by Cydney Posner
Today, Acting SEC Chair Michael Piwowar issued yet another statement directing the Corp Fin staff to revisit the pay-ratio disclosure rules. Of the non-bank related mandates imposed by Dodd-Frank, disclosures regarding resource extraction payments, conflict minerals and pay ratio were the provisions that seemed to elicit the greatest ire from the business community. With resource extraction payment disclosure rules now almost out of the picture — the President still must sign off — as a result of action under the Congressional Review Act (see this PubCo post), and Piwowar having already reopened for review Corp Fin’s 2014 Guidance on conflict minerals (see this PubCo post), all that remained of the low-hanging fruit was the pay-ratio provision.
As you probably recall, the Dodd-Frank pay-ratio provision mandated that the SEC require most public companies to disclose, in a wide range of their SEC filings:
- the median of the annual total compensation of all employees of the company, except the CEO (that is, the point at which half the employees earn more and half earn less);
- the annual total compensation of the CEO; and
- the ratio of the two amounts above.
Adopting final rules to implement the provision took more than five years from the date of enactment of Dodd-Frank in 2010. In part, the delays could be ascribed to the interest-group politics surrounding the provision. Throughout the long process, business, organized labor and consumer advocacy groups lobbied intensively both for and against the rule. Republicans in Congress sought numerous times to repeal the provision and pressured the SEC to delay adoption of final rules, while Democrats pressured the SEC to accelerate its implementation. Proponents of the provision, focusing on reports of the mounting disparity between executive and worker pay (and income inequality in general), argued that pay-ratio information was essential to allow investors to determine if executive pay was excessive and needed to be reined in. Opponents of the provision argued that, for almost all companies, calculating the ratio would be of little value to investors, but tremendously complicated, expensive and potentially inaccurate.
Although ultimately, the SEC adopted a relatively flexible approach that was welcomed in all quarters, criticism of the requirement did not abate. Indeed, in his dissent from adoption of the final rules, Commissioner Piwowar did not hold back in his disdain for the rule and appeared to be methodically establishing a case for a court challenge to the pay-ratio rule on grounds of both First Amendment and inadequate cost-benefit analysis. At the time, he published lengthy additional dissenting comments claiming, among other things, that the adoption of the rule violated the procedural requirements of the Administrative Procedure Act—including a failure to timely identify an objective or benefit of the rulemaking—and lambasting the inadequacy of the SEC’s quantitative analyses. In that regard, he characterized the majority’s efforts to attribute “benefits” to the rule as “speculative” and pure “conjecture.” In addition, he argued that the SEC should have performed “investor testing.”
In his statement today, the Acting Chair observed that, with compliance required for companies for their first fiscal years beginning on or after January 1, 2017— that is, the first disclosure for calendar-year companies will be in the 2018 proxy statement with respect to compensation for 2017— companies
“are now actively engaged in the implementation and testing of systems and controls designed to collect and process the information necessary for compliance. However, it is my understanding that some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.
“In order to better understand the nature of these difficulties, I am seeking public input on any unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed. I welcome and encourage the submission of detailed comments, and request that any comments be submitted within the next 45 days.
“I have also directed the staff to reconsider the implementation of the rule based on any comments submitted and to determine as promptly as possible whether additional guidance or relief may be appropriate.
“I understand that issuers need to be informed of any further Commission or staff action as soon as possible in order to plan and adjust their implementation processes accordingly. I encourage commenters and the staff to expedite their review in light of these unique circumstances.”
In contrast to the conflict minerals disclosure rules — which require filings for the 2016 reporting period to be submitted at the end of May 2017 — pay-ratio disclosure is not required until the 2018 proxy statement for most companies, which should allow sufficient time for any potential new guidance or changes to the rules to at least be floated if not finally determined and to permit most companies to put their pencils down on pay-ratio calculations, at least for the time being.