Subject: File No. S7-07-13
From: Gary G. Friend , II

October 4, 2013

Three years ago, the Securities and Exchange Commission (SEC) was charged with drafting a rule that, as part of the Dodd-Frank Act, would require public companies to disclose the total annual compensation of their CEO, the median total annual compensation of the remaining employees, and the ratio between the two. This was, presumably, to increase financial transparency and highlight the growth of an already hideous inequality between generously compensated executives and the average worker, without whom no wealth would be generated at all.

On Sept. 18, the SEC released its draft proposal on how exactly companies would go about disclosing this and the result is a vague, toothless, broad-as-the-universe mess than is so ineffective and counter to the legislations original intention that its insulting. Given the task of creating a rule to increase transparency and highlight inequality, the SEC has instead given us a regulation-in-name-only proposal that doesnt so much have loopholes but is instead composed almost entirely of them.

What is the SEC offering instead? According to the proposal text, we are providing instructions and guidance designed to allow registrants to choose from several alternative methods to identify the median, so that they may use the method that works best for their own facts and circumstances.

So, for example, a company might use payroll figures to determine their ratio, or they could base it on a random sampling of employees, or they might use tax records, or they might do something entirely different depending on what outcome the company wants to produce. They could even, according to the proposal text, exclude employees in the sample that have extremely low or extremely high pay because they would not be the median employee. Good news for companies that use a lot of minimum wage workers.

The proposal is similarly vague on what, exactly, they mean by compensation. Is it cash only? Does it include benefits? Do stock options count? Who knows? According to the SEC, it is believed that its best if the companies themselves decided what does and does not count as compensation, which the proposal said would result in a reasonable estimate of a median employee at a substantially reduced cost.

A total lack of clear methodology in how exactly companies are meant to calculate this figure gives corporations a blank check to come up with any figure they want. What turned a measure meant to increase transparency and accountability into yet one more way for corporations to obscure truth and cast illusions?

A deep and abiding concern on the part of the SEC that following this rule not be too expensive for multi-billion dollar corporations. This concern for protecting companies from what they would see as a burdensome compliance cost pops up all over the proposal.

The SEC is, apparently, very concerned about making things easier for the companies affected. According to the SEC itself, allowing registrants to select a methodology for identifying the median, including identifying the median employee based on any consistently applied compensation measure and allowing the use of reasonable estimates, rather than prescribing a methodology or set of methodologies, could permit a registrant to alter the reported ratio to achieve a particular objective with the ratio disclosure, thereby potentially reducing the usefulness of the information. We believe that requiring the use of a consistently applied compensation measure should lessen this concern.

So, after the Global Financial Crisis of 2008, after Bear Stearns, Lehman Brothers, AIG, and Countrywide Financial, after the Savings and Loans Crisis, after the Dot-com Bubble, after the accounting scandals of Enron, Arthur Andersen, Worldcom, Tyco, Aldelphia, Global Crossing, et al, ad nauseum--the SEC is once again putting its trust in the corporations in need of obvious oversight to do the right thing and regulate themselves?

Why are we not surprised?

And, what could possibly go wrong?