On February 6, 2017, the SEC's Acting Chairman, Michael S. Piwowar, issued a public statement requesting detailed comments on any "unexpected challenges" faced by issuers preparing to comply with the pay ratio disclosure rule and whether relief is needed.1 Mr. Piwowar also directed the Commission's staff to reconsider the implementation of the rule based on any comments submitted and to determine whether additional guidance or relief is appropriate. Comments must be submitted by March 23, 2017.2
A Race Against Time for the SEC
For Acting Chairman Piwowar and others desiring to see the rule repealed, time is of the essence. For each issuer, the first reporting period for the pay ratio disclosure is the first full fiscal year beginning on or after January 1, 2017. As a result, most issuers have already invested both time and money in order to ensure they are prepared for the existing deadline. The Acting Chairman's press statement acknowledged this fact and urged commentators and staff to expedite their review so that issuers can adjust accordingly.
Should the SEC choose to repeal or revise the rule, it will have to satisfy the requirements of the Administrative Procedures Act (the "APA") which (absent an exception) requires the publication of proposed rulemaking in the Federal Register, followed by a notice and comment period. There are currently, however, only two SEC commissioners, one of whom favors the pay ratio disclosure rule. As a result, the rulemaking process will not begin until a third commissioner is appointed to the SEC.3 Therefore, Acting Chairman Piwowar may be anticipating that the comments the SEC receives will provide the agency with the ammunition necessary to invoke the "good cause" exception to the APA's notice and comment requirements. If so, the SEC would be able to issue an "interim final rule" shortly after the new Commissioner is appointed that would suspend compliance with the pay ratio disclosure rule until further notice. This "good cause" exception is available when notice and public procedures are "impracticable, unnecessary or contrary to the public interest."4
The Legislative Option
Alternatively, the rule can be repealed through the legislative process. The Financial CHOICE Act (the "FCA"), which had been approved by the House Financial Services Committee last September, is expected to be reintroduced in mid-February. The FCA serves as the Republicans' blueprint for rolling back the Dodd-Frank Act and contained within the bill is a provision that would eliminate the pay ratio rule. As the APA subjects SEC action to judicial review if challenged, the legislative option would be the most straightforward method of repealing or revising the rule.
Conclusion
As illustrated by the issuance of, and reaction to, President Trump's Executive Order on Core Principles for Regulating the United States Financial System,5 the rolling back of the Dodd-Frank Act is a top priority for both the President and the Republican majority in Congress. As both Congress and the SEC reconsider the pay ratio disclosure rule, issuers should pay close attention in order to properly adjust their compliance process.
Footnotes
1 Required by § 953(b) of The Dodd-Frank Act, the Pay Ratio Rule requires that companies disclose the median total compensation of all employees of the company, not including the principal executive officer, the annual total compensation of the principal executive officer and the ratio of these two amounts. The first disclosures will be made in an issuer's 2018 proxy materials, and will cover compensation paid in 2017. The final rule is available at: https://www.sec.gov/rules/final/2015/33-9877.pdf. For an overview of the final rule, you may wish to refer to our client publication: "The SEC's Final Pay Ratio Rules: What You Need to Know," available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2015/08/The-SECs-Final-Pay-Ratio-Rules-What-You-Need-to-Know-ECEB-081015.pdf.
2 The press release is available at: https://www.sec.gov/news/statement/reconsideration-of-pay-ratio-rule-implementation.html.
3 President Trump has nominated Jay Clayton to be the Chairman of the SEC, but his confirmation hearing has not yet been scheduled.
4 5 USC § 553(b)(3)(B).
5 Our Annotated Guide to the Executive Order is available at: http://www.shearman.com/en/newsinsights/publications/2017/02/guide-to-trump-order-on-financial-reg-reform.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.