Yet Another Rule to Discourage Companies From Going Public

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There has always been a tension between regulating the capital markets to protect the public and making capital formation more efficient. While I was focusing on Tuesday’s meeting SEC Advisory Committee on Small and Emerging Companies discussing changes to private placements, the SEC passed another rule that smacks public companies. Now public companies need to start worrying about the ratio of the CEO’s compensation to the median compensation of all employees.

I think it’s a silly rule that will do nothing except fire up shareholder activists and further discourage companies from going public.

At least this rule is not the fault of the Securities and Exchange Commission. Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated this rule. Blame Congress, not the SEC.

(b) ADDITIONAL DISCLOSURE REQUIREMENTS.—

(1) IN GENERAL.—The Commission shall amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)—

(A) the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;

(B) the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and

(C) the ratio of the amount described in subparagraph (A) to the amount described in subparagraph (B).

There is an exception for Emerging Growth Companies from the rule. Yet another benefit to grabbing this status under the JOBS Act.

The SEC did not mandate any particular methodology for the calculation. This rule will be a big challenge for bigger companies and multi-national companies.

I also wonder if there will be a math problem with companies using “average” instead of “median.” Surely, at least one company will put someone in charge of the calculation that does not know the difference.

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