Chair Mary Jo White
Aug. 5, 2015
Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on August 5, 2015, under the Government in the Sunshine Act.
The Commission will today consider three rulemakings, including recommendations from the staff to finalize two mandates of the Dodd-Frank Act – the dealer registration requirements for security-based swap dealers and major security-based swap participants under Title VII and the requirement to disclose a pay ratio under Section 953. The Commission will also consider, in connection with the registration requirements, a third staff recommendation to propose a rule of practice providing a procedure for processing applications from security-based swap entities to deal with individuals and entities subject to statutory disqualifications.
We will start today with the two recommendations from the Division of Trading and Markets regarding security-based swap entities. We will discuss these recommendations together, but vote on them separately. Then, we will consider and vote on the third recommendation, which is from the Division of Corporation Finance, to implement the statutory pay ratio mandate.
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Pay Ratio
The third item on the agenda today is the consideration of final rules to implement Section 953(b) of the Dodd-Frank Act — the provision requiring companies to compute and disclose the ratio of the chief executive officer´s annual total compensation to the annual total compensation of the company´s median employee.
To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement. Since it was mandated by Congress, the pay ratio rule has been controversial, spurring a contentious and, at times, heated dialogue. The Commission has received more than 287,400 comment letters, including over 1,500 unique letters, with some asserting the importance of the rule to shareholders as they consider the issue of appropriate CEO compensation and investment decisions, and others asserting that the rule has no benefits and will needlessly cause issuers to incur significant costs.
These differences in views were evident at the time the Commission voted to propose the pay ratio rule. That the Commission was even considering the rule proposal was, for example, criticized as contrary to our mission. We may hear similar thoughts today.
From my perspective, one of our important affirmative responsibilities, among many others, is to implement the mandates of Congress – and to do so in a way that is as cost-effective as feasible and that best advances our mission. That this particular mandate and others under the Dodd-Frank Act or the JOBS Act do not provide a specific deadline for their adoption does not diminish the agency´s obligation to act. It is the law, and we are required to carry it out, just as we did in March when we adopted Regulation A+ under the JOBS Act.
Here, the staff is recommending that the Commission adopt a carefully considered and calibrated pay ratio disclosure rule that carries out a statutory mandate that the Commission was given. The pay ratio disclosure will provide shareholders with additional company-specific information that they can use when considering a company´s executive compensation practices, an important area of corporate governance on which shareholders now have an advisory vote. A number of commenters noted that the pay ratio disclosure will be important to them as they exercise their say-on-pay votes.
While there is no doubt that this information comes with a cost, the final rule recommended by the staff provides companies with substantial flexibility in determining the pay ratio, while remaining true to the statutory requirements. As did the proposal, the final rule provides companies with substantial discretion to use estimates and sampling as a means to determine the median employee and the employee´s compensation. As required by the JOBS Act, the final rule excludes emerging growth companies. Smaller reporting companies, foreign private issuers, registered investment companies and registrants filing under the U.S.-Canadian Multijurisdictional Disclosure System would also be excluded, as they were in the proposal.
The staff is also recommending additional accommodations in the final rule, including: an exemption for situations when foreign data privacy laws would prevent companies from being able to process or obtain the necessary compensation information to calculate the ratio; an ability to exclude up to 5% of non-U.S. employees when determining the median employee; and allowing companies to use cost-of-living adjustments when determining the median employee and calculating the employee´s total compensation, in order to achieve a more meaningful reflection of the compensation of employees as compared to the chief executive.
The staff´s recommendations for the final rule would also allow companies to choose any date during the last three months of a company´s fiscal year to determine the median employee and, to further reduce costs, would permit companies to use the same median employee for three years unless there has been a change in the employee population or employee compensation arrangements that the company reasonably believes would result in a significant change in the pay ratio disclosure.
These are good and reasonable changes that should reduce costs for many companies while adhering to the statutory requirements.
I want to commend the staff for all of their exceptional and extensive work to craft a reasonable rule that is both flexible and faithful to the terms and objective of the statute. Once again, the SEC staff has demonstrated their expertise, thoughtfulness and clear-eyed analysis as they formulated this recommendation for our consideration.
Specifically, I would like to thank Director Keith Higgins, Betsy Murphy, Felicia Kung, John Fieldsend, Shehzad Niazi, Raquel Fox, Sylvia Pilkerton, and Brandon Riemersma in the Division of Corporation Finance; Annie Small, Rich Levine, Bryant Morris, Dorothy McCuaig, Brooks Shirey, and Sara Prins in the Office of the General Counsel; Mark Flannery, Scott Bauguess, Vanessa Countryman, Simona Mola Yost, Anzhela Knyazeva, Vladmir Ivanov, Peter Iliev, and Wei Liu in the Division of Economic and Risk Analysis; and Michael Pawluk and Matt DeLesDernier in the Division of Investment Management.