Articles Posted in SEC

Leah Kessler

On Tuesday, November 28, 2017, the U.S. Supreme Court heard oral arguments in the case of Digital Realty Trust, Inc. v. Paul Somers. While the Supreme Court’s ruling on this case is not expected until next June, the outcome, as well as the arguments made this week, have serious ramifications for the accepted legal definition of “whistleblowing” and the protections that definition provides.

Paul Somers was the Vice President at Digital Realty Trust, Inc., from 2010 to 2014, during which time he filed reports to senior management about possible securities law violations by the company. When Digital Realty fired Somers, he filed suit in the U.S. district court for California, alleging that Digital Realty fired him for his reports of securities law violations in violation of the anti-retaliation protections created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank was passed in 2010 in the wake of the 2008 financial crisis and expanded the whistleblower incentives and protections under the 2002 Sarbanese-Oxley Act. (Here is a side-by-side comparison of these two whistleblowing acts, including both the definitions they use and the protections they provide.) Although the district court held Somers to be a “whistleblower” under the statute, and the Ninth Circuit affirmed the district court’s decision on behalf of Somers, Digital Realty appealed to the Supreme Court on the grounds that Somers was not a “whistleblower” as defined by Dodd-Frank because Somers did not report his concerns to the Securities and Exchange Commission (SEC) before he was terminated.

The Securities and Exchange Commission (SEC) in a 3-2 vote proposed a new rule that would require public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. As provided by the JOBS Act, the proposed rule would not apply to emerging growth companies, smaller reporting companies or foreign private issuers. Newly public companies would have a transition period and initial compliance would be required with respect to compensation for the first fiscal year commencing on or after the date the company becomes subject to the reporting requirements. SEC Chair Mary Jo White stated that « this proposal would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate ».

This new rule is required under Section 953(b) « Executive compensation disclosures » of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). Section 953(b) the “Dodd-Frank Act”) directs the Commission to amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer companies to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto) — the median of the annual total compensation of all employees of the company, except the chief executive officer (or any equivalent position) of the issuer; the annual total compensation of the chief executive officer (or any equivalent position) of the company; and the ratio of the median of the total compensation of all employees of the company to the annual total compensation of the chief executive officer of the company. Section 953(b) also requires that the total compensation of an employee of a company shall be determined in accordance with section 229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect on the day before the date of enactment of the Dodd Frank Act.

The proposed pay ratio rules would provide flexibility since they do not prescribe a specific methodology for companies to use when calculating « pay ratio ». Companies would be allowed to determine the statistical methodology that best suits their particular circumstances to determine the median annual total compensation of its employees. Registrants may choose to identify the median using their full employee population or by using statistical sampling or another reasonable method. However, companies would be required to disclose the methodology used to identify the median, and any material assumptions, adjustments or estimates used to identify the median or to determine total compensation. One of the reasons to allow registrants flexibility in developing their own methodology is to take into account potential costs associated for compliance with the new rule.