In the period following the financial crisis of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which compelled the Securities and Exchange Commission (SEC) to engage in substantial rulemaking. The Dodd-Frank mandate in Section 953(b) required the SEC to promulgate a rule, which it eventually finalized and is currently known as Pay Ratio Disclosure. Historically, SEC rulemaking has received great deference when rules are judicially challenged. However, following the passage of Dodd-Frank, the D.C. Circuit Court of Appeals has begun to grant less deference to SEC rulemaking where it has found that the SEC has not engaged in a proper cost-benefit analysis, and subsequently has invalidated a number of SEC rules. The Pay Ratio Disclosure requires publicly held companies to file: (1) the median of the annual total compensation of all the employees employed by the publicly held company, or registrant; (2) the annual total compensation of the registrant’s Chief Executive Officer (CEO), or equivalent executive officer; and (3) in ratio form, the amount of the CEO compensation to the median employee pay. Since the Pay Ratio Disclosure’s first proposal it has been met with criticism from both business organizations who have previously challenged other SEC rulemakings, as well as Republican members of Congress and Republican Commissioners of the SEC. This Note argues that Pay Ratio Disclosure, due to its burdensome compliance costs coupled with its lack of tangible benefits, should be invalidated. Further, this Note recommends that in place of Pay Ratio Disclosure, Congress should direct the SEC to promulgate a rule subjecting CEOs of publicly held companies to a soft pay cap.
Full Disclosure: Moving Beyond Disclosure Regulations to Affirmative Regulation of Executive Compensation,
11 Brook. J. Corp. Fin. & Com. L.
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