Is the staff of the Securities and Exchange Commission pursuing its own activist agenda without adequate supervision by agency heads?
Many SEC observers were caught off guard yesterday when the New York Times broke the news that the SEC has been requiring major US corporations to include shareholder proposals supporting universal healthcare in official proxy materials. This seemed to be a departure from many recent decisions by the SEC's commissioners restraining or rejecting innovative regulations favored by special interest shareholder groups. Why had the SEC suddenly embraced this radical rule favoring proposals on political issues only indirectly tied to corporate governance?
The answer may lie in the disarray at the top ranks of the SEC.
More on the SEC staff's activist lark after the jump.
The agency has been operating with only three commissioners--all Republicans--since February, and recently commissioner Paul Atkins announced he would resign as soon as his replacement is confirmed by the Senate. Lacking adequate and bipartisan supervision, the agencies staff seems to have ventured off on an activist lark favoring the universal health care proposals.
A crucial factor enabling the SEC staff to act autonomously may be widespread ignorance about its activities. The rulings requiring the shareholder proposals are issued in a peculiar way that many unfamiliar with the agencies activities do not understand. Companies receiving shareholder requests for proxy proposals often ask the SEC to issue an advisory opinion to reassure them that the SEC will not force them to include the proposal in proxy materials. This advisory opinion is called a "no action letter."
In the case of the healthcare proposals, the SEC has been refusing to issue no action letters to companies. This forces companies to make the choice between including the shareholder proposals or risk an enforcement action by the agency. Most find it prudent not to risk an SEC lawsuit. By refusing to issue a no-action letter the SEC staff creates a rule without going through ordinary rule-making procedures that apply to most other government agencies.
It's not clear if the top ranks of the agency--including the commissioners themselves--knew that this underhanded rulemaking was occurring. Ignorance of the SEC's activities on these opinions--ignorance shared by agency heads and the broader public--may have enabled and encouraged the SEC staff to go down this road.
The next question, of course, is whether the agency heads will act to constrain their staff now that the issue has been brought to their attention. Or perhaps the question is whether an SEC led by mostly new minted commissioners will be able to effectively curtail the bureaucrats from acting autonomously and without supervision.