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Bradford in Ohio State Law Journal 60 (1999). Copyright 1999, Moritz College of Law. Used by permission.


The Securities and Exchange Commission (SEC) is sometimes accused of using the administrative process "to graft new, substantive standards and obligations onto existing statutes or SEC rules." Through the use of the no-action letter process, the SEC staff sometimes creates substantive securities law which is inconsistent with the relevant federal securities statutes and case law. Many of these staff positions "go far beyond reasonable and fair explanations of existing statutes or SEC rules." However, in substantive areas lacking definitive case law or rules, these no-action letters assume an extraordinary importance to securities lawyers and regulated entities. For all practical purposes, the SEC position becomes the law, whether or not the position is faithful to the statute.

The SEC's interpretation of the term "security" in the Investment Company Act of 19406 (Investment Company Act or Act) is a particularly egregious example of law-making by SEC administrative fiat The SEC's authority under the Investment Company Act like its authority under the other federal securities statutes, turns on the presence of "securities." The Act regulates "investment companies," and, to be an investment company, an investment fund or program usually must both issue securities to its investors and invest in securities itself.

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