In an action related to the adoption of the policy statement on mandatory arbitration provisions, yesterday the Commission, by a three-to-one vote, adopted an amendment to Rule 431(e) of the SEC’s Rules of Practice, which is the rule addressing the Commission consideration of actions made by the Staff pursuant to delegated authority.

Many routine SEC matters that require Commission action are handled by the Staff pursuant to delegated authority from the Commission. This includes the acceleration of the effectiveness of a registration statement under the Securities Act. The Commission maintains the power to affirm, reverse, modify, set aside or remand for further proceedings, in whole or in part, any action made pursuant to delegated authority, and Rule 431 specifies the process by which the Commission considers any such action, which can be prompted by the filing of a petition for review by a third party or upon the Commission’s own initiative. Rule 431(e) provides for an automatic stay of an action made pursuant to delegated authority upon filing with the Commission of a notice of intention to petition for review, or upon notice to the SEC’s Secretary of the vote of a Commissioner that a matter be reviewed, except in specific circumstances. In the rulemaking action yesterday, the Commission added the acceleration of the effectiveness of a registration statement to the list of circumstances excepted from this automatic stay provision.

In his statement in support of the change, Chairman Atkins notes:

Currently, declaring a registration statement effective is not among the exceptions to a stay. However, stays of an effective registration statement may be extremely disruptive. A company, its underwriters, and other market participants may commence sales of the securities once the registration statement is effective. A stay of effectiveness could fundamentally interrupt the sales process. Investors – selling securities holders as well as purchasers — might be extremely disadvantaged. Market participants could incur costs as a result. A stay could also create uncertainty for issuers and underwriters that have sold securities. Rather than automatically trigger such adverse consequences, the Commission should have the opportunity to carefully weigh the equities involved before taking such a significant step.

Adding declarations of effectiveness of registration statements to the limited list of exceptions to the automatic stay requirement will help to alleoviate some of the aforementioned concerns. In the execution of its mission, the Commission should provide as much regulatory certainty as possible to market participants raising capital. Today’s amendments to rule 431 further that mission.

As with the policy statement on mandatory arbitration provisions, Commissioner Crenshaw opposed this action, noting in her statement:

It would be bad enough if all the Commission did today was issue the mandatory arbitration policy statement. But we simultaneously propose amendments to our Rules of Practice in order to eviscerate the procedural rights of those who might choose to challenge an issuer’s inclusion of mandatory arbitration.

Currently, when either a Commissioner or a third-party requests Commission review of almost any staff action made pursuant to delegated authority, those actions are automatically stayed pending Commission consideration. This consideration is an important backstop to delegated staff action. That all goes away with today’s amendments. From now on, the automatic stay, which provides the mechanism for meaningful Commission review of registration statements before an offering hits the market, vanishes. Accordingly, I also cannot support today’s amendments to the Commission’s Rules of Practice.

I must admit that in three decades as a practicing securities lawyer, including a decade spent inside Corp Fin, I never encountered a situation where a Commissioner or another party sought review of the Staff’s action in declaring a registration statement effective, so I am comfortable in concluding that the Commission’s amendment to Rule 431 of the Rules of Practice will likely not make much difference in our day-to-day practice.

– Dave Lynn