handbook to be useful. Many Commission officials agreed, but said it should be updated and expanded.

According to Commission officials, some of the boilerplate language in the handbook is no longer used in current rules. Because of this, Commission staff often rely on language used in a recent rule as opposed to the handbook. The handbook is further outdated due to recent changes in the rulemaking process.

Commission officials believed that the handbook should reflect changes since its 1999 update and be expanded to include guidance on preparing concept releases, interpretations, and updates for the Unified Agenda, issuing rule-related press releases, and preparing Rule Identification Number forms. They also suggested that the handbook should contain more detailed examples and further explain how to get approvals on various documents from officials within and outside of the Commission.

To further enhance its utility, the handbook could be made available on the Commission's intranet.

Recommendation P

    OGC should update and expand the SEC Compliance Handbook and make it available on the intranet. In updating the handbook, OGC should consider the suggestions above and ask the divisions and offices for other possible improvements to the handbook.

Rule Listing

CF's rulemaking group maintains an internal listing of all rules under development and future rulemaking projects. The list includes a brief synopsis of each rule, timetables for completing various stages of each rule, and a contact person. However, there is no readily available internal listing of all rules under development throughout the Commission.8

We believe such a listing (which has been implemented at other Federal agencies) would be useful at the Commission. Several Commission officials said a listing would assist them in staying better informed of rulemaking proceedings and in managing their workflow. It could also increase accountability through the establishment of internal milestones and help ensure that officials are aware of all rules under development.

The listing could include:

  • A brief synopsis of each rule that the Commission intends to consider;

  • What stage each rule is at;

  • Where possible, general timeframes for completing various stages of the rulemaking process (e.g., drafting a rule, submitting the rules to OEA and OGC for comment, scheduling an open meeting for Commission approval);

  • Which division(s) is working on the rule; and

  • A contact person.

To increase its usefulness, the listing should be updated regularly (e.g., monthly and whenever a significant event occurs), posted on the intranet, and maintained by one office, for example, the Office of the Secretary (OS). Rulemaking divisions would provide timely updates to the office maintaining the listing.

Recommendations Q, R, S

    Each rulemaking division (i.e., MR, IM, and CF), in consultation with OGC, OS, OEA, and other affected offices, should consider developing a listing of rules under development, as discussed above.

Timeliness

For the twelve rules we reviewed, the average time between publication of proposed and final rules was 450 days. Initiation of a rule within the rulemaking division to final publication took between one month to six years. The Commission met statutory deadlines for the four rules we reviewed which had deadlines.

Commission officials and industry officials indicated that the rulemaking process is often time consuming due to its complexity and myriad requirements. Based on our discussions with these officials, timeliness is also affected by staff and Commissioner turnover, myriad procedural burdens and political developments.

Others noted that many divisions and offices are involved in rulemaking, which requires coordination of officials' schedules and circulating of documents throughout the Commission. Some Commission officials expressed frustration with certain phases of the process, especially the amount of time taken to comply with administrative requirements such as the Paperwork Reduction Act (PRA).

We recognize the time-consuming and complicated nature of rulemakings, and the difficulty of establishing a standard timeframe for rules. Furthermore, procedural burdens increase the time required to adopt a rule after proposal. Officials said that delays may also result from the receipt of many comments that request extensive changes, a decision to give industry the chance to take action on its own, a change in a rule's focus, or a change in Commission resources. However, we agree with some Commission officials who indicated that timeliness could sometimes be improved after the close of the public comment period.

According to these officials, once a proposed rule is published, the staff that worked on it often become immersed in other tasks while waiting for the public comment period to end. Some officials said it sometimes takes longer than it should for staff to return to the project and work on finalizing the rule after the public comment period has closed. Enhanced internal tracking of rules and timeframes (see above), as well as the establishment of goals or milestones, could help expedite the process.

Public Comments

Comment Logging

OS receives comment letters from the general public via hard copy, e-mail and fax. For each rule, OS numbers each comment and prepares a log of all comments received. OS posts to the Internet only those comments received via e-mail.

We reviewed the OS public comment log and identified the following discrepancies:

  • OS's log did not always include all comments received;9

  • Copies of the same comment letter were assigned different numbers in a few instances;

  • Different comment letters were assigned the same number in a few instances; and

  • Numbered comments in OS's log did not match the actual comment letters in some instances.

Recommendation T

    OS should research the above discrepancies and implement procedures to prevent further discrepancies.

E-Mail Forwarding

After logging comment letters, OS policy is to forward a copy of all comments received (including e-mail) to the rulemaking division and the public reference room and the originals to OFIS's Records Management Branch. However, we noted that OS was not sending e-mail comments to the public reference room and Records Management Branch. As a result, e-mail comments typically were not in their files.

Apparently, an OS staff member mistakenly believed that e-mail comments did not need to be distributed because they are available on the Commission's website.

Recommendation U

    OS should forward all e-mail comments not previously distributed to the public reference room and the Records Management Branch. It should remind its staff of the distribution policy for e-mail.

Comment Log Forwarding

OS does not forward its comment log together with the comments. Forwarding this log would help the rulemaking divisions, the public reference room and the Records Management Branch ensure that they had received a complete set of comments.

Recommendation V

    OS should also forward a completed comment log when it forwards the public comments.10

OS agreed with our findings and began implementing the three recommendations above immediately after we brought these issues to their attention. We commend OS's prompt response.

Internet Posting

Public comments would be more accessible if the Commission posted all comments on the Internet, not just those received via e-mail. Other Federal agencies post hard copy comments, using scanning technology.

OS officials indicated they would like to post all comments on the Internet but this would require additional resources.

Recommendation W

    OS should explore ways to capture all public comments on the Commission's Internet site.

Due Dates and Effective Dates

OS ensures that all proposed and final rules are posted on the Internet. Sometimes the Internet postings do not contain a due date for the receipt of public comments or for the effective date of a rule. OS officials said this occurs because the Commission (purposely) sends many of the rules to the Federal Register with the dates omitted. Federal Register staff then enter the dates into the releases based on the dates the rules are published in the Federal Register.

OS posts to the Internet the original version of a rule that is sent to the Federal Register (without dates). OS's policy is to update the Internet version of a rule with the correct date(s) after a rule is published in the Federal Register. However, in some cases, the Internet posting is not subsequently updated.

Recommendation X

    OS should ensure that the Internet postings of all proposed and final rules contain the applicable dates.

DOCUMENT RETENTION

OS Records

OS maintains copies of rules and related documents (such as OMB's approval of a rule as "major" or "not major"). Overall, we found OS's files to be complete.

Rulemaking Divisions' Records

Officials in MR, CF and IM maintain rulemaking files, which include drafts of rules, cost analyses, documentation of compliance with statutory and administrative requirements, and concurrences by other divisions and offices. Many of these files were in the office of the staff that worked on the rule, while others were stored in a central location.

We found that in some instances adequate documentation to support cost estimates in rules was missing. In at least one case, employee turnover was the cause, according to officials. Also, the types of documents retained in a rule's documentation file varied due to personal preferences of rulemaking staff. Some attorneys stored pertinent rule-related documents in their personal files.

It is imperative that the Commission retain documentation supporting a rule's assertions so it can defend a rule. High staff turnover exacerbates the need for good documentation.

Recommendations Y, Z, !A

    Each rulemaking division (i.e., MR, IM, and CF) should ensure that significant rule documentation (such as cost analysis) is stored in a rule's documentation file. To improve accessibility and document retention, the files should be stored in a central location in the division.

    Commission officials said this would require additional resources (i.e., storage space and staffing).

Recommendations !B, !C, !D

    Each rulemaking division (i.e., MR, IM, and CF) should develop a list of documents or types of documents that should be retained in a rule's documentation file.11

OFIS's Records

OFIS maintains public comments, original copies of Commission rules and PRA documentation. OFIS receives these documents from OS or OIT.

We reviewed related files and identified problems related to completeness and organization. We discussed these issues with OFIS, OIT and OS. OFIS staff subsequently re-filed some documents, resulting in more complete files based on a second review in February 2002. We commend OFIS's efforts to address these issues. However, we still identified issues in our second review, as discussed below.

Public Comment Files

OFIS retains two sets of comment files. The official set of files (known as S7 files) are stored by OFIS employees in the Records Management Branch (at the Operations Center). Another set are the public files in the Branch of Public Reference at headquarters.

We reviewed these two sets of files for most of the 12 sampled rules. Generally, the sets of files were incomplete and needed better organization. Specifically, we noted:

  • Several comment letters were missing (including comments received in hard copy and via e-mail);

  • Some public comment letters were misfiled;

  • Although the comment letters were assigned numbers by OS, they were not arranged in numerical order in any of the files reviewed (which would help locate letters); and

  • In several cases, the original, signed copy of a proposed and final rule was not in the S7 files.

OFIS staff said that the public removes or misplaces comment letters from the public reference room files. OFIS has posted signs in the public reference room and instructed the guard to review documents taken from this room. The room also contains several photocopy machines for public use. Additional steps would enhance the completeness and usefulness of the S7 files maintained by the Records Management Branch and Branch of Public Reference. For example, OFIS should:

  • Compare the comments it receives from OS to the comment log, and resolve any discrepancies with OS;

  • Work with OS to ensure it receives the original, signed copy of proposed and final rules;

  • Periodically review its files for completeness, ensure its staff are familiar with filing procedures, and file comments in numerical order; and

  • Consider placing the comments in binder.

Recommendation !E

    OFIS's Records Management Branch and Branch of Public Reference should implement procedures (such as the suggestions above) to improve the completeness and usefulness of its S7 files.

Paperwork Reduction Act Submissions

OFIS's Branch of Records Management maintains files of PRA submissions (known as 270 files). OFIS receives these documents from OIT after OIT coordinates OMB's approval of the submission.

According to OIT records, a total of 22 PRA files supported the rules we reviewed. We reviewed 14 of these files. Our findings were similar to our review of public comment files (above) in that the files were incomplete and needed better organization.

To enhance the completeness and usefulness of its PRA files, OFIS should:

  • Implement procedures to better organize PRA files and ensure they are complete, consulting with OIT as necessary;

  • Consider adding a table of contents to new files and inserting dividers to separate PRA submissions;

  • Refile missing PRA submissions and OMB approvals for recent rules12; and

  • Consider setting up a system to document what items have been provided to it (in consultation with OIT and OS).

Recommendation !F

    OFIS should implement procedures (such as the suggestions above) to enhance the completeness and usefulness of its PRA files.

    ABBREVIATIONS

APA Administrative Procedure Act

CF Corporate Finance (Division of)

FRFA Final Regulatory Flexibility Analysis

IM Investment Management (Division of)

IRFA Initial Regulatory Flexibility Analysis

MR Market Regulation (Division of)

OEA Office of Economic Analysis

OFIS Office of Filings and Information Services

OGC Office of the General Counsel

OIT Office of Information Technology

OMB Office of Management and Budget

OS Office of the Secretary

PRA Paperwork Reduction Act

RFA Regulatory Flexibility Analysis

SBA Small Business Administration

SEC Securities and Exchange Commission

Rulemaking Criteria

The following is a summary of statutes, regulations and Commission policies affecting rulemaking and for which we measured compliance.

ADMINISTRATIVE PROCEDURE ACT

The Administrative Procedure Act (APA) sets forth the basic procedural requirements for agency rulemaking. It generally requires (1) publication of a notice of proposed rulemaking in the Federal Register, (2) opportunity for public participation in rulemaking by submission of written comments, and (3) publication of a final rule and accompanying statement of basis and purpose not less than 30 days before the rule's effective date.

PAPERWORK REDUCTION ACT

The Paperwork Reduction Act (PRA) requires each government agency to (1) develop and routinely use a paperwork clearance process and (2) solicit and review public comments on "collection of information" requirements.

Under the PRA, a "collection of information" typically consists of obtaining information from or imposing a reporting or recordkeeping requirement on ten or more people outside of the federal government.

The PRA is intended to reduce unnecessary paperwork, improve management of information resources and encourage more effective public participation with respect to reporting and recordkeeping issues. The OMB administers the PRA and must approve each information collection before it can be enforced.

REGULATORY FLEXIBILITY ACT

The Regulatory Flexibility Act (RFA) requires an analysis of whether a rulemaking or proposed rule will have a significant economic impact on a substantial number of small entities.13 If required, this analysis is included both when rules are being proposed (an initial regulatory flexibility analysis, or IRFA), and when they are being adopted (a final regulatory flexibility analysis, or FRFA). When appropriate,

a certification signed by the Chairman that states that a proposed or final rule will not have a significant economic impact on a substantial number of small entities may be published instead of an IRFA or FRFA.

The RFA also requires agencies to ensure that small entities have an opportunity to participate in the rulemaking process. It requires the Chief Counsel of the Small Business Administration's Office of Advocacy to monitor agencies' compliance with the Act.

SMALL BUSINESS REGULATORY ENFORCEMENT FAIRNESS ACT

This Act was enacted in 1996, in part to strengthen the implementation of the RFA. It requires agencies to analyze whether a new rule is major or non-major.

The primary element of the major rule analysis is whether the rule is likely to have an annual effect on the economy of $100 million or more. Agencies must seek OMB approval on their conclusion as to whether a rule is major or not major (also see footnote 3). If a rule is a major rule, its effective date will be delayed for at least 60 days.14

The Small Business Regulatory Enforcement Fairness Act also requires agencies to publish small entity compliance guides for each rule or group of related rules for which an entity is required to prepare a FRFA. The guides are to explain the actions a small entity is required to take to comply with an associated final rule.15

COST-BENEFIT ANALYSIS

Under Commission policy, a cost-benefit analysis is considered part of the justification for proposing or adopting a rule. Work on this section typically begins when the proposing release is drafted.

The analysis typically discusses a rule's potential costs and benefits for affected entities, the economy, investors, and the marketplace. It also explains why regulation is needed and alternative forms of compliance. When possible, the analysis quantifies potential costs and benefits for affected entities.

EFFECTS ON EFFICIENCY, COMPETITION AND CAPITAL FORMATION

When the Commission is adopting a rule, it may be required to consider the public interest or to determine that a rule's adoption is necessary or appropriate in the public interest. In these instances, Section 3(f) of the Exchange Act requires the Commission to consider "whether the action will promote efficiency, competition and capital formation." The Securities Act and Investment Company Act have similar provisions.

Section 23(a)(2) of the Exchange Act requires the Commission to consider the impact that any rule promulgated under the Act would have on competition. It states that a rule is not to be adopted if it would impose a burden on competition not necessary or appropriate in furthering the purposes of the Act.

1 A list of abbreviations is included as Appendix A.

2 Of the rules reviewed, five were initiated by the Division of Market Regulation (MR) four by the Division of Corporation Finance (CF), and three by the Division of Investment Management (IM). We did not review interim final rules.

3 A rule is major if OMB determines the rule has resulted or is likely to result in: (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers or individual industries, or (3) significant adverse effects on competition, investment or innovation. All other rules are considered not major. Most of the Commission's rules are not major.

4 The objectives of Executive Order 12866, issued in 1993, are to enhance agencies' regulatory review and oversight functions and make the process more accessible to the public. As an independent regulatory agency, the Commission is not legally bound by the requirements in Executive Order 12866. However, the Commission has recognized that these principles represent accepted standards of good practice in conducting rulemaking proceedings.

5 Under the Paperwork Reduction Act, Federal agencies are not allowed to contact more than nine members of the public for information about a particular matter, unless they have obtained OMB's approval. The approval process can be time-consuming.

6 This requires the Commission to restate (in the cost benefit analysis section) information contained in earlier portions of the rule.

7 The Regulatory Flexibility Act requires an analysis of whether a rulemaking or proposed rule will have a significant economic impact on a substantial number of small entities.

8 The "Unified Rulemaking Agenda" on the Internet contains uniform reporting of data on rules under development at the Commission and other Federal agencies. However, the Agenda is only updated semi-annually and does not list all rules under development. Its format and limited information reduce its usefulness, according to Commission officials.

9 This was partly due to problems in the system OS uses to log comment letters, which caused some listings to be deleted. These glitches were identified and worked on shortly after the issuance of our discussion draft report.

10 OS plans to provide read-only access, to the system they use to log public comments, to officials in OFIS and the rulemaking divisions. This would ensure that OFIS and the rulemaking divisions have access to the most recent comment log.

11 Some offices within CF, IM and MR were developing, or had already developed, such a list at the time of our review.

12 Documentation in the PRA files went back to the early 1980s. Although we noted instances where older submissions and approvals were not in the files, our review focused on missing documentation that was recent (1999-2001). We believe it would be too onerous to recommend that OFIS research or recreate all missing documentation. Furthermore, OMB approvals typically expire after three years.

13 The Act does not define levels for "significant economic impact" or "substantial number of small entities." However, it provides illustrations of significant economic impact such as 175 staff hours per year of recordkeeping.

14 A major rule takes effect on the later of 60 calendar days after the date Congress receives the agency's report on the rule or the date the rule is published in the Federal Register.

15 Several of the rules we reviewed were technically subject to these criteria. However, we did not evaluate Commission compliance with these criteria because at the time of our audit, GAO was conducting an evaluation of agency compliance with these criteria. See GAO Report 02-172 "Regulatory Reform. Small Entity Compliance Guide Requirements" for more information.