Heath Tarbert, the Chairman of the Commodities and Futures Trading Commission, has directed his staff to use no-action letters sparingly. Meanwhile, the Securities and Exchange Commission's two Democratic Commissioners want to circumscribe the authority of their own staff. Is this the right direction of travel?

A few days ago Heath Tarbert directed CFTC staff on the use of (i) no-action letters, (ii) interpretive letters, (iii) staff guidance, advisories and frequently-asked questions or FAQs and (iv) exemptive letters. He told them "to ensure that staff Letters are limited to those circumstances that are not suitable for a general rulemaking" and that "staff letters should supplement, rather than replace, rulemakings."

In a "Directive on the Use of Staff Letters and Guidance," Mr Tarbert drew the following distinctions.

With regard to no-action letters, the CFTC should offer time-limited relief to market participants (i) experiencing operational difficulties that impede timely compliance (transitional compliance relief), (ii) raising unique issues about CFTC regulations where the relevant situation was not contemplated by the relevant regulations (this is known as "square peg" relief) and (iii) facing challenges brought on by, among other things, a market crisis. According to Mr Tarbert, persons other than the recipient of a no-action letter may not rely on the letter, but may view the letter as instructive of a division's views.

Mr Tarbert said that interpretive letters were derived from statutory provisions or regulations and aimed to provide context for ambiguous terms. For staff guidance, advisories and FAQs, Mr. Tarbert stated, the staff should advise the public "prospectively" as to how it would implement the underlying provisions of regulation.

Mr Tarbert stated that exemptive letters may be issued only when the CFTC has granted its members of staff explicit authority. He said that exemptive letters may include conditions that are "traceable" to relevant regulations, but cautioned against amending existing regulations within a letter and against exemptive letters that would have effect beyond the recipient, in which case, he said, rulemaking would be more appropriate.

Mr Tarbert believes that the CFTC acts best with public participation and that, as a result, "rulemaking should be the agency's default policymaking vehicle."

The right way to go?

Chair Tarbert's guidance follows closely on the issuance of a statement by the SEC's two Democratic Commissioners that the staff's authority should be circumscribed. Notwithstanding this unusual agreement across the political divide, it is exactly the wrong way to go. The SEC and the CFTC have authority over vast swathes of the US economy. It is extremely difficult and time-consuming to get the staff to say "yes" to almost any question, even where yes is the right policy answer. If every meaningful question must go up for "commission action," whether at the SEC or the CFTC, the gridlock will become much worse.

Think of the SEC and CFTC as business organisations. If the leaders of those organisations decide that they cannot delegate meaningful decision-making authority to their senior staff, those organisations will not be successful. It should not be the case that, as the real world seems to move ever faster, the regulators organise their operations to move more slowly.

Furthermore, persons other than the recipient of a no-action letter ought to be able to rely on it, as long as they fit the terms of the letter. If this is not the case, the regulator has created an unlevel playing field, or perhaps obliged its staff to write numerous identical letters to numerous parties. Perhaps a better solution is for a firm that relies on another firm's letter to notify the regulator. That would allow the regulator to inquire further and ask whether the conditions were really met, or should be altered, or whether rulemaking is necessary.

Finally, the enforcement division of a regulator should be bound by a no-action letter issued by a rulemaking division of that regulator. It is not the job of enforcement staff to second-guess the intentions of their rulemaking divisions. As a practical matter, this is the way everyone expects no-action relief to work. It would hardly be relief if, after the issuance of a no-action letter, the enforcement staff were to decide to conduct their own review of whether relief was granted appropriately and, if they thought it was not, to take action.

* Steven Lofchie can be reached at Steven.Lofchie@cwt.com