SEC Votes for Greater Pay Disclosure at Companies

The Securities and Exchange Commission has voted to require companies to disclose more information about their compensation practices and the background of their board members.

In a 4-1 vote, the SEC decided to require public companies to begin providing a written disclosure of their pay practices for all employees starting next year. Companies would also need to disclose why they chose a specific leadership structure and the qualifications of the board of directors, including their diversity. In addition, companies would need to provide information on fees given to compensation consultants.

“Through these rules, investors will better understand whether a company’s compensation policies and practices are reasonably likely to increase the company’s risk exposure,” said SEC Chair Mary Schapiro.

The new rules are also intended to give investors a better understanding of the stock and option awards granted to company executives and directors, the background and qualifications of directors and board nominees, and how diversity, defined as broadly or narrowly as the company may choose, is considered by the board when nominating director candidates, she noted. Investors would also better understand why a board has chosen its particular leadership structure, and what the board’s role is in the area of risk oversight.

“Lastly, investors will better understand whether the compensation consultant retained by the board’s compensation consultant performs other work for the company that could create at least the perception of a conflict of interest or worse,” she added.

Schapiro said the new rules would further advance a critical factor in corporate governance, noting, “Accountability is impossible without transparency.”

In addition, the SEC commissioners voted 5-0 to tighten custody controls involving investment advisers. The new rules would “promote independent custody and require the use of independent public accountants as third party monitors,” according to the agency.

The new custody rules grew out of the Madoff scandal, according to Schapiro. They are intended to apply to investment advisers who act as custodians and actually hold onto a client’s assets.

“Under the new rules, these advisers, at least once each year, would be subject to a ‘surprise exam’ by an independent auditor in order to verify client assets,” she explained. “If evidence reveals missing assets or material discrepancies during the surprise exam, the auditor would be required to notify the SEC within one day. This will give the agency a direct line into potential frauds at an early stage.”