Terms & History

A description of the structures and process that created the data which we analyzed. If you are familiar with the field than this section can be skipped, if not this provides a general description of the SEC processes.

The Securities and Exchange Commission (SEC)

The SEC is empowered by Congress to regulate the $24.3 trillion securities industry through the issuance of rules. The rules issued by the SEC are legally enforceable so stakeholders have an incentive to attempt to influence the final regulation to serve their self-interests.

In 1934 Congress passed the Securities Exchange Act of 1934 which created the Securities Exchange Commission (SEC). The goal of which was, and is, to regulate and oversee the securities industry in the United States. Part of the role is to draft and pass rules which alter the legal actions allowed and requirements for firms operating within the securities industry. There are two main types: (1) discretionary rules which the SEC opts to regulate without specific direction from Congress and (2) mandated rules which Congress specifically requested.

For example, in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in Congress following the advent of the 2008 Great Recession. Through Section 951 of Dodd-Frank Congress required the SEC to create policies which prohibit the issuance of securities of issuers without claw-back policies [1]. Subsequently the SEC passed a rule which implemented such policies shortly after (see Shareholder Approval of Executive Compensation and Golden Parachute Compensation) [2].

Rules as released by the SEC are legally binding and regulate the ~24.3 trillion-dollar (as of June 05, 2023) securities market in the United States [3]. The language used by the SEC and the specific areas of the security market that they (using discretion) decide to regulate have impacts on various stakeholders. As a result, these stakeholders are motivated to influence the actions and language of the SEC to protect their own interests. Our analysis examines what makes these stakeholders effective in the attempts to influence the rules and regulations created by the SEC.

The Rulemaking Process

As a general process, the SEC releases a Proposed Rule and requests comments and meetings from the public. Following the comment period, the SEC Board of Commissioners votes as to whether to adopt a Final Rule which may be changed to address concerns brought forward in the comment period.

Once the SEC decides to draft a rule (either through mandate or discretion) about a specific area or aspect of the securities industry they will begin working on a proposed rule. In some cases, the SEC will ask questions or gauge the public’s opinion through the issuance of a Concept Release (see endnote 4 for an example), but this is does not occur in many cases [5]. Following the creation of a Proposed Rule the SEC will publish the rule with a request for comment on the Federal Register as well as the Rulemaking Index [6, 7]. Proposed rules are open for comment from the public which can be submitted online [8]. Typically, the period for comment is between 30 and 60 days after the release of the Proposed Rule, but this can be extended at the discretion of the SEC. Comments directed at the SEC are filed and published by the SEC (see endnote 9 for an example). Under the Administrative Procedure Act of 1946 (APA) federal agencies (including the SEC) are required to respond to material concerns brought forward in the comment period if a final rule is published [10].

The publication of a Final Rule happens following a vote by the Board of Commissioners for the SEC and is legally binding for the securities industry. Following the publication of a Final Rule the SEC can release clarifying rule and/or memos to the industry about specific aspects of the rule. For example, in 2012 the Commission adopted a listing requirement standard under mandate from Congress (Dodd-Frank) and in 2013 released the specific listing requirements for each major securities exchange [11].

The rulemaking process of the SEC is does not always follow this exact structure, for example, interim rules can be passed and final rules (without a previous proposed rule) also are published with a request for comment. But in the majority of cases the SEC follows this structure and it is conditions that we study the effectiveness of influence within the SEC.

Comments & Meetings

The SEC receives thousands of comment letters about each Proposed Rule many of these comments are from individuals and do not represent the interests of a larger organization. Our analysis focuses on comment letters which are submitted on behalf of a larger organization (“entity”). Entities may also form coalitions, deciding the submit a comment letter or meet with the SEC as group rather than individually.

As described above between the publication of a proposed and final rule the SEC accepts comments from the public. Anyone can submit a comment, but our analysis is specific to entities (e.g. corporations or interest groups) which send comments to the SEC. The SEC also may meet with stakeholders and releases memorandums that indicate when and with whom these meetings occurred with. These comments and meetings are the focus of our analysis and what, if anything, makes them effective.

In 2023 the SEC released a Proposed Rule named, “Order Competition Rule” and requested comment [12]. The SEC received thousands of comments and meet with several entities. The majority of the comment received are Form Letters, which are generic and not materially different from each other. Specifically, a Form Letters are identical to each other, but submitted by separate individuals. For example, specific to the Order Competition Rule the SEC received 2,654 of Form Letter J (the letter following the form letter classification is randomly assigned) [13, 14]. Comments sent to the SEC that are classified as Form Letters are excluded from our analysis because they do not convey unique influence or information. Typically, they are sent out by interest groups to their members for them (the members) to then “comment” to the SEC.

The Order Competition Rule also received hundreds of unique comments letters some from individuals and others commenting on behalf of an entity [15]. For example, Sean Paylor sent a comment letter to the SEC representing the interests of Acadian Asset Management [16]. Additionally, there are comment letters which were sent by individuals representing solely their own beliefs and interests, for example, Luke Petersen [17]. Our analysis centers around the comment letters sent by individuals representing an entity (e.g. Sean Paylor) or by an entity itself.

Meeting memorandums are also reported by the SEC in reference to a rule, but the exact language used in the meeting is not disclosed [18]. These meetings are also a source of data for our analysis as, in our experience with this SEC data, the SEC almost exclusively meets with individuals representing entity interests not just their own.

Within comments and meetings entities may decide to “team-up” and co-write or co-meet with the SEC on behalf of their collective interests. These coalitions do not make up the majority of comments or meetings, but are not infrequent. Coalitions are a focal point of our analysis and studying whether or not they increase the efficacy of an entity being able to influence the SEC.

Financial Data

Financial data utilized in this project comes from a variety of respected private and government sources.

Our analysis takes advantage of several different data sources to collect financial information with regard to entities which comment or meet with the SEC. The Wharton Data Research Service (WRDS) was utilized to collect public markets data on many companies. WRDS is widely respected source of historical financial data and is used by 10,000s users and over 500 institutions as a data source [19]. Publicly accessible IRS-990 and Federal Reserve data is also utilized for other entities which submitted comments or met with the SEC [20, 21]. A further discussion of these sources and their utilizations can be found in the analysis description.