Rulemaking, How it Works

Rulemaking is the process by which federal agencies implement legislation passed by Congress and signed into law by the President. Major pieces of legislation, such as the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940, provide the framework for the SEC's oversight of the securities markets. These statutes are broadly drafted, establishing basic principles and objectives. Then, as the securities markets evolve technologically, expand in size, and offer new products and services, the SEC engages in rulemaking to maintain fair and orderly markets and to protect investors by altering regulations or creating new ones.

Rulemaking can involve several steps—concept release, rule proposal, and rule adoption:

Concept Release. The rulemaking process usually begins with a rule proposal, but sometimes an issue is so unique or complicated that the SEC seeks out public input on which, if any, regulatory approach is appropriate. A concept release is issued describing the area of interest and the SEC's concerns and usually identifying different approaches to addressing the problem, followed by a series of questions that seek the views of the public on the issue. The public's feedback is taken into consideration as the SEC decides which approach, if any, is appropriate.

Rule Proposal. The staff drafts a detailed formal rule proposal and presents it to the Commission. Unlike a concept release, a rule proposal is specific in its objectives and methods for achieving its goals. Following approval by the Commission, the rule proposal is presented to the public for a specified period of time, typically between 30 and 60 days for their review and comment. Input once again is considered as a final rule is crafted.

Rule Adoption. Finally, the staff presents a final rule to the Commission for its consideration. If adopted, the measure becomes part of the official rules that govern the securities industry. If the rule is a major rule, it may be subject to congressional review and veto prior to becoming effective.