New House bills seek to relax some SEC requirements and help reverse the growth in income inequality

by Cydney Posner

Hat tip to thecorporatecounsel.net blog for identifying these two new House bills. H.R. 5405, Promoting Job Creation and Reducing Small Business Burdens Act, is intended to relax some additional requirements for Emerging Growth Companies (EGCs), and has been passed by the House. It has some good stuff In it, like delaying (maybe even eliminating?) XBRL requirements. The other bill is H.R. 5662, CEO-Employee Pay Fairness Act, just introduced by Rep. Chris Van Hollen on Thursday.  That bill is designed to address income inequality, so you can guess how likely that is to pass in the current House. 

Promoting Job Creation and Reducing Small Business Burdens Act

Among other things, H.R. 5405 would make the following changes:

Title VI

  • Currently, under the JOBS Act, EGCs may initiate the IPO process by submitting their IPO registration statements confidentially to the SEC for nonpublic review by the SEC staff. The EGC must, however, make the entire filing public at least 21 days before it commences its road show. The bill would amend the Securities Act to reduce from 21 days to 15 days the amount of time before its road show that the EGC must make its entire filing public.
  • Where an issuer was an EGC at the time it filed or submitted a registration statement with or to the SEC, but during the review process ceases to be an EGC, the bill would provide a grace period during which the company would continue to be treated as an EGC, extending through the earlier of:
    • the date on which the company consummates its IPO under the registration statement; or
    • one year after the company ceases to be an EGC.
  • The bill would amend the JOBS Act to allow EGCs to omit from Form S-1 registration statements financial information for historical periods otherwise required as of the time of filing (or confidential submission) so long as
    • the omitted financial information relates to a historical period that the issuer reasonably believes will not be required to be included in the Form S–1 at the time of the contemplated offering; and
    • prior to distributing a preliminary prospectus, the issuer amends the registration statement to include all financial information then required by Reg S–X.

Title VII

  • The bill would exempt EGCs and other issuers with total annual gross revenues of less than $250 million from the requirements to use XBRL for the lesser of five years or two years after the SEC conducts a mandatory cost/benefit study and concludes that the benefits of XBRL outweigh the costs. (And how likely is that? Hopefully, the study will lead the SEC to toss XBRL for everyone altogether. See the news brief, XBRL: a colossal waste of time (and money)?)

Title X

  • The bill would permit a summary page on Form 10-K that includes links or cross-references (as Broc Romanek points out, is there some reason companies are prohibited from doing that now?)
  • The bill would require the SEC to revise Reg S-K
    • to reduce the burden on EGCs, accelerated filers, smaller reporting companies and other smaller issuers, while still providing all material information to investors; and
    • to eliminate provisions for all issuers that are duplicative, overlapping, outdated or unnecessary (a process which the SEC already has underway in its disclosure effectiveness project ).
  • The bill would also require the SEC to study how to modernize Reg S-K, discourage repetition and boilerplate, including methods of delivery and presentation.

Title XI

  • The bill would require the SEC to revise Rule 701 to increase the threshold for information delivery from sales of $5 million in any consecutive 12-month period to $10 million, indexed for inflation.

CEO-Employee Pay Fairness Act 

The text of H.R. 5662 has not yet been posted, but according to the related fact sheet, the bill is “designed to incentivize companies to give their rank-and-file employees annual raises that, on average, at least keep pace with increases in living costs and labor productivity.” If a company fails to do so, the company would not be able to take advantage of IRC Section 162(m), which allows tax deductions for the CEO and other highly paid executives for performance-based compensation exceeding $1 million.

The purpose of the bill is to address the increasing disparity in the rates of growth of executive and worker pay: “Since the 1970s, compensation for regular workers has not kept up with increases in labor productivity. At the same time, executive pay continues to spiral upwards. Fifty years ago, the average CEO in the United States was paid 20 times more than the typical worker. Now that ratio is 300-to-1, far higher than in any other advanced economy.… Adding insult to injury, average taxpayers subsidize excessive executive pay through corporate tax deductions….Corporations wrote off an estimated $66 billion in ‘performance’ pay for CEOs and other top executives between 2007 and 2010.” To satisfy this new requirement for the tax deduction, the company would be required to raise the average pay of employees earning under $115,000 by average annual net productivity growth since 2000 (approximately 2 percent), plus inflation. The bill would apply only to public companies.

According to this column in the Washington Post (also identified by Broc), “[b]etween 1947 and 1972, the nation’s productivity increased by 97 percent and median pay by 95 percent. Since then, however, as the decline of unions and a host of other factors weakened employees’ bargaining power, hardly any productivity gains have gone to workers. Between 1979 and 2011, productivity rose by 75 percent, but median pay rose by just 5 percent…. From 1978 to 2013, CEO pay rose by a mind-boggling 937 percent…. Before 1980, … workers had enough bargaining power to win pay increases without legislative assistance. Annual cost-of-living increases and pay raises in line with the economy’s annual productivity increases were a feature of many union contracts, and non-union employers often felt compelled to match those raises lest their workers jump to better-paying companies. Today, with unions virtually vanished from the private sector, workers have no such leverage.”

Van Hollen, quoted in the article, argued that his bill would not limit CEO pay, just the tax subsidy for it: “We’re saying to corporations…Look, you can pay your CEO whatever you want. Just don’t ask taxpayers to subsidize that pay if you don’t reward workers, as you reward your CEO, for their increases in productivity.”

The article observes that the current focus in Washington and around the country is on increasing the minimum wage, which seeks to provide “a lifeline for those in low-paying jobs, [but does] nothing for the majority of workers, whose incomes have also been either stagnating or declining.”  The author suggests that, even if the bill does not move in Congress, some states may run with the ball by, for example, lowering state tax rates on companies that meet certain criteria related to the ratio of CEO to average worker pay.

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