August 2015

Pay ratio disclosures
Photo by Brian Talbot

After much foot dragging, I have finished reading the adopting release for the new pay ratio disclosure rules.  Yes, the release is long (300 pages or so), but adopting releases are always long.  The real reason why it took so long is that the whole concept of pay ratio disclosure just seems silly to me (and apparently to Bob Lamm as well) so I just hoped it would go away.

I am not against finding ways to strengthen the middle class.  Just like I am not against ending the sale of certain minerals in Central Africa that end up funding deadly conflict.  The problem I have is that public companies should not have to bear the complete burden of fixing social ills.  Less than 1% of the 27 million companies in the United States are publicly traded.  And there are plenty of private companies that are larger than most publicly traded companies.  Thus, while we may not agree whether the social goals are worth achieving, I think we can all agree that there are better ways to achieve them than selective enforcement (particularly since the SEC itself has said that the pay ratio will not be comparable from one company to another).  The Securities Edge  has been criticizing the social disclosure movement for some time, but we haven’t yet seemed to have stopped Congress from continuing to go down that path.

So, unless Congress acts to reverse its mandate for public companies to disclose their pay ratios before 2018 (the first year of required disclosure), I suppose we should all start learning how to comply.  Leading practices for calculating the ratio and providing narrative disclosure will develop over the next couple of years, but I have summarized the important parts of the rules in this post:

What is the required disclosure?

Registrants must disclose:

  • The median of the annual total compensation of all employees of the registrant (excluding the CEO)
  • The annual total compensation of the CEO; and
  • The ratio of the median to the CEO’s compensation.

The ratio needs to be expressed as X:1 or X to 1 where “X” represents the CEO’s total compensation and “1” represents the median employee’s salary.  The ratio can also be expressed in narrative form such as: “The CEO’s annual total compensation is X times the median employee’s annual total compensation.”  You can’t Continue Reading Pay ratio (unfortunately) coming to public company filings soon

Photo by Nancy Kamergorodsky
Photo by Nancy Kamergorodsky

Earlier this week, the Financial Crimes Enforcement Network (“FinCEN”) proposed a rule that would require investment advisers registered with the Securities Exchange Commission (“SEC”) to establish anti-money laundering (“AML”) programs and report suspicious activity to FinCEN pursuant to the Bank Secrecy Act (“BSA”). FinCEN’s proposed rule would also add “investment advisers” to the general definition of “financial institution,” which, among other things, would require such advisers to file reports and keep records relating to certain transfers of funds. The public comment period for the proposed rule will commence once the proposed rule is published in the Federal Register and will continue for a period of 60 days. In the spirit of public debate, here are a few of our initial thoughts regarding the proposed rule:

  • The rule would require those investment advisers registered with the SEC to comply with its obligations. Generally speaking, only those investment advisers who manage $100 million or more in client assets must register with the SEC. This, in addition to the laundry list of exemptions from the SEC’s registration requirements, appears to leave a gaping whole through which potential money launderers may nonetheless access the United States financial system through an investment adviser, i.e., through small, midsize, or other unregistered advisers.
  • Most, if not all, investment advisers regularly work with financial institutions already subject to BSA requirements, such as when executing trades through broker-dealers to purchase or sell client securities, or when directing custodial banks to transfer assets. And if FinCEN’s August 2014 proposed rule requiring financial institutions to identify and verify the beneficial owners of legal entity customers comes to fruition, it may, in many cases, expand the scope of customer due diligence for banks and broker dealers with respect to their investment adviser customers and, in turn, the customers of their investment adviser customers. Thus, in many ways, imposing BSA compliance obligations on registered investment advisers might be unnecessarily duplicative.
  • FinCEN’s proposed rule would not require registered advisers to develop and maintain a customer identification program (“CIP”) or comply with certain other AML requirements applicable to financial institutions. While FinCEN has, in other cases, omitted CIP requirements for certain financial institutions, it did not do so with respect to broker dealers and, given FinCEN’s emphasis on investment advisers’ ability to appreciate a broader understanding of their clients’ movement of funds through the financial system, a CIP might actually be a key to accurately capturing and utilizing that broad understanding.
  • FinCEN is proposing to delegate its authority to examine investment advisers for compliance with these requirements to the SEC. Even assuming the SEC isn’t busy enough already, given the issues discussed above, the increase in supervisory and enforcement burden on the SEC may not be justified.

Feel free to join the debate, and please contact us if you have any questions regarding the proposed rule, the BSA or AML compliance generally. After the close of the public comment period, the proposed rule will be subject to additional review and revision based on public comments before it is finalized by FinCEN.

It’s done. On August 5, the SEC adopted final rules that will require publicly traded companies to disclose the ratio of the CEO’s “total compensation” to that of the “median employee.” We’re still wending our way through the massive (294 pages) adopting release, but one piece of good news (possibly the only one) is that it appears that pay ratio disclosures won’t be needed until 2018 for most companies.

I’ve already posted my views on this rule (see “CEO pay ratios: ineffective disclosure on steroids”), so it’s no surprise that I’m not happy. However, what is surprising are the myths and madness that the mandate has already created. First, there’s the “median employee,” who may be a myth in and of him/herself. But that’s not all; the media (notably The New York Times) have begun to tout the rule and make all sorts of predictions about how it will impact CEO pay, many of which involve myths and madness of their own.

Myth: In an August 6 column, Peter Eavis wrote about the rule, saying “the ratio, cropping up every year in audited financial statements, could stoke and perhaps even inform a debate over income inequality”. Really? In the audited financial statements? I haven’t finished reading the rule, despite its being such a page-turner, but I didn’t see that in there and don’t think I will. Someone better tell the audit firms – and also tell Mr. Eavis that the ratio is not auditable.

Continue Reading Pay ratio disclosure: Myths and madness