July 16, 2015

What’s the SEC Chair’s Role? Authority for the SEC’s Commissioners to Act?

Recently, a member asked: “I did a little looking at the statutory or other authority of the SEC’s Chair. I didn’t find very much that describes the role and authority of the chairman. As a practical matter, does the staff treat the Chair as the CEO (boss) and generally do what the Chair says? I always tell my clients that individual directors who are not officers have no authority to direct management to do anything. A board must act collectively or not at all. Interestingly, I could find a rule governing quorums of the Commission, but no rule that defining what vote is required for Commission action (i.e., a majority of the authorized number of Commissioners or a majority of a quorum). Perhaps these are matters that you could address in your blog.”

I forwarded this question to my go-to expert on this type of thing – Scott Kimpel of Hunton & Williams – who responded:

In Free Enterprise Fund v. PCAOB (2010), the Supreme Court held (just a few weeks before passage of Dodd-Frank) that the five Commissioners are, jointly, the head of the SEC. Also, Section 989B of the Dodd-Frank Act amended the Inspector General to provide that the “head of the designated Federal entity” with a board or commission (such as the SEC) means “the board or commission of the designated Federal entity.” Dodd-Frank changed prior law under which the inspector general only reported to the SEC chair. But the Court in Free Enterprise otherwise left intact Reorganization Plan Number 10 of 1950 (15 Fed. Reg. 3175).

Reorg Plan 10 formally transferred from the full Commission to the SEC Chair responsibility for all executive and administrative functions, including “(1) the appointment and supervision of personnel employed under the Commission, (2) the distribution of business among such personnel and among administrative units of the Commission, and (3) the use and expenditure of funds.” Item (3) is notable because it vests responsibility for the SEC budget solely with the Chair. I’ve found over the years that many people are surprised that the other commissioners have little to no input in the budget process, and the full Commission never takes a vote on the budget, which is unlike other agencies, such as the CFTC, where I understand there is no comparable provision and all of the Commissioners weigh in.

Reorg Plan 10 also vests the Chair with authority to appoint “the heads of major administrative units . . . subject to the approval of the Commission.” This provision gives the Chair a great deal of authority to hire and fire the general counsel and other division/office heads. Historically, these senior positions were held by career members of the civil service who ascended to director status after many years on the Staff, and director-level officers held these positions for many years across the tenures of multiple chairs. More recently, SEC Chair have generally brought in their own folks (often from the private sector) to serve as general counsel and as division/office directors, then these folks quickly leave when a new Chair joins. Unlike many cabinet-level executive departments that require Senate confirmation for the general counsel and various undersecretaries, there is no such requirement at the SEC, so appointing new directors is comparatively easy.

In terms of the interaction of the Chair, Commissioners and Staff, I believe the CEO-board analogy is a rough one at best. While it is true that the SEC Chair generally holds a position akin to a COO or CEO, the other Commissioners have no say in appointing the Chair (Reorg Plan 10 vested that power in the President), nor do they set the Chair’s compensation—all hallmarks of private-sector board oversight of the chief executive. And unlike traditional directors at a private-sector company, SEC Commissioners are employees of the agency, maintain offices and personal staffs at SEC headquarters, and regularly interact with members of the Staff, particularly on rule-makings and enforcement matters.

It is true that the Chair has the most frequent contact with the senior staff, but rank and file staff have little daily interaction with the Chair or the other Commissioners and generally take direction from their immediate staff supervisors. Many Staff members can work at the SEC for years without ever meeting a Commissioner other than a chance encounter with one in an elevator or at the coffee shop. That said, there is certainly no rule or protocol that otherwise limits who the other Commissioners can speak to on the Staff. Because adoption of rules and authorizing enforcement action are both activities that require a vote of the Commission, individual Commissioners can have a great deal of influence over how these matters develop, and there is regularly a good deal of horse trading among the Commissioners and Staff working on a project to achieve a majority on a given vote.

As to the voting question more specifically, the quorum requirement appears at 17 CFR §200.41. It provides: “A quorum of the Commission shall consist of three members; provided, however, that if the number of Commissioners in office is less than three, a quorum shall consist of the number of members in office; and provided further that on any matter of business as to which the number of members in office, minus the number of members who either have disqualified themselves from consideration of such matter pursuant to §200.60 or are otherwise disqualified from such consideration, is two, two members shall constitute a quorum for purposes of such matter.”

A majority vote of those SEC Commissioners participating in a meeting where quorum is present is required for a matter to pass. There is no particular SEC rule on this issue, but it is instead based on the holding in cases like FTC v. Flotill Products, which the Supreme Court decided in 1967. In that case, the Court considered whether an official action of the FTC required the vote of a majority of the full Commission, or only of a majority of the quorum that participated in the decision. The Court noted what it referred to an “almost universally accepted common-law rule . . . in the absence of a contrary statutory provision, a majority of a quorum constituted of a simple majority of a collective body is empowered to act for the body.” I believe the SEC’s Office of General Counsel and Office of Secretary have developed various rules of thumb to administer this holding in practice. And a great deal of the Commission’s business is discharged through written consents in lieu of a meeting (each known colloquially as a “seriatim” from the legal Latin for a document signed in series) in which all five of the Commissioners must sign before the action is effective.

Also see Keith Bishop’s blog on this topic…

Mailed: July-August Issue of “The Corporate Executive”

We recently mailed the July-August Issue of The Corporate Executive, and it includes pieces on:

– FASB Issues Exposure Draft Proposing ASC 718 Amendments
– Delaware Courts Approve Another Lawsuit Over Director Stock Awards (and More Lawsuits Are Filed)
– A Trap for Corporate Executives
– IRS Issues Final Section 162(m) Regs
– Grant Date When Performance Awards Are Granted After the Start of the Performance Period
– SEC Proposes Clawback Rules

Act Now: Get this issue rushed to when you try a “1/2 Price for Rest of 2015″ No-Risk Trial to The Corporate Executive.

Wearable Computers: What Next?

Apparently, wearable computers were all the rage during this year’s SXSW despite the demise of Google Glasses. How might wearable technology impact investors? This article from a few years back gives some clues…

– Broc Romanek