by Cydney Posner

The WSJ is reporting that, contrary to all expectations (including my own), “the U.S. Chamber of Commerce isn’t planning to mount a legal challenge to the Securities and Exchange Commission’s pay ratio rule.”

The pay-ratio rule requires public companies to report the ratio of the median of the annual total compensation of all employees of the company, except the CEO,  to the annual total compensation of the CEO.  It was adopted by the SEC, as  required by Dodd-Frank, by a vote of three to two. Most companies will not need to report their ratios until their 2018 proxy statements.

The WSJ reports that, according to Tom Quaadman, senior vice president for Capital Markets Competitiveness at the U.S. Chamber of Commerce, the Chamber “’decided not to move forward on [the legal challenge]’” at least in part because the rule “won’t affect most companies until 2018, Mr. Quaadman said. The political landscape around the rule could also change in Congress and the White House following the 2016 election, he added.”  The House has made a number of attempts to repeal the rule without success (see this PubCo post), but presumably  a political shake-up in 2016 could change that result.

Interestingly, according to the WSJ, “the Chamber said it is more important to move forward with litigation surrounding its challenge of another Dodd-Frank disclosure rule, the one on conflict minerals, he said. The conflict minerals case ‘has implications for the pay ratio,’ Mr. Quaadman said.”  The conflict minerals case, decided two-to-one in August of this year by a three-judge panel of the D.C. Circuit (reaffirming its earlier decision), concluded that the requirement in the conflict minerals rule to disclose whether companies’ products were “not found to be DRC conflict free” amounted to “compelled speech” in violation of companies’ First Amendment rights.  (For a discussion of the conflict minerals case, see this PubCo post, as well as these PubCo posts of 1/3/15, 11/18/14,  9/14/147/29/14 and 7/16/14,)

As discussed in this PubCo post, the SEC and intervenor Amnesty International have filed petitions for en banc rehearing in that case, arguing that the panel’s holdings call “into question the application of [the more lenient standard of review] to many disclosures required under the securities laws, including those aimed at preventing investor deception,” (SEC) and “threaten the viability of the modern securities regime by precluding application of the relaxed First Amendment review long applied by this Court to a range of established disclosures.”(Amnesty) Similarly, an amicus brief submitted by a group of anti-smoking  and other public health organizations supporting those petitions argues that the analysis employed by the panel in its decision would put in jeopardy all kinds of mandatory commercial disclosures required in many other contexts, such as OSHA warnings to employees about workplace hazards, environmental notifications and mandatory disclosures to consumers in financial transactions.  It appears from the Chamber’s comments that, depending on the outcome of the conflict minerals case, the Chamber could decide to pursue First Amendment challenges to a number of SEC disclosure rules (including pay-ratio rules). This PubCo post discusses the amicus brief and the larger stakes involved in the conflict minerals case.

At the time that the SEC adopted the final pay-ratio disclosure rules, it appeared that the two dissenting SEC commissioners were setting out a case for an almost certain court challenge to the rules. (See this PubCo post.)   At the SEC’s open meeting to adopt the rules, Commissioner Gallagher contended that, like the conflict minerals rules, the pay-ratio rules may run afoul of the First Amendment as improperly compelled speech. In his view, where, as with pay-ratio disclosure, the purpose is only to name and shame companies, “the rule is not intended to, and does not, produce information in furtherance of a legitimate government purpose.” Commissioner Gallagher characterized the rationale for the rules as “pure applesauce, ” and contended that there was nothing in the record to show that the SEC had performed the work necessary to consider what, if any, the benefits of the rules were.

Sidebar: In 2011, the D.C. Circuit tossed out the SEC’s mandatory proxy access rules. (See these news briefs.) In that case, plaintiffs Chamber of Commerce and Business Roundtable had argued, among other things, that the SEC failed to properly analyze its costs and that it used inconsistent data to justify the rule and calculate its costs.  The Court agreed, concluding that the SEC acted “arbitrarily and capriciously” in issuing the rule when it failed to provide an adequate cost/ benefit analysis.

According to the WSJ, Mr. Quaadman said other groups could still move forward.  Whether the Business Roundtable or other business groups decide to pursue a further challenge to the pay-ratio rules in the absence of participation by the Chamber remains to be seen. In any event, it now appears that the stakes in the conflict minerals case may be larger than they appear in your rear view mirror.

Posted by Cydney Posner