The U.S. Securities and Exchange Commission (SEC) delivered a pair of rule proposals Wednesday that tilted toward the interests of Wall Street and corporate America as the regulator plodded through a backlog of mandates from the 2010 Dodd-Frank Act.
The five-member SEC voted unanimously to propose a measure that would allow overseas banks to conduct some derivatives trades without having to comply with U.S. regulations. The SEC also proposed a requirement for companies to show annual comparisons of executive pay and the stock's performance. The rule would allow companies to omit new stock and options, which can make up the biggest part of compensation.
Both proposals will be open for public comment for 60 days.
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"We are taking another trudging step on the path toward completing Dodd-Frank," said Commissioner Daniel Gallagher, a Republican who voted against the pay proposal. Gallagher and Michael Piwowar, a fellow Republican commissioner, said regulators should make smaller public companies exempt from the measure.
Derivatives Carve-Out
Under the SEC's derivatives proposal, the world's biggest banks would win a break from Dodd-Frank rules designed to increase competition for prices in the market by forcing trading onto public platforms. The SEC measure carves out certain stock and credit-default trades from the requirement.
Swaps became a central part of Dodd-Frank after largely unregulated trades helped fuel the 2008 financial crisis. Congress and regulators sought to reduce risk and increase transparency in the market by requiring most trades to be guaranteed at central clearinghouses and traded on swap-execution facilities.
Cross-border application of those rules has been contentious. JPMorgan Chase & Co., Goldman Sachs Group Inc., and other banks have been lobbying regulators for years to curb the reach of rules to their overseas trading divisions. U.S. banks argued that the restrictions could hurt their ability to compete with foreign rivals, who may not be subject to the same price-transparency requirements.
When the Commodity Futures Trading Commission (CFTC) in 2013 proposed applying rules to trades arranged in the U.S., Wall Street lobbying groups sued the agency. Even though the industry lost the case, the CFTC has put the policy on hold and is continuing to consider changes.
The SEC justified the exemption by saying that the risk posed by those trades is primarily outside of the U.S. Kara Stein, a Democratic commissioner at the SEC, added that the swaps under the agency's jurisdiction are "thinly traded products," and therefore wouldn't necessarily be traded on the public platforms anyway.
Marcus Stanley, policy director for Americans for Financial Reform, a coalition including the AFL-CIO labor federation, questioned the SEC's proposal.
"We have lots of doubts and questions here about the direction they're going," Stanley said. "If they're going to permit foreign subsidiaries of U.S. banks to sidestep the clearing and exchange trading requirements even for transactions conducted in the U.S., that's a problem."
Under the SEC proposal, banks would still need to comply with conduct standards meant to regulate deals with pensions, endowments, and municipalities. The measure would apply to single securities or narrow indexes, which make up about 5 percent of the swap market.
Executive Pay
The pay-for-performance yardstick adds a new measure of executive compensation to corporate disclosures. The aim is to show investors how the chief executive's pay compares with the shareholders' return and what other executives make.
"Having a description of how the executive compensation actually paid relates to the financial performance of the company can assist shareholders in assessing a company's executive compensation practices and policies," SEC Chair Mary Jo White said.
Under the plan, companies would be required to publish a new table in their annual proxy statement showing "actual pay," including cash compensation as well as stock and options that vested that year. That figure, though, would exclude unvested stock grants and options.
Many companies have pushed for a similar formula for defining compensation, which paints a scaled-back picture of how much they pay their top executives. The companies call it "realized pay," a total that omits the change in value of an executive's pension and doesn't include unvested stock awards.
"For more companies, it will end up being a lower number," said Mark Borges, a principal at San Francisco-based Compensia, a compensation consultant. "You're indicating how much that individual has pocketed during the year, regardless of when those amounts were awarded."
For instance, Apple Inc. reported in 2012 that CEO Tim Cook was paid US$378 million, mostly from stock awards. Yet, under the SEC's new formula, the stock award wouldn't show up as part of Cook's actual pay for that year. In fact, it wouldn't show up until 2016, when half of his shares vest.
The new requirement would add to existing disclosures. Companies already have to report to shareholders in their proxy statements what they pay their top five earners. That figure tallies all the cash, stock, pension-benefit gain, and perks that an executive is awarded in the past year.
The agency still hasn't moved to impose some of the more contentious rules on executive pay that were mandated in Dodd-Frank, including a requirement to show what the CEO makes compared with the average for all employees.
The SEC's proposal hews closely to models used by companies such as General Electric Co., Exxon Mobil Corp., and the Coca-Cola Co., which for years have given investors supplemental disclosures with pay totals that strip out unvested stock and options as well as changes in pension value. Even so, the commission's Republicans objected to the proposal, saying it probably wouldn't improve shareholders' understanding of executive pay.
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