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SEC to unveil CEO pay ratio rule, adopt municipal adviser rule

The headquarters of the U.S. Securities and Exchange Commission (SEC) are seen in Washington, July 6, 2009. REUTERS/Jim Bourg
The headquarters of the U.S. Securities and Exchange Commission (SEC) are seen in Washington, July 6, 2009. REUTERS/Jim Bourg

By Sarah N. Lynch and Lisa Lambert

WASHINGTON (Reuters) - U.S. corporations will need to disclose how their chief executive's paycheck compares to that of their average worker under a proposal set to be unveiled on Wednesday by the U.S. Securities and Exchange Commission.

The SEC's CEO pay ratio rule is championed by unions and labor advocates who say the disclosures will help investors identify whether a company's compensation model is too top-heavy.

But companies and business organizations such as the U.S. Chamber of Commerce, as well as, the Center on Executive Compensation, which represents human resources executives, have vehemently opposed the measure, saying it is too costly to compile the data and will not be useful for investors.

They have urged the SEC to scale it back, possibly by allowing companies with global offices to compile the median annual pay of average workers using compensation data from only their U.S.-based employees.

The proposal is one of two major outstanding regulations mandated by the 2010 Dodd-Frank Wall Street reform law that the SEC plans to tackle at Wednesday's public meeting.

In addition to the CEO pay ratio plan, the SEC is expected to adopt a reform that will allow it to oversee financial advisers to cities, counties and other municipal entities that sell public debt or manage public money.

The rule will require advisers to register with the SEC and be held to a "fiduciary" standard, or ensure they act in the best interest of customers.

The primary complaint against the municipal adviser rule proposal was that it was drafted too broadly, ensnaring too many people, such as volunteers or board members, in cumbersome regulation.

The final rule is expected to have a narrower definition of who qualifies as an adviser, but it is also expected to span hundreds of pages. Once enacted, the federal government will be able to give professional qualification licensing exams and extend regulations that only broker-dealers currently must follow to advisers, including limits on gifts and gratuities.

PAY DISPARITY

The SEC's CEO pay-ratio proposal comes on the heels of the fifth anniversary of the collapse of investment banking giant Lehman Brothers and the country's financial meltdown.

The 2007-2009 financial crisis led to widespread public outrage over the lavish compensation of bank CEOS, especially after the government swooped in to rescue the sector.

A new report by the Institute for Policy Studies which analyzed data about top CEO earners over a 20-year period found that chief executives whose firms collapsed or received government bailouts have held 112 of the 500 top pay leader slots.

And yet, even after Wall Street reforms were passed, the report said the pay gap between CEOS and the average American worker has grown from 195-1 in 1993 to 354-1 in 2012.

The CEO pay-ratio provision, which was tucked into the law by New Jersey Democratic Senator Robert Menendez, is one short paragraph in the lengthy Dodd-Frank law. But its backers say it is critical information for the marketplace.

"This rule is really, really important to investors because it will shine a light on the pay ladder within a company," said Vineeta Anand, the chief research analyst at the AFL-CIO Office of Investment.

"When the gap between the CEO and the mid-ranking employee is very steep, it can have a negative impact on employee morale, on productivity and cause high turnover. All of those things affect a company's bottom line."

But critics strongly object to a pay ratio rule at all, and are urging the SEC to keep its costs minimal.

Tim Bartl, the president of the Center on Executive Compensation, said that over the past three years, shareholder support for proposals to require companies to disclose a CEO to worker pay ratio has been extremely low.

Of the 14 proposals, Bartl said the average vote against them was 93.5 percent.

"When you boil it down, the pay ratio disclosures is not information that investors broadly speaking find useful," he said. "There is no business purpose for the companies to collect data in that way."

(Reporting by Sarah N. Lynch and Lisa Lambert; Editing by Leslie Gevirtz)

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