Corporate Governance

The SEC and Quorum Requirements

By J Robert Brown Jr.

The Supreme Court, in New Process Steel v. National Labor Relations Board, 2010 US Lexis 4973 (June 17, 2010), just invalidated an attempt by the NLRB to put in place a two person quorum requirement.  The Court held, in a surprisingly close vote, that a quorum had to be at least three (out of five) commissioners.  The case was a matter of statutory construction, with Section 3(b) of the NLRA providing that "three members of the Board shall, at all times, constitute a quorum". 

The interpretive issue arose because the same statute also allowed the NLRB to delegate authority to committees and in these committees, two members could be a quorum.  The NLRB used the committee authority to effectively reduce the quorum for all matters (something like 600) by delegating all of the Board's powers to a committee.  Justice Stevens characterized the approach as a "Rube Goldberg-style delegation mechanism".  

The case got us to thinking about the quorum requirements for the SEC.   After all, the problem at the NLRB arose out of the failure of the political process.  Membership had fallen to two commissioners and the "Rube Goldberg-style delegation" was an attempt to allow the Board to continue to function.  The same thing could, for course, happen to the Commission.  Indeed, back in 1995, Commissioners Levitt and Wallman were the only members of the Commission.  Towards the end of the Bush administration, the Commission for a time consisted of three members. 

These are addressed in the Commission rules and provide:

• 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.

17 CFR § 200.41.  In other words, the Commission does not have to go through the Rube Goldberg approach and create a committee but can simply rely on the two remaining commissioners to provide the quorum.  Of course, the rule goes further and provides that a single commissioner will constitute a quorum, at least in cases where only one commissioner remains on the board.   See Exchange Act Release No. 35548 (March 30, 1995)("To provide adequate flexibility in this unlikely situation, the Commission is providing that one commissioner would constitute a quorum if no other commissioners are in office."). 

Given the Court's ruling in New Process Steel, however, one might reasonably ask whether the SEC's rule is valid.  There are some significant differences in the two cases.  Most noticeably, the determination of the SEC's quorum requirement is not set out in the enabling statute.  One lower court concluded that as a result, the agency had broad discretion to determine its own quorum requirement.  See Falcon Trading Group v. SEC, 102 F.3d 579  (DC Cir. 1996)("If not otherwise constrained by statute, an agency sufficiently empowered by its enabling legislation may create its own quorum rule."). 

Second, the creation of a two person quorum in New Process Steel was by resolution.  The SEC has done it by rule.  Of course, as a precedural rule, the SEC did not submit the change for notice and comment.  See Exchange Act Release No. 35548 (March 30, 1995)("Therefore, the provisions of the Administrative Procedure Act ("APA") regarding notice and comment are not applicable.").  As such, it is unlikely to receive any deference under Chevron.

While the SEC's situation is different enough, the presence of a one person quorum does raise questions.  The Commission was created as a collective body with collective decision making authority.  One has to wonder whether a one person Commission is consistent with this approach. 

Full post as published by The Race to the Bottom on June 21, 2010 (boomark / email).