Clawbacks, Fiduciary Duties, and Block-Tagging (Part 3)

Commissioner Piwowar dissented from the adoption of the proposed clawback rule.  His dissent provided some interesting insight into the internal process for the adoption of rules.  As he stated: 

  • The Commissioners received the original discussion sheet outlining the staff’s thinking exactly one year ago today, on July 1, 2014. We then received the first draft of the proposal, having been prepared by the staff and approved by the Chair’s office, at the end of May. 

By the time the final version was drafted, however, changes had been made.  As he noted:  "Up until two weeks ago, I was fully prepared to vote in favor of the proposal until significant changes were made that, in my opinion, were unsupportable."  Commissioner Piwowar had this to say about the final set of changes:  

  • There is a reason that a discussion sheet is circulated so far in advance – to allow for a deliberative process to occur among Commissioners and staff. Discussion sheets often generate reactions and new ideas that are incorporated into the draft proposal. For that reason, the ability to engage our economists, attorneys, accountants, examiners, and data specialists with additional lines of research and inquiry is critical to ensuring that the final work product represents the culmination of extensive deliberation and thought. Repeated instances of substantial eleventh-hour modifications by the Chair’s office deny the other Commissioners and the staff the benefits of such discussion.

Last minute changes are presumably more likely in a Commission with sharp divisions.  But in truth, the concern also arises from a well meaning but potentially counter productive statute, the Sunshine Act.  

Under the Sunshine Act, agencies are required to hold public meetings (except when in the public interest not to do so) when conducting agency business.  A meeting occurs anytime "at least the number of individual agency members required to take action on behalf of the agency" engage in deliberations that "result in the joint conduct or disposition of official agency business".  See 5 U.S. Code § 552b.   

As a result, anytime three commissioners at the SEC meet together to discuss proposed rules, they are arguably holding a "meeting" under the Sunshine Act.  Three or more commissioners at the SEC cannot, therefore, sit in the same room and hammer out compromises unless they are willing to do so at an open meeting.  This probably discourages compromise and probably reinforces the divisions that exist within the Commission.

The Sunshine Act was adopted at a time when agencies such as the SEC were less divided, with decisions typically by consensus.  It was possible in those circumstances to develop a consensus on a particular path forward in a secretive manner that was not in the best interests of the public.  Moreover, where this occurred, a dissent or negative vote was unlikely.  In those circumstances, the need for public meetings anytime a majority of commissioners gathered may have been greater.  

In an era of divided agencies, however, tools need to be developed to manage the divisions.  Some ability to meet internally and iron out difference would seem useful.  Moreover, the divided nature of the Commission provides a check on any internal process that allows for discussions of ongoing Commission business. Commissioners unhappy with any resulting compromise can make their own views public either by dissenting or in a grudging concurrence.

Perhaps it is time to reexamine the Sunshine Act.   

J Robert Brown Jr.