By Mark S. Nelson, J.D.
The SEC Stabilization Act of 2023, if enacted, would dramatically restructure the SEC, at least according to its backers, Reps. Warren Davidson (R-Ohio) and Tom Emmer (R-Minn), to bring greater stability to the agency’s rulemaking and enforcement efforts but, in the near term would seek to remove current SEC Chair Gary Gensler. The proposed 3-3 commission structure would be contrary to the dominant 3-2 commission model among independent federal agencies and could result in securities regulation gridlock. But, in the eyes of the bill’s sponsors, the changed Commission structure could promote greater unanimity in rulemaking and could free the chair from some administrative duties.
“U.S. capital markets must be protected from a tyrannical Chairman, including the current one,” said Rep. Warren Davidson in a press release. “That’s why I’m introducing legislation to fix the ongoing abuse of power and ensure protection that is in the best interest of the market for years to come. It’s time for real reform and to fire Gary Gensler as Chair of the SEC.”
Specifically, the SEC Stabilization Act (H.R. 4019) would convert the Commission from a 3-2 commission into a 3-3 commission modeled after the Federal Election Commission. The goals of a federal financial regulatory agency, however, may differ from those of the FEC, which was designed to foster nonpartisan decisions in the especially fraught field of federal elections.
Among the models available to choose from are the existing, traditional 3-2 model with a partisan balance that matches the political views of whichever political party holds the White House. Some agencies have a single commissioner structure that is overseen by a cabinet-level secretary who is responsible to the president. Still other agencies, such as the CFPB, have a single director structure (which is now directly accountable to the president after a recent Supreme Court decision). The purpose of the 3-2 commission is largely to allow an administration to pursue its regulatory goals, a generalized purpose that courts have tended to uphold when a new administration seeks to repeal the rules adopted by a prior administration’s agency leadership.
Under the SEC Stabilization Act, Commissioners would have six-year terms instead of five-year terms, and they would be selected two-at-a-time in a staggard manner so that two seats would open every two years. The president, at each two-year interval, would have to nominate two persons of different political parties, thus ensuring a 3-3 political (likely partisan) balance.
It might be noted that, historically, “[i]t is perhaps inevitable, too, that the President will tend to appoint minority members who are generally sympathetic to his administration” (See, Loss, Seligman and Paredes, Securities Regulation at Ch. 1.J.1., a Wolters Kluwer publication). However, over the past decade or so, presidents have tended to pick their own chair and then to increasingly appoint former Congressional staffers to the commissioner seats, thus almost ensuring a strong 3-2 partisan split on most matters, a practice that would seem likely to continue with an expanded Commission.
The bill does not expressly address the presence of political Independents among the commissioners. In recent years the SEC has had three chairs who identified as Independent: Mary L. Schapiro, Mary Jo White, and Jay Clayton (Schapiro and White were appointed by Democratic presidents; Clayton was appointed by a Republican president). Schapiro also had previously served as a non-chair Commissioner in the 1980s to mid-1990s, a seat to which she was appointed and reappointed by two different Republican presidents before being named Acting Chair by a Democratic president. Non-chair Commissioner Robert J. Jackson Jr., who served from January 2018 to February 2020, also identified as an Independent.
The SEC Stabilization Act also would do what some federal agencies already do and split off many of the routine administrative tasks from the Chair and place them with an executive director. The purpose of the proposed change would be to free the Chair to focus on regulatory and enforcement matters, but it also would strip the Chair of significant power over the conduct of the agency, especially regarding the hiring and firing of agency employees and the delegation of Commission functions to Commission employees.
Other agencies have managing directors, but those roles are often overseen by the agency chair, who also appoints the managing director (with commission approval) and retains the ability to delegate tasks to the managing director. The SEC Stabilization Act would have the proposed SEC executive director selected by the commissioners as a whole rather than by the chair alone. Currently, the Commission may, by published order or rule, delegate any of its functions to a Commission division, an individual Commissioner, an administrative law judge, or an employee or employee board.