On August 5, 2015, the Securities and Exchange Commission approved its final rule subjecting most public companies to the so-called “Pay Ratio Disclosure” mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.  The SEC voted 3-2 to approve the measure, with the panel’s two Republican members opposing it.  In the split vote, the SEC finally put into place one of the most controversial rules mandated by Dodd-Frank.  In the years since the SEC began working on the rule, it has attracted an intense measure of both public scrutiny and advocacy, drawing more than 286,000 public comments.

The final pay ratio rule requires annual disclosure of the ratio of a reporting company’s principal executive officer’s total annual compensation to the median of the total annual compensation of all its employees. The new rule will require disclosure of the pay ratio in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure.  Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after January 1, 2017.

The rule attempts to address concerns from a prior proposal about the costs of compliance by providing companies with a measure of flexibility in meeting the rule’s requirements.  For example, a company will be permitted to select its methodology for identifying its median employee and that employee’s compensation, including through statistical sampling of its employee population.  The rule also permits companies to calculate the median employee’s salary only once every three years, and to choose a determination date within the last three months of a company’s fiscal year.  In addition, the rule allows companies to exclude non-U.S. employees from countries in which data privacy laws or regulations make companies unable to comply with the rule and provides a de minimis exemption for non-U.S. employees.  The rule also does not apply to smaller reporting companies, emerging growth companies, foreign private issuers, or registered investment companies.  It also provides transition periods for new companies, companies engaging in business combinations or acquisitions, and companies that cease to be smaller reporting companies or emerging growth companies.

SEC Chair Mary Jo White stated that “the Commission adopted a carefully calibrated pay ratio disclosure rule that carries out a statutory mandate,” and that “the rule provides companies with substantial flexibility in determining the pay ratio, while remaining true to the statutory requirements.”  That assessment will likely be challenged through the courts.  In his dissent, Daniel Gallagher, a Republican SEC commissioner, cited a federal appeals court in Washington that struck down another SEC regulation that would have forced companies to disclose when they bought conflict minerals from war-ravaged regions of Africa, ruling that it violated their free speech rights. Gallagher stated “[w]e’ve seen from our Conflict Minerals rule that naming-and-shaming rules can fall afoul of the First Amendment,” suggesting that this new regulation could as well.