Back in December, this blog discussed the quorum questions surrounding an SEC with several vacancies. Unlike many federal agencies, the SEC has no statutorily-defined quorum. The Commission set the minimum number of members necessary to conduct business by rule at three in 1995, but carved out two major exceptions. The first exception provides that if there are fewer than three Commission members currently serving, a quorum consists of the number of members then in office. This rule allowed Commissioners Kara M. Stein and Michael S. Piwowar to constitute an operating quorum to conduct SEC business for the past few months.
The second exception may prove to be important in the future as new Chairman Jay Clayton takes the helm of the agency. Due to his lengthy corporate client list from his tenure at Sullivan & Cromwell, and his wife’s employment at Goldman Sachs, the new chairman will likely encounter many instances where he will recuse himself from SEC actions due to personal or family conflicts. Under the rules, now that the SEC has three members, it is sufficient if there are two eligible commissioners available to vote after any recusals and disqualifications. In the event of a recusal, if Commissioners Stein and Piwowar can agree, the SEC may act even without the participation of the chairman.
Despite the stark differences in ideology and regulatory philosophy between Commissioners Stein and Piwowar, a recusal by the chairman would not necessarily mean agency gridlock. The two acted cooperatively during their tenure as a two-member SEC on rulemaking matters, such as adopting the “T+2” securities transaction settlement rule, and proposing enhanced municipal securities disclosures under Exchange Act Rule 15c2-12. The commissioners also agreed to authorize a large number of administrative and judicial enforcement actions.
It is likely that the SEC will remain shorthanded for several months to come. Absent a recusal or disqualification, all three current members of the Commission must be present to take any action. This will not be problematic with regard to routine Commission business and non-controversial rulemaking matters. The quorum rules might place a roadblock, however, in the way of sweeping regulatory changes for the time being. Until the nomination and confirmation of a fourth member of the SEC, any one member of the Commission can effectively block all agency action merely by finding somewhere else to be when challenging matters come up for consideration.
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