Investigate Piwowar?

by Cydney Posner

Not everyone is pleased by the actions taken by Acting SEC Chair Michael Piwowar directing the SEC staff to review the conflict minerals and pay-ratio disclosure rules.  In fact, today, four Senate Democrats on the Senate Banking Committee have called for an investigation into whether he has the authority to delay or revisit those rules, which were adopted by the SEC as mandated by Congress in Dodd-Frank. Whether the Senators make any headway with the requested investigation remains to be seen.

The letter, addressed to the SEC’s Inspector General and signed by ranking Democrat Sherrod Brown, Elizabeth Warren, Robert Menendez and Brian Schatz (of Hawaii), asked that the OIG “conduct an investigation into each of these decisions to determine whether they are legally permissible and in keeping with the SEC’s core mission.” Specifically, the letter requested an investigation into the following questions:

“1. What specific changes in SEC policy, regulation, or guidance were made or initiated by Commissioner Piwowar during his tenure as Acting SEC Chair?

2. What impacts will these changes have on the SEC’s mission?

3. Did Commissioner Piwowar provide a valid substantive justification for these changes?

4. Did Commissioner Piwowar provide adequate public notice and comment periods, and did he follow all required SEC guidelines and rules for taking action, including the SEC’s quorum requirements?

5. Is Commissioner Piwowar carrying out these actions at his own initiative, or has he consulted with, or received direction from, anyone within or outside the Administration?”

The Senators expressed concern that “Commissioner Piwowar’s actions may lack adequate justification, undermine the SEC’s mission, exceed his authority as Acting Chairman, violate other procedural requirements, and could potentially prove to be a waste of the SEC staff’s precious time and resources.”  In addition, they took issue with his actions in light of the absence of a traditional quorum.  “Nevertheless,” the letter maintains, citing the WSJ, “Commissioner Piwowar ‘has decided to jumpstart the deregulatory agenda, freezing unfinished Dodd-Frank requirements and opening the door to scaling back some completed rules he considers ‘politicized’ — a major exertion of authority for a position usually seen as a short-term caretaker.’” Moreover, they contend, “Commissioner Piwowar’s personal distaste for a congressional mandate is not sufficient grounds to attempt to weaken a final rule that has been approved by the SEC. We are also concerned that Commissioner Piwowar appears to have directed the agency staff to undertake this review before consulting with his only fellow Commissioner and seeking her approval.”  In addition, they argue, “[t]here is no evidence that any of these changes in the SEC’s course are desired, or have been sought, by the person nominated to be the next SEC Chair.”

SideBar:  In January, Piwowar, who views the conflict minerals rule as “misguided,” directed “the staff to consider whether the 2014 guidance [regarding conflict minerals compliance] is still appropriate and whether any additional relief is appropriate in the interim” and opened a 45-day comment period. (See this Pubco post.) And in February, citing unanticipated compliance difficulties that may hinder issuers in meeting the reporting deadline, Piwowar issued yet another statement directing the Corp Fin staff to revisit the pay-ratio disclosure rules and opening a new 45-day comment period.  As you may recall , the pay-ratio rule required public companies to disclose the ratio of the median of the annual total compensation of all employees of the company to the annual total compensation of the CEO. Piwowar has also previously expressed (at great length) his disdain for the pay-ratio rule and, in his dissent at the time of its adoption, appeared to be methodically establishing a case for a court challenge to the rule on grounds of both First Amendment and inadequate cost-benefit analysis. Both rules were adopted by SEC majorities and are currently effective, although compliance with the pay-ratio rule is not required until 2018. (See this PubCo post.)

The potential re-opening and delay of the pay-ratio rule was also the subject of a letter from Democratic Senators Chris Van Hollen and Bob Menendez.  The two Senators urged Piwowar to retract his “statement opening a new public comment window on the rule and directing SEC staff to reconsider the rule.” Objecting to his unilateral action that could delay implementation of a Congressionally-mandated rule, they maintained that, for

“nearly seven years, investors have been waiting for this disclosure, and now as the first reporting period has just begun, you have inexplicably halted this important investor tool…. Pay ratio disclosure helps investors evaluate the relative value a CEO creates, which facilitates better checks and balances against insiders paying themselves runaway compensation.  When a company’s performance improves but only the CEO is rewarded, for example, investors should know, so that they can ask what kinds of incentives this creates for the company’s future performance.  Similarly, when a CEO asks for a raise while giving other employees a pay cut, investors should have this information to help them evaluate whether this is value creation or simply value capture by insiders.  Investors should have this information available to consider when they vote on executive compensation.”

Given that the rule has already been adopted by the SEC, they expressed concern that the sole purpose of Piwowar’s action was “to discredit the rule and generate momentum to repeal the statutory requirement.” Moreover, they were “alarmed” that he appeared “to solicit comments from issuers only, improperly overlooking the views of the thousands of investors that submitted comments to the SEC prior to its adoption of the final rule.” Finally, they requested that his response include  “an estimate of the cost of your actions to open a new public comment period and to devote staff resources to reconsideration of the rule.”

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