Friday, January 27, 2012

Securities Industry and Corporate Secretaries Ask SEC to Use Negotiated Rulemaking in Adopting Dodd-Frank Pay Ratio Regulations

The securities industry and the Society of Corporate Secretaries and Governance Professionals have urged the SEC to employ a negotiated rulemaking process when adopting pay ratio regulations under Dodd-Frank that will allow a representative group of stakeholders on a rulemaking advisory committee to join with the Commission in developing a balanced rule that achieves the legislative intent of Section 953(b).

In a letter to the SEC, SIFMA and the Society also asked the Commission to hold a roundtable discussion of experts and stakeholders to better understand the potential issues and unintended consequences of implementing the pay ratio disclosure requirements. The letter was also signed by, among others, the Financial Services Roundtable and the US Chamber of Commerce.

The groups also urged the SEC to submit the proposed regulations to the Office of Information and Regulatory Affairs (OIRA) review process. OIRA is located within the Office of Management and Budget and was created by Congress with the enactment of the Paperwork Reduction Act of 1980 to review federal regulations. In the view of the trade groups, a thorough OIRA review will allow for increased scrutiny to better understand the cost and benefits of the pay ratio rules and aid the SEC in choosing the least burdensome means of implementing Section 953(b). This will ensure that the best and most practical approaches can be included in a proposed regulation that will balance the perceived benefit of this disclosure against the implementation costs.

Moreover, the groups urged the SEC to follow the requirements outlined in Executive Orders 13563 and 13579 to identify alternative approaches and choose the least burdensome means of implementation.

Section 953(b) requires disclosure of the median of the annual total compensation of all employees of an issuer, except the CEO, as calculated in accordance with Item 402(c)(2) of Regulation S-K, the annual total compensation of the CEO, and the ratio of the median annual compensation of all employees to the CEO’s compensation. Recently, the House Financial Services Committee reported out a bi-partisan bill that would repeal Section 953(b). The Burdensome Data Collection Relief Act, HR 1062, is currently awaiting action by the full House of Representatives.

The corporate disclosure regime is designed to provide information that is useful to investors when making investment decisions, noted the groups. While pay ratio disclosure may be of general interest to some investors, they conceded, it is unclear how this disclosure will be material for the reasonable investor when making investment decisions. The ratio will inevitably vary widely among industries or businesses without any relevance to the financial performance of a company. Thus, additional consideration of any possible benefit to be provided by this disclosure must be considered in the rulemaking process and weighed against the costs.

According to the groups, there are significant hurdles and burdens faced by the business community in attempting to comply with Section 953(b). There is a widespread misperception that this information is readily available at the touch of a button, noted the letter, but this could not be further from the truth. Companies may have tens of thousands of employees stretched out over dozens of countries, especially the largest companies with operations around the world. Obtaining the data will be difficult and time-consuming as the definition of compensation among countries will vary widely, and companies will face difficulties attempting to rationalize compensation with currency fluctuations.

The requested SEC roundtable could gather information from the people that will handle the practical compliance with this rule. The groups asked that this roundtable discussion, if it occurs, be designated part of the rulemaking record.

Given the lack of discussion about the practical implications of Section 953(b) prior to its enactment, continued the groups, it is of utmost importance during difficult economic times that implementing regulations are carefully and thoughtfully proposed. Further, the SEC should use caution during the rulemaking process to ensure that the economic consequences do not outweigh the objectives of the rule.

Noting that Section 953(b) does not include a deadline for promulgating regulations, the trade associations urged the SEC to resist rushing into proposing regulations, given the substantial cost and implementation burdens that are likely to be imposed on companies. While acknowledging that Section 953(b) is more prescriptive than many Dodd-Frank requirements, the groups said that the SEC has been afforded the time to thoroughly analyze the economic impacts that different alternatives will have on the U.S. economy at large. Thus, the SEC should consider how to provide the most flexibility for the least cost and minimize the disadvantages of unnecessary regulatory expenditures.

Finally, the groups urged the SEC to submit the proposed regulations to the Office of Information and Regulatory Affairs (OIRA) review process. In the view of the trade groups, a thorough OIRA review will allow for increased scrutiny to better understand the cost and benefits of the pay ratio rules and aid the SEC in choosing the least burdensome means of implementing Section 953(b). This will ensure that the best and most practical approaches can be included in a proposed regulation that will balance the perceived benefit of this disclosure against the implementation costs.

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