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From Securities Regulation Daily, March 8, 2019

Commissioner Jackson renews call to action on unfinished Dodd-Frank rulemaking

By Amanda Maine, J.D.

Jackson said that the credibility of the SEC is at stake if it does not implement the Dodd-Frank rules, including the proposed rules on executive compensation.

In a spirited address to PLI’s recent conference titled Corporate Governance—A Master Class 2019, SEC Commissioner Robert Jackson said he believes that the Commission must act on the remaining provisions of the Dodd-Frank Act that have not been implemented. Jackson has been outspoken about the SEC’s inaction on certain Dodd-Frank provisions, especially those involving executive compensation. During his PLI address, he reasserted his view that the SEC should complete the rulemaking required by Dodd-Frank.

Compensation rules. Section 956 of the Dodd-Frank Act mandates that the SEC promulgate a number of executive compensation rules. According to Jackson, leaving those rules unaddressed poses a real risk to the economy. He noted, however, that the SEC finalized the hedging rule in December, which mandates that companies disclose hedging policies in proxy or information statements for the election of directors with respect to hedging transactions in the companies' equity securities granted as compensation.

The hedging rule, which Jackson noted was adopted unanimously and by seriatim, is important because it demonstrates that the SEC is keeping up with the way the market has been moving. He also assured that the hedging rule is a sign of things to come regarding executive compensation rules. Jackson said he hopes to return to the conference next year with another victory on the books regarding the Commission’s executive compensation rules. According to Jackson, the credibility of the SEC is at stake if it does not implement these rules.

Jackson suggested that perhaps people are more keen to finish these rules now than they were a few years ago because of the regulatory makeup of the Commission. He assured, however, that he will continue to fight for significant restrictions on banker pay, longer-term holding periods for executives who accept stock as compensation, clawbacks related to long-term risk-taking, and other proposals related to Section 956.

Pay for performance. Another Dodd-Frank mandate that the SEC has yet to finalize is the pay-for-performance rule, Jackson said. While he acknowledged that the rule is complicated and costly to administer, he advised that it is good trade off to make. Issuers must bear costs to be in the U.S. markets, he observed. He noted that some have suggested that in lieu of a pay-for-performance rule, investors can look at Form 4 and "add it up." He rejected this approach, saying that investors won’t do that. Jackson reiterated that he favors a stock-based incentive approach.

Clawback provisions. Jackson said it is a scandal that nearly nine years after Dodd-Frank, the SEC has not implemented its clawback provisions. The SEC proposed its clawback rule, which would require companies to include a clawback provision in their executive compensation contracts that is triggered by any accounting restatement, in 2015. The lack of action on the clawback rule demonstrates a serious threat to the market and the credibility of the SEC, he said. He added that, from what he has heard from boards of directors, most boards want to implement their own clawback provisions. However, they are reluctant to do so while they wait for the SEC to enact clawback rules. As such, Jackson called on his fellow commissioners to finalize the SEC’s clawback rules.

Volcker Rule. Jackson noted that he dissented from the changes to the Volcker Rule proposed by the Commission and other regulators last year. He said that the particular changes that the regulators made to the Volcker Rule were not the reason for his dissent. Rolling back the Volcker Rule without addressing the fact that people still get paid to take risks does not make sense. This exposes the economy to risks, he warned. However, Jackson said that he is delighted to see that the rule is back on the SEC’s agenda and hopes to finalize it this year.

Board diversity. When asked about diversity in the boardroom, Jackson pointed to recent CorpFin C&DIs on the subject. He also mentioned the Thirty Percent Coalition, which aims to have 30 percent of boards of directors’ seats occupied by women by 2030. According to Jackson, while it seems like a modest goal, he worries that it will not be achieved. He explained that most boards that he has spoken to are in favor of more diversity, and that the rate of change in the gender makeup has doubled in 20 years. However, he noted that diversity is still an issue in boardrooms because there is little turnover. The incumbency effect on boards is even greater than the incumbency effect on Congress, Jackson observed.

ESG. Regarding ESG (environmental, social, and governance) disclosures, Jackson noted that it has been a very frequent subject of shareholder proposals. Too often, he said, corporate lawyers have arrived at the view that what the Commission decides is material. Shareholder proposals reflect the view of a shareholder, or a "reasonable investor," and not, he said, a reasonable commissioner. The question is, what is important to investors, he explained. He also criticized those who call into question the motives of shareholders who put forth these proposals. There is no basis in the law for this. A shareholder proposal is entitled to consideration by the board and by CorpFin, Jackson implored.

Jackson also advised that CorpFin has made mistakes in the past when it comes to excluding shareholder proposals. For example, for many years, proposals relating to executive compensation were allowed to be omitted from proxies on the "ordinary business" exception. The Division also allowed the exclusion of proposals relating to corporate spending on politics, Jackson said.

Jackson also name-checked former Chair Mary Jo White, who in a speech, according to Jackson, said that the SEC should not be regulating in social matters. While giving due respect to the former chair, Jackson said that it is not her call to know the difference between social matters and other matters; it’s the investors’ call, he concluded.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews ExecutiveCompensation PublicCompanyReportingDisclosure SECNewsSpeeches

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