Rulemaking, How it Works

Rulemaking is the process by which federal agencies implement legislation passed by Congress and signed into law by the President. In addition, an agency may engage in rulemaking to update rules under existing laws, or to create new rules within existing authority that the agency believes are needed. For the most part, the SEC’s authority to issue rules derives from what are generally referred to as the Federal Securities Laws: the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. Newer laws, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, also give rulemaking authority and require some specific rulemaking by the SEC.

Rulemaking generally involves several steps that are designed to give members of the public an opportunity to provide their opinions on whether the agency should reject, approve, or approve with modifications a rule proposal. Here is a brief description of some of these steps:

Concept Release. The rulemaking process usually begins with a rule proposal, but sometimes an issue is so unique or complicated that the SEC seeks public input before issuing a proposed rule. A concept release typically outlines the topic of concern, identifies different potential approaches, and raises a series of questions inviting public comment on the matter. The public's feedback is taken into consideration as the SEC decides which approach, if any, is appropriate.

Rule Proposal. When approved by the Commission, a rule proposal is published for public notice and comment for a specified period of time, typically between 30 and 60 days. A rule proposal typically contains the text of the proposed new or amended rule along with a discussion of the issue or problem the proposal is designed to address. The public’s input on the proposal is considered as a final rule is drafted.

Rule Adoption. When approved by the Commission, the new rule or rule amendment becomes part of the official rules that govern the securities industry. The adopting release reflects the Commission’s consideration of the public comments. Many rules are effective immediately, but some have a delayed effective date. In either case, the date by which the public must come into compliance with a new or amended rule (the Compliance Date) may be delayed or phased in to ensure the transition is a smooth one.