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Pay-Ratio Disclosure Rule Approved Despite Opposition

The SEC, in a 3-2 vote, backed a final rule that calls for companies to disclose the ratio comparing their CEO’s compensation to the median for other employees. The commission also adopted rules requiring dealers in financial swaps and firms that trade them in large amounts to register with the SEC.

A divided SEC on August 5, 2015, voted to finalize rules for so-called pay-ratio disclosure under the Dodd-Frank Act.

The rule requires public companies to calculate and disclose a ratio comparing their chief executive’s compensation to the median compensation for other employees.

On a 3-2 vote, with the commission’s two Republicans dissenting, the SEC adopted the rule in Release No. 33-9877, Pay Ratio Disclosure , which will cover a wide swath of the public market. The companies will be first required in 2018 to include the ratio in proxies, annual reports, and registration statements, using 2017 compensation data.

The requirement is being implemented with an amendment to Item 402 of Regulation S-K.

The approval comes two years after the commission proposed the disclosure requirement, one of several executive compensation requirements mandated by the 2010 Wall Street reform law. That package of rules represents some of the commission’s last remaining work under Dodd-Frank.

At the same meeting, commissioners also agreed to adopt rules requiring dealers in financial swaps and firms that trade them in large amounts to register with the SEC. The swaps rules are a central part of Dodd-Frank.

Proponents of pay-ratio disclosure say the rule will help inform shareholders in say-on-pay votes. Other backers of the measure, including the AFL-CIO, see it as a step toward reducing outsized CEO pay packages.

Foes of the rule frame it as a distraction from more pressing work, one that is costly for companies to implement, while providing no real benefit to investors. The opponents wanted to delay the measure, which carried no statutory deadline, while Democrats on Capitol Hill pushed for the SEC to move on it.

“This rulemaking may well be the most useless of our Dodd-Frank mandates,” said Republican commissioner Daniel Gallagher, in remarks prior to the vote. “And so, it warranted the caboose treatment.”

Public companies and industry groups lobbied to exclude certain populations of foreign and part-time workers from the ratio, arguing that the data would be difficult to gather, and would unfairly skew the ratio.

In a nod to those concerns, the final rule allows companies to exclude up to 5 percent of their non-U.S. workers. Companies are also permitted to adjust the ratio to account for differences in the cost-of-living between regions, although they must present that data along with the non-adjusted version.

In her remarks, Chair Mary Jo White called the final version of the rule “both flexible and faithful” to Dodd-Frank.

“These are good and reasonable changes that should reduce costs for many companies while adhering to the statutory requirements,” she said.

The changes did little, however, to win over opponents of pay-ratio disclosure, setting up a battle on Capitol Hill and possibly the courts. In a statement, Rep. Jeb Hensarling, a Texas Republican who chairs the House Financial Services Committee, said his committee will seek to repeal the Dodd-Frank provision this fall through H.R. 414, the “Burdensome Data Collection Relief Act.”

The U.S. Chamber of Commerce, in a statement, said it will “continue to review the rule and explore our options for how best to clean up the mess it has created.”

The disclosure “will provide valuable information to investors about how a company manages human capital,” said SEC Commissioner Kara Stein, who backed the rule. “As investors increasingly focus on corporate governance and executive compensation issues, the pay-ratio disclosure will provide another piece of information that is useful on many fronts, such as say-on-pay votes.”

Commissioner Luis Aguilar called the rule a step toward promoting “corporate accountability.”

Smaller filers, including “emerging growth companies” under the JOBS Act, would be exempted from the disclosure, as would registered investment companies.

The SEC also voted 5-0 to adopt registration requirements for swaps dealers and participants. It also voted 3-2 to propose a pathway for those subject to a “bad actor” disqualification to participate in the swaps market, with Republican Michael Piwowar and Stein, a Democrat, casting the dissenting votes. Stein criticized a provision in the latter proposal that would recognize waivers granted by other agencies and self-regulatory organizations.

“Serious problems arise when persons or firms can use other regulators to make an end-run around the commission’s disqualification regime,” she said.

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