By Robert Baylor, WorldatWork
July 19, 2017 — Washington, D.C. — With six months to go before the Dodd-Frank Act's CEO pay-ratio rule is set to take effect, there has been no substantive action to repeal the rule — leaving companies to find the path to complete the required disclosure.
At a Heritage Foundation forum held July 17, Securities and Exchange Commission (SEC) Commissioner Michael Piwowar, Ph.D., indirectly addressed the rule's fate this year, indicating only that the SEC has "exempted authority in a number of spaces, potentially providing some kind of scale disclosure or outright exemption for smaller reporting companies."
The only indication Piwowar gave that changes could be ahead was in a measured response to an after-event question, answering "staff was looking through the [pay ratio] comments right now and we'll see what we can move forward on," leaving out any timeframe for completion.
However, with August looming, there remains just four months in the year before the first compliance deadline for the rule is crossed. Registrants affected by the pay-ratio rule must comply with the disclosure for "the first fiscal year beginning on or after Jan. 1, 2017," which for practitioners becomes Jan. 1, 2018, for 2018 proxy statements.
Larger companies most likely have had dedicated staff working on this compliance, given the size and complication of multinational workforces. However, smaller companies may have been hoping that the SEC and Congress would repeal the requirement, negating their need to dedicate staff and resources to this requirement. It is more than likely that hope will be a miscalculation, given the SEC inaction and Congress's busy calendar for the rest of the year.
The House passed the Financial CHOICE Act in early May which contained a pay-ratio repeal, but the bill (H.R. 10) has not seen any action in the Senate other than being introduced and sent to the Senate Committee on Banking, Housing and Urban Affairs. It is extremely likely the bill, in its current form, would face a Senate filibuster, so if it was ever taken up by the upper chamber it would be considerably changed for it to have a chance of passage.
High Expectations for a Quick Change Not Met
When President Trump took office in January, expectations were high that many of the controversial Dodd-Frank executive compensations promulgated by the outgoing Obama administration would be quickly rescinded or reconsidered.
In early February, Piwowar opened a comment period to reexamine the CEO pay-ratio disclosure mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. He wrote at the time that he would like companies to submit comments that outline "any unexpected challenges" that they are facing as they prepare to comply with the rule. He also asked the SEC's staff to "reconsider the implementation of the rule" through the comments received to determine "whether additional guidance or relief is appropriate."
WorldatWork has submitted several official comments to the agency since the rule was first surmised in 2010, the most recent on March 21, 2017, concluding in each letter that the pay ratio "will not enhance transparency or provide any benefit to shareholders or potential investors."
But in the months since February, there has been little action by Washington to address Dodd-Frank rules in a timely manner. Other national issues, such as health insurance or tax code reform, have taken precedence. And while the Trump administration is moving forward on regulatory reforms, changes as massive as what the administration is seeking in that area take years to put into place to become efficient policy.
Piwowar has been skeptical in the past of the CEO pay ratio. "Section 953(b) of Dodd-Frank simply has nothing to do with protecting investors, ensuring fair, orderly, and efficient markets, or facilitating capital formation," he said in August 2015 when the rule was voted upon by the SEC.
The CEO pay-ratio rule was finalized in 2015 and requires about 3,800 public companies to disclose the pay ratio in their 2018 proxy filings. The SEC cannot officially remove the Obama-era regulation without a formal rulemaking process, which entails a lengthy public comment period and economic analysis.
In May 2017, WorldatWork released an updated Issue Summary of the pay-ratio rule's provisions and compliance requirements. The summary contains a wealth of practical information for practitioners facing disclosure requirements.
Robert Baylor is the public affairs manager in WorldatWork's Washington, D.C., office. He can be reached at firstname.lastname@example.org.
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