How to dilute political polarization at the SEC

A majority of commissioners on the Securities and Exchange Commission is rushing to regulate with a slate of intrusive and burdensome new rules. The minority commissioners have objected, but their pleas for restraint have not had a noticeable effect. A limited procedural reform is needed to restore balance.

The SEC and other major agencies have been reflecting the same partisanship and polarization that dominate national politics. Small majorities in Congress, when they have a president from the same party, too often favor partisan measures that barely pass, such as the recent $700 billion bill on health care, climate, and taxes, which needed a tiebreaking vote from the vice president in the Senate and passed on a party-line vote in the House.

In our sprawling country, rich with a broad spectrum of views, how can a massive bill pass without losing one vote of the proposing party or gaining one from the opposition party? Studies from political scientists do not adequately explain this or the inability of centrist politicians to compromise and build coalitions to serve a wider vision of the public interest.

This divisiveness rather than cooperation now exists at some federal agencies. The statute creating the SEC requires that the commissioners come from different political parties, with no more than three of the five from one party. The current majority commissioners have succumbed to the same winner-take-all approach seen in Congress.

A recent example is the SEC’s broadside at the internal governance structure of clearing agencies. The SEC wants to obligate these back-office institutions that clear and settle securities trades to have a majority of independent directors, directors with a “diversity” of “perspectives,” and several board committees that comply with SEC standards. Both minority commissioners were unconvinced and dissented, one writing that the “proposal takes an overly prescriptive, regulator-knows-best approach to these matters.”

The SEC also acted on a partisan basis to propose extensive new disclosures about climate change and in July 2022 to rewrite the rules on proxy advisers that the SEC had just adopted in 2020.

Partisan flip-flops and novel, sweeping regulatory regimes from a federal administrative agency are seldom good government and should be avoided. A procedural change at the SEC and possibly other agencies could help.

First, require a supermajority vote for significant actions. The norm in multimember agencies is for approval by a simple majority. A supermajority requirement would be a simple majority plus one, or four votes in favor in the standard case at the SEC. “Significant” agency action would include major new regulations or repeals, decisions on enforcement cases, and final adjudications.

This would set up a formal incentive for consultation and compromise among the commissioners. The majority would need to incorporate features in a proposal to attract the vote of at least one other commissioner.

Supermajority voting would honor the original theory for requiring an agency with several heads to come from different political parties. Supreme Court Justice Brett Kavanaugh, when he was a judge, explained that a multimember agency benefits from different points of view and fosters compromise and less extreme decisions.

The agency has worked this way in the past. Some SEC chairs have had an informal practice of bringing a matter to a vote only when it had the support of at least four commissioners. If this type of collegiality returns to Washington, a supermajority voting requirement could be lifted.

Although supermajority voting is not unusual, it violates the democratic rule of simple majority and can lead to impasse in favor of the minority. Both parties have used the Senate cloture rule to block the majority’s priorities.

Second, to address those concerns, provide that falling short of a supermajority does not terminate a proposal and instead only delays final action. A major agency proposal not initially receiving a supermajority of votes could be reconsidered after a period of time — say one year — on only a simple majority vote. The calculation for the majority would be whether it can wait to pass the proposal or whether further consultations and amendments could produce a supermajority sooner.

No doubt, some would try to game a supermajority voting rule, but it should appeal to those tired of the adoption and repeal of regulations as partisan majorities shift. Good government from agencies should not be winner-take-all. It must promote the general welfare, not just the political majority.

Andrew N. Vollmer is a senior affiliated scholar with the Mercatus Center at George Mason University, former professor of law, general faculty, at the University of Virginia School of Law, and former deputy general counsel of the Securities and Exchange Commission.