Confirmation of New SEC Commissioners With the year-end departure of Democrat Commissioner Luis Aguilar and the October resignation of Republican Daniel Gallagher, the five-member Commission has just three sitting members – Chair Mary Jo White, an independent, Democrat Kara Stein, and Republican Michael Piwowar. In October, President Obama nominated Democrat Lisa Fairfax, a George Washington University Law Professor, and Republican Hester Peirce, a former SEC and Senate Banking Committee Staff Member. So far, the Senate Banking Committee has not announced a hearing or vote on their nominations. However, even after the Senate approves the nominations it will still take time before the SEC is back to business as usual, including reviewing and voting on controversial rulemakings.
Final Dodd-Frank Rules Expected in 2016 In its fall 2015 regulatory agenda, the SEC anticipated completing final rules on pay for performance and clawbacks by October 2016. The Association's Center On Executive Compensation filed extensive comments on both proposed rules, urging the Commission to take a principles-based approach to the final pay for performance rule. Assuming rulemaking is completed this year, it is likely that companies would be required to include the pay for performance disclosure in their 2017 proxies. The clawback proposal is subject to the development of listing standards by the stock and commodities exchanges and thus would not likely take effect until 2018, the year the first pay ratio disclosures are required. The SEC is also expected to complete rules requiring the disclosure of hedging and pledging policies by companies and say on pay vote disclosure by institutional investors. Meanwhile, the SEC and six other financial regulators are expected to re-propose rules implementing Dodd-Frank section 956 limitations on incentive-based compensation structures that encourage risk-taking for very large financial services companies, and the Center will engage affected companies and file comments.
Congressional Disclosure Review Mandate Provides Opportunity to Streamline Proxy Disclosures The five-year transportation law enacted in December mandates that the SEC draft a report by December 2016 on approaches to modernizing and streamlining corporate disclosures, presumably including executive compensation disclosures, and to issue rules implementing those changes by December 2017. The SEC Staff had previously announced plans to conduct a comprehensive review of executive compensation disclosure rules, with a focus on streamlining the Compensation Discussion and Analysis (CD&A) section of the proxy and the compensation tables. The Congressional mandate now provides impetus for the staff to complete that review, which will be even more important in light of the forthcoming pay ratio and pay for performance disclosures, which are likely to make proxy disclosures even longer.
Buybacks, Inequality and Executive Compensation In light of the continued focus on income inequality and executive compensation, it is expected that there will be a push by Sen. Tammy Baldwin (D-WI) and others urging the SEC to repeal its exemption to the short swing profits rule that allows companies to employ stock buybacks as part of their capital allocation strategy. In a series of articles last year, Reuters summarized the critics' argument as follows: "[S]oaring CEO pay tied to short-term performance measures like earnings per share is prompting criticism that executives are using stock repurchases to enrich themselves at the expense of long-term corporate health, capital investment and employment." Certain unions are filing shareholder resolutions asking companies to adopt a policy to exclude the impact of buybacks on performance metrics or vesting of any stock award. Although it is not expected that such initiatives will have substantial effects on current practices, companies should be aware of the focus as they consider their capital allocation and compensation strategies.