SEC Approves Final Say on Pay Rules ... Narrowly

Yesterday, by a 3-2 vote, the Securities and Exchange Commission (SEC) approved its new final rules implementing the Dodd-Frank 'Say on Pay' provisions. Before discussing the key provisions of the new rules, let me digress by saying that compared to other government agencies such as the IRS and DOL, the SEC has what I view as a strange process. Presumably with significant input from Commissioners, staffers write the rules which are then voted on (usually at an open meeting) by the five commissioners. At the open meeting, there is enough discussion that attendees (live or by some sort of conferencing medium) can get the gist of what is in the rules. Then, they publish the rules.

For those who don't normally play in this arena, 'say on pay' is the common term for allowing shareholders of an SEC registrant the right to, at least triennially, express their opinions (non-binding vote) via an up or down vote on the compensation of top executives.

In any case, here are the keys as I heard them:

• Proxy issuers must give shareholders all four available choices for a say-on-pay vote. That is, they must have a choice between annual, biennial, triennial, or abstention.
• Companies must explain in their Compensation Discussion and Analysis (CD&A) what consideration they gave to the shareholder's say on pay vote.
• Future shareholder proposals on say on pay or say on pay frequency may only be excluded if the company adopts the frequency indicated by the majority vote (NOTE: I'm not sure what happens if no choice gets a majority vote, it could be that there is only a plurality).
• The requirement to report the results of these shareholder votes is to be postponed to 150 days after the annual meeting, at which point it should be filed in Form 8-K.
• Small companies get a 2-year delay in effective date.

There is one other (in my view) strange thing about the way these SEC rules evolve. Periodically, the staffers will receive questions from registrants. They publish their answers on the SEC website, and once published, by some magical process, those answers appear to become part of the final rule.