May 26, 2020

Even If Enacted, Financial CHOICE Act May Not Repeal SEC’s Pay Ratio Rule

While prognosticators continue to place odds on whether the Financial CHOICE Act of 2017, H.R. 10, will be enacted, many commentators are claiming that it will “repeal” the Securities and Exchange Commission’s pay ratio rule.  Even if H.R. 10 is enacted, I’m not so sure that it would “repeal” the pay ratio rule.

It is certainly true that Section 857(a)(24) of H.R. 10 specifically repeals Section 953(b) of the Dodd Frank Wall Street Reform and Consumer Protection Act, H.R. 4173.  Section 953(b) in turn directs the SEC to amend Item 402 of Regulation S-K to require pay ratio disclosure.  So why wouldn’t H.R. 10 repeal the pay ratio disclosure rule?  My concern is that while H.R. 10 eliminates the requirement that the SEC adopt the pay ratio rule, it does not expressly repeal the rule or the authority of the SEC to adopt the rule.  Although the SEC adopted the pay ratio rule to implement Congress’ mandate, it did not rest its authority solely on Section 953(b).  It also relied upon  Sections 7, 10 19(a), and 28 of the Securities Act, Sections 3(b), 12, 13, 14, 15(d) 23(a), and 36(a) of the Exchange Act.  The SEC could, of course, decide to repeal the pay ratio rule.  A repeal may not be immediate because the Administrative Procedure Act would require the SEC to provide notice and an opportunity for comment on the repeal.  5 U.S.C. § 553 (The APA defines “rulemaking” as the “process for formulating, amending, or repealing a rule”.)  It is possible, however, that the SEC would invoke the APA’s “good cause” exception.  However, this would require the SEC to find that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest. 5 U.S.C § 553(b)(3)(B).  Given the APA’s failure to define “good cause”, proponents of the pay ratio rule may challenge the SEC’s decision in the federal courts.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...