SEC Adopts Interpretive Guidance on Pay Ratio Rule

The Securities and Exchange Commission has approved interpretive guidance to assist companies in their efforts to comply with the pay ratio disclosure requirement mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Under the Commission’s rule implementing the pay ratio requirement, companies are required to begin making pay ratio disclosures in early 2018. 

“It’s our priority to make sure that we implement disclosure rules mandated by Congress in a way that is true to the mandate and, to the extent practicable, allows companies to use operational data and otherwise readily available information to produce the disclosures,” said Chairman Jay Clayton.  “Today’s guidance on pay ratio reflects the feedback the SEC has received and encourages companies to use the flexibility incorporated in our prior rulemaking to reduce costs of compliance.”  

In particular, the guidance:

• States the Commission’s views on the use of reasonable estimates, assumptions and methodologies, and statistical sampling permitted by the rule

• Clarifies that a company may use appropriate existing internal records, such as tax or payroll records, in determinations about the inclusion of non-U.S. employees and in identifying the median employee

• Provides guidance as to when a company may use widely recognized tests to determine whether its workers are employees for purposes of the rule

The Commission’s staff is also providing guidance separately about the pay ratio rule.  Bill Hinman, Director of the Division of Corporation Finance noted, “This additional staff guidance, which includes examples illustrating how reasonable estimates and statistical methodologies may be used, is intended to assist companies with their compliance efforts and reduce the costs associated with preparing disclosures.  We encourage companies to contact the division staff if additional interpretive questions arise as the compliance date approaches.”