Reconsider the Ratio: SEC Acting Chair Calls Pay Ratio Rule into Question

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Acting Chairman of the Securities and Exchange Commission Michael Piwowar recently told Bloomberg in an interview that, pending confirmation of President Trump’s successor for chair of the SEC, the commission was “not going to sit by and do nothing in the meantime.” No one would describe the SEC’s actions over the past couple of weeks as “doing nothing.” Dr. Piwowar issued a statement on February 6, 2017, that calls into question the future of the “pay ratio” rule, only a week after launching a reconsideration and comment period regarding the conflict minerals rule. 

Item 402(u) of Regulation S-K established the “pay ratio” rule, which was mandated by the Dodd-Frank Act and requires public companies to disclose the median annual total compensation of its employees, the annual total compensation of its CEO, and the ratio of those two amounts. The rule provides that disclosure of the pay ratio will be required with respect to the first fiscal year beginning on or after January 1, 2017, so for calendar-year companies, the first disclosure will be required in their 2018 proxy statements and will be based on 2017 compensation. Since the final rules were adopted in August 2015, many in the business community have lobbied for their repeal, arguing that calculating the pay ratio would be complicated and expensive and the ratio itself would not be helpful to investors. On the other side of the aisle, consumer advocacy groups have encouraged the SEC to accelerate implementation, arguing that the pay ratio would finally allow investors to evaluate whether the compensation of the company’s CEO is excessive.

In his statement on February 6, 2017, Dr. Piwowar stated that companies have encountered “unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.” He asked for companies to submit detailed comments to the SEC within the next 45 days informing the SEC of challenges that they have faced when preparing to comply with the pay ratio rule, and he asked for suggestions as to how to remedy the situation. In addition to seeking input from companies regarding how they are implementing the rule, Dr. Piwowar directed the SEC 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.”  

As mentioned above, Dr. Piwowar issued a similar statement on January 31, 2017 directing the SEC staff to reconsider the conflict minerals rule and determine whether relief, in addition to the partial stay of compliance issued in May 2014, is appropriate. He asked for all interested parties to submit comments regarding the reconsideration of the conflict minerals rule, as well as all aspects of the rule itself. 

Since the pay ratio rule has not been repealed, we advise public companies to continue developing an appropriate methodology for determining the median employee and begin calculating his or her compensation. If you would like to discuss any challenges that your company has encountered when attempting to comply with the pay ratio disclosure requirement, including if you are interested in submitting a comment to the SEC regarding such challenges or the conflict minerals rule, please contact a member of the Bradley Public Company Advisory team. Our team will continue to monitor closely all of the fast-moving developments in the current regulatory landscape and update our clients and other interested parties.