In what may be a surprise to many, according to the Wall Street Journal, “the U.S. Chamber of Commerce isn’t planning to mount a legal challenge to the Securities and Exchange Commission’s pay ratio rule.”

The pay ratio rule was adopted by a 3-2 vote by the SEC on August 5, 2015 and requires all public companies to disclose the ratio of the compensation of their chief executive officers (CEO) to the median compensation of their employees.  Under the new rule, mandated by Dodd-Frank most companies will have to start reporting their ratios in their 2018 proxy statements. 

Given the track record of the Chamber of Commerce, many thought it would take on the pay ratio rule.  Instead, the Chamber concluded not to challenge the rule at this time in the belief that the “political landscape around the rule could [ ] change I Congress and the White House following the 2016 election.”

Instead of using resources to challenge the pay ratio rule, the Chamber feels it is “more important to move forward with litigation surrounding its challenge” of the conflict minerals rule (discussed many times before on this blog).  The Chamber recognizes that the conflict minerals case ‘has implications for the pay ratio.”

It is high time that the challenge to the conflict minerals rule (“Rule”) get the attention it deserves.  While some (including this author) have been paying close attention to the tortured legal process of the adoption of and challenges to the Rule, for many it has stayed below the radar.  It is time for all to pay heed. The litigation over the Rule has serious implications for disclosure regulation as a whole.  In their petitions for an en banc review of the case, the SEC and Amnesty International (and intervenor in the case) argued respectively that the panel’s holdings call “into question the application of [the more lenient standard of review] to many disclosures required under the securities laws, including those aimed at preventing investor deception,” and “threaten the viability of the modern securities regime by precluding application of the relaxed First Amendment review long applied by this Court to a range of established disclosures.”

For those who have not yet been following this case closely here is a brief summary of the holdings in the panel’s decision, highlighting the portions deemed must problematic by those seeking the en banc review. 

First, the panel ruled (in contrast to the July 2014 ruling in by the DC Circuit in American Meat Institute v. United States Dept. of Agriculture, (discussed here) that the applicable standard of review for compelled factual commercial disclosures under the First Amendment announced in Zauderer v. Office of Disciplinary Counsel applies only to disclosures in connection with voluntary advertising or product labeling.  In Zauderer the Supreme Court held that compelled commercial speech “rights are adequately protected as long as disclosure requirements are reasonably related to the State’s interest in preventing deception of consumers,” provided that the requirement is not “unjustified or unduly burdensome disclosure” so as to chill protected commercial speech.  Instead of analyzing the Rule under the more lenient Zauderer test, the panel instead said that the relevant test was the more stringent one established in Central Hudson Gas & Electric Corp. v. Public Service Commission that requires that a regulation compelling speech be tested under a four-part analysis: “At the outset, we must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.”

An amicus brief submitted by an interesting coalition of groups including, among others, Truth Initiative, Public Health Law Center, National Association of County and City Health Officials, Campaign for Tobacco-Free Kids, American Cancer Society Cancer Action Network and Tobacco Control Legal Consortium argues that if the panel’s ruling stand, many mandatory commercial disclosures required in other contexts, such as OSHA warnings to employees about workplace hazards, environmental notifications and mandatory disclosures to consumers in financial transactions would be in jeopardy under the more strict standard of review.

The amicus brief also argues that “Zauderer does not apply to disclosures relating to any issue around which there is public controversy, even if there is no controversy about the truth of the required disclosures.… Under the panel majority’s rule, the requirement that automobile manufacturers disclose mileage ratings and affix a label to the fuel compartment of vehicles capable of operating on alternative fuels,… would apparently be subject to heightened scrutiny because of public controversies about climate change… and disagreements about mandatory vaccinations would support heightened scrutiny of requirements that schools report immunization rates.” 

The brief next argues the panel’s  holding requiring proof that disclosures are effective in achieving the state’s interest could endanger the use of “such basic warning label regimes as those governing the presence of allergens in food, …. the safety of children’s toys,… and the serious side effects of prescription drugs.”