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US Securities and Exchange Commission

SEC Plans to Repropose ‘Pay Versus Performance’ Rule Instead of Finalizing It

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

SEC Chair Gary Gensler has put a priority on finishing up Dodd-Frank compensation rules, but the commission is hitting the brakes on so-called pay versus performance rule in Section 953(a) of the financial reform law.

This requires companies to provide a table that compares the “compensation actually paid” to executive officers with the company’s total shareholder return (TSR), along with the returns for companies in the same industry. Sec. 953(a) of PL111-203

The proposal in Release No. 34-74835Pay Versus Performance, was issued in April 2015.

When the SEC’s agenda—which is updated twice a year—was unveiled in June that reflected Gensler’s priorities for the first time as chair, the commission aimed to finalize pay versus performance rule.

According to that agenda, the SEC wanted to adopt the rule in the spring of 2022. In the updated agenda, published on December 13, 2021, the commission no longer has it under final stage. Instead, the SEC will reopen the comment period of the 2015 proposal. And the commission wants to do this by spring 2022.

Unlike the SEC’s decision to reopen so-called clawback rules in Dodd-Frank, which the Council of Institutional Investors (CII) was disappointed about, CII General Counsel Jeffrey Mahoney said that “we do not have pay v. performance as a priority item. We are fine with a reproposal.”

Criticisms of SEC Agenda

In the meantime, SEC commissioners Hester Peirce and Elad Roisman in a joint statement said that they were disappointed with the agenda.

“It fails to include any items intended to facilitate capital formation and misses opportunities to foster fair, orderly, and efficient markets and further investor protection,” they said in a December 13 statement. “Instead the agenda is brimming with plans to redo recently completed rules, add new regulatory obligations, and constrain investor choice.”

The recently completed rules refer to the ones that were done when Jay Clayton was chairman. A Trump appointee, Clayton delivered on the then-President’s promise of deregulation to the consternation of investors.

Now, under Gensler, who has been taking the opposite approach, the two Republicans on the commission have been unhappy.

Some of the rulemakings Peirce and Roisman said that the commission is trying to undo include proposals to further amend the rules on proxy solicitation and shareholder proposals, the resource extraction payments rule, exempt offering rules, and the whistleblower rules.

“Not only are the Commission’s most recent amendments to each of these rules barely or less than a year old; none have been effective for more than a few months,” the two commissioners said. “As we said when we initially raised these concerns, we have not seen any new information that would warrant opening up any of these rules for further changes at this time. So, why the rush to revisit them?”

They believe his agenda does not fulfill the SEC’s tripartite mission of facilitating capital formation, maintaining fair markets, and furthering investor protection.

For example, they were aghast that the agenda does not include a single item designed to help companies raise capital.

“Indeed, several items listed are poised to do the exact opposite,” they noted. “One example is the proposal to alter the thresholds at which an issuer is required to register a class of securities with the Commission…. A likely unintended consequence of lowering thresholds will be to limit the opportunity of employees, smaller investors, and other non-institutional investors to invest in promising businesses.”

In their view, the SEC is not even doing a good job at protecting investors.

In particular, they said that the updated agenda does not mention any regulation on digital assets. But in the last several years, the digital asset market has grown in size, complexity, and diversity.

“Rather than taking on the difficult task of formulating rules to allow investors and regulated entities to interact with digital assets, including digital asset securities, the Agenda—through its silence on crypto—signals that the market can expect continued questions around the application of our securities laws to this area of increasing investor interest,” the commissioner stated. “Such silence emboldens fraudsters and hinders conscientious participants who want to comply with the law.”

However, Gensler has said that there are clear commission rules on digital assets. He said that Congress should give the SEC the power to regulate digital asset trading and lending platforms.

The near-term agenda has about 50 rulemaking items.

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