Dodd Frank, Compensation Ratios, and Agency Discretion (Part 3)

We are discussing the regulatory discretion provided to the Commission in implementing ratio disclosure in Section 953(b) of Dodd-Frank.

Section 953 provides that ratio disclosure must occur in filing references in Item 10(a) of Regulation S-K.   The provision provides that:

• Registration statements under section 12, annual or other reports under sections 13 and 15(d), going-private transaction statements . . . , tender offer statements . . . , annual reports to security holders and proxy and information statements . . . and any other documents required to be filed under the Exchange Act, to the extent provided in the forms and rules under that Act.

To the extent ratio disclosure must occur in all of the filings in Item 10, it would require disclosure at least quarterly.  Of course the formula could be calculated once, disclosed and incorporated in all of the other filings by reference.   

More importantly, the Commission can simply amend Item 10 and eliminate references to periodic reports.  Such an amendment would not change the application of Regulation S-K to periodic reports.  The forms for quarterly and annual reports could still cross reference the regulation.  The result would be that companies would need to disclose ratio compensation only once a year in the proxy statement.  

Standing alone, the cross reference to Item 10 in Section 953 could stand for the proposition that ratio disclosure had to be included in any filing listed in that regulation at the time of enactment, effectively precluding the SEC from changing the frequency of disclosure. This is, analytically, unlikely to be the correct interpretation.  The statute cross references a regulation then imposes no limitations on changes in the regulation.  The logical interpretation is that Congress intended to allow the Commission to change the requirements by amending the regulation.

But the interpretation is not left only to logic.  Elsewhere in Section 953(b), Congress specifically referenced another regulation and instructed that the Commission use the version "in effect on the day before the date of enactment of this Act."  Dodd Frank, 953(b)(2).  In other words, where Congress wanted to limit the discretion of the Commission to change the applicable standards in a regulation, it did so expressly. 

The Commission can amend Item 10 of Regulation S-K and determine the frequency of ratio disclosure.

Frequency of disclosure can be whatever the SEC reasonably thinks appropriate (and consistent with the public interest) and the SEC has sufficient rulemaking authority to implement the preferred frequency.   

For a more detailed discussion on this issue and Section 953(b), see Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process.