Executive Compensation: Filling Vacant SEC Slots, Revisiting Dodd-Frank and Pay Ratio Among Top Priorities

January 06, 2017

Executive compensation and corporate governance served as a major focal point of the Obama Administration's financial regulatory agenda and reversal of the resulting policies, whether through regulation or legislation, will be a priority for Republicans.

Dodd-Frank Reform, Including Pay Ratio Repeal, Targeted  President-elect Trump has repeatedly criticized the landmark 2010 Dodd-Frank Act, calling for it to be dismantled and replaced "with new policies to encourage economic growth and job creation."  The initial blueprint for Republican Dodd-Frank Reform efforts is the Financial CHOICE Act, passed by the House Financial Services Committee in the fall of 2016, which is not a full repeal but a comprehensive revision of the massive financial reform law.  Based on the bill, the likely reform targets include many of the executive compensation provisions in Dodd-Frank, including repeal of the pay ratio and the financial services incentive compensation rules.  It is expected that Dodd-Frank reform will be among the top Republican reform priorities, behind health care, tax reform and immigration.

Trump SEC to Feature New Chair, Commissioners, Outlook, and Priorities  The Securities and Exchange Commission will look dramatically different than the Obama-era agency as Republican control of the White House now means that the GOP will have a three-to-two majority on the five-member Commission and a Trump-appointed Chair will now set the agency’s regulatory and enforcement agenda.  The SEC has had only three of five presidentially-appointed Commissioners for over a year, and Chair Mary Jo White has announced her intent to resign January 20.  This week, President-elect Trump named Jay Clayton, a partner with Wall Street law firm Sullivan and Cromwell, as his nominee for SEC Chair.  Mr. Clayton, a well-respected securities attorney, has represented companies in a variety of transactions, securities offerings and enforcement matters.  In making the pick, the President-elect said, "We need to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm workers."  Another near-term order of business for President-elect Trump will be nominating two Commissioners to fill the two other vacant slots on the Commission.  In addition, now that the Chair has been identified, it can be expected that individuals will begin to be vetted to fill several important SEC staff positions, including the Head of the SEC’s Division of Corporation Finance—the branch of the SEC and is responsible for executive compensation rulemaking.  It is expected that once fully staffed, the SEC will take a much different approach to regulation, especially regarding the Dodd-Frank governance and compensation provisions, than the Obama-era Commissions did.  For example, the Commission could revisit the pay ratio rule, delaying the effective date, and given that the Dodd-Frank Act does not provide deadlines for rules such as pay for performance or clawbacks, it is possible that the SEC would not take immediate action to complete them or, alternatively, substantially revise them.  In addition, the Commission could accelerate work on other projects such as disclosure reform, in an effort to encourage more companies to participate in the securities markets.

Proxy Advisory Firm Reform Likely to Be Pursued  Expect further efforts to pass the Corporate Governance Reform and Transparency Act, which would create a separate SEC-centered regulatory regime over proxy advisory firms, which includes an annual reporting requirement and conflict of interest disclosures.  It also is possible that the new SEC Chair may pursue proxy advisory firm oversight, without legislation through regulatory channels. 

Tax Reform Efforts Could Impact Executive Compensation  If the Republicans engage in a comprehensive tax reform effort in 2017, executive compensation tax policy could be impacted.  First, based on previous Republican reform proposals, it is conceivable that the pay for performance exception to Section 162(m) of the IRS code, which allows companies to deduct executive compensation that exceeds $1 million so long as it is performance based, could be repealed to help pay for a more favorable corporate tax structure.  Section 162(m) has been a target of both Democrats and Republicans and even absent a comprehensive tax reform effort could be used as a revenue raiser to offset increases in social spending.  The other area which could be targeted in tax reform is Section 409A of the Code, which sets a regime for nonqualified deferred compensation.  Repeal of Section 409A has also been repeatedly proposed and could offer an attractive revenue raising tool to offset across-the-board tax rate reductions.