Taking full advantage of his time as acting chairman of the Securities and Exchange Commission, Michael Piwowar has announced that the agency’s much-maligned pay ratio rule, which he says is causing “unanticipated compliance difficulties,” is now under reconsideration.
The rule, pushed to the SEC by the Dodd-Frank Act and adopted in August 2015, requires a public company to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer. Critics have pushed back against the rule on both conceptual grounds—viewing the data demand as part of a name-and-shame campaign by unions, media, and activists—and logistical ones, especially for multinationals facing cost of living and pay differentials in low-income countries, various inflation rates, and currency fluctuations.
Piwowar announced the reconsideration of the rule with a statement posted on the SEC’s website this week.
“Based on comments received during the rulemaking process, the Commission delayed compliance for companies until their first fiscal year beginning on or after Jan. 1, 2017,” he wrote. “Issuers are now actively engaged in the implementation and testing of systems and controls designed to collect and process the information necessary for compliance. However, it is my understanding that some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.”
In order to better understand the nature of these difficulties, Piwowar is seeking public input on “any unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed.” The comment period will be open for 45 days, beginning on Feb. 6. He has also directed staff “to reconsider the implementation of the rule based on any comments submitted and to determine as promptly as possible whether additional guidance or relief may be appropriate.”
“I understand that issuers need to be informed of any further Commission or staff action as soon as possible in order to plan and adjust their implementation processes accordingly,” he added.
Piwowar has been a vocal critic of the rule. He has dismissed the rule as “Saul Aliskyian tactics by Big Labor and their political allies.” At the time the rule was passed by the Commission, he published “Additional Dissenting Comments on Pay Ratio Disclosure,” a public statement clocks in at 4,156 words, 76 footnotes, and with accusations the Commission failed to adopt the rule properly.
The gist of Piwowar’s statement was that the SEC violated the Administrative Procedures Act by failing to articulate what the pay ratio rule is supposed to accomplish, and then poorly crafted the rule with inaccurate definitions of who an “employee” is and by ignoring academic studies suggesting that pay ratio disclosure might actually lead to increases in CEO pay. Lastly, he said, using the rule might force investment advisers to violate their fiduciary duties as dictated under the Investment Advisers Act.
“Should the final rule become effective, I have one request for companies,” Piwowar wrote. “Please keep track of your compliance costs and consider voluntarily disclosing that information alongside your pay ratio. The Commission and others should have an understanding of your actual compliance costs, and voluntary disclosures would make the likely incredibly high costs evident.”
The latest move comes just days after Piwowar ordered a similar review and public comment period for the SEC’s conflict minerals rule, a requirement that companies disclose their use of certain minerals mined from the war-torn Democratic Republic of the Congo. On Jan. 31, he directed SEC staff to reconsider whether previous guidance regarding the rule is still appropriate and whether any additional relief is appropriate.
The timing of Piwowar’s rule reconsiderations is notable. Because the 45-day public comment period will likely extend past his tenure as acting chairman, it allows the next chairman (likely Trump nominee Jay Clayton, a partner with Sullivan and Cromwell) to hit the ground running, armed with plenty of political capital and low-hanging fruit.