Our colleague Joshua A. Stein, a Member of the Firm at Epstein Becker Green, has a post on the Retail Labor and Employment Law blog that will be of interest to many of our readers in the financial services industry: “Nation’s First Website Accessibility ADA Trial Verdict Is In and It’s Not Good for Places of Public Accommodation.”

Following is an excerpt:

After years of ongoing and frequent developments on the website accessibility front, we now finally have – what is generally believed to be – the very first post-trial ADA verdict regarding website accessibility.  In deciding Juan Carlos Gil vs. Winn-Dixie Stores, Inc. (Civil Action No. 16-23020-Civ-Scola) – a matter in which Winn-Dixie first made an unsuccessful motion to dismiss the case (prompting the U.S. Department of Justice (“DOJ”) to file a Statement of Interest) – U.S. District Judge Robert N. Scola, Jr. of the Southern District of Florida issued a Verdict and Order ruling in favor of serial Plaintiff, Juan Carlos Gil, holding that Winn-Dixie violated Title III of the ADA (“Title III”) by not providing an accessible public website and, thus, not providing individuals with disabilities with “full and equal enjoyment.”

Judge Scola based his decision on the fact that Winn-Dixie’s website, “is heavily integrated with Winn-Dixie’s physical store locations” that are clearly places of public accommodation covered by Title III and, “operates as a gateway to the physical store locations” (e.g., by providing coupons and a store locator and allowing customers to refill prescriptions). …

Read the full post here.

Featured on Employment Law This Week: The Department of Labor’s Fiduciary Rule will go into effect on June 9th.

The controversial rule will require financial professionals who advise clients on retirement accounts to promote suitable products and act in the best interests of their clients. Secretary of Labor Alexander Acosta announced in a Wall Street Journal op-ed that there is “no principled legal basis” to delay the rule, although full enforcement won’t begin until 2018. The department intends to issue a Request for Information to seek public opinion on revisions and related exemptions.

Watch the segment below and read our recent post.

The Department of Labor (“DOL”) previously announced the applicability date for the DOL’s fiduciary rule (the “Fiduciary Rule”) will be June 9, 2017.  On May 22, 2017, in an opinion piece for the Wall Street Journal, Labor Secretary Alexander Acosta disclosed that, despite the Administration’s agenda of deregulation, the regulators are required to following existing law and must enforce the Fiduciary Rule.  On the same date, the DOL announced, in Field Assistance Bulletin 2017-02 (“FAB 2017-2”), that during a transition period from June 9, 2017 until January 1, 2018, the DOL will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the Fiduciary Rule and related exemptions or treat those fiduciaries as being in violation of the Fiduciary Rule and related exemptions.  The DOL explained that its general approach to implementation will emphasize assisting plans, plan fiduciaries, and financial institutions with compliance, rather than citing violations and imposing penalties on these parties.

Under FAB 2017-2, during the transition period, financial institutions and advisors are still required to comply with the “impartial conduct standards” in dealing with consumers, which require advisors to follow fiduciary norms and basic standards of fair dealing, which is described in more detail here.

The DOL further stated in FAB 2017-2 that it may still make additional changes to the Fiduciary Rule and the related exemptions. Any such changes would be based on the DOL’s on-going analysis of the issues raised in President Trump’s February 3, 2017 memorandum related to the effect of the Fiduciary Rule on the ability of Americans to gain access to retirement information and financial advice.  The DOL stated that it intends to issue a Request for Information (“RFI”) seeking additional public input on possible changes to the Fiduciary Rule and related exemptions.

In conjunction with FAB 2017-2, the DOL also issued a set of 15 FAQs that cover a variety of topics, including:  implementation of the Fiduciary Rule and related exemptions during the transition period from June 9, 2017 to January 1, 2018; possible future changes to the Fiduciary Rule; robo-advice providers; communications that are not subject to the Fiduciary Rule; and the seller’s carve-out.  A summary of certain of the more significant FAQs follows:

  • The phased implementation schedule applies to the Best Interest Contract Exemption (requiring customers be protected through contractual provisions that advisors will act in the best interests of the customer) and the Principal Transaction Exemption (imposing standards for advice regarding transactions between employer retirement plans and IRAs) during the transition period. Absent further action from the DOL, the transition period ends on January 1, 2018 and full compliance with all of the conditions of these exemptions will be required for financial institutions and advisers.
  • Parties subject to the Fiduciary Rule need not come into compliance until 11:59 PM local time on June 9, 2017 and will not be treated as fiduciaries under the Fiduciary Rule before then.
  • The RFI to be issued by the DOL will ask for comment on whether an additional delay in the January 1, 2018 applicability date would allow for more effective retirement investor assistance and help avoid excessive expense. The DOL notes that, by granting additional time, it may be possible for firms to create a compliance mechanism that is less costly and more effective than the interim measures that that they might otherwise use. By way of example, the DOL mentions that the possible use of “clean shares” in the mutual fund market to mitigate conflicts of interest is likely not going to be ready for implementation by January 1 2018. “Clean shares” sold by the broker would not include any form of distribution-related payment to the broker. Instead, the financial institution could set its own commission levels uniformly across the different mutual funds that advisers may recommend. As long as the compensation is reasonable, the DOL states that this approach would be an optimal means of reducing conflicts of interest with respect to mutual fund recommendations.
  • During the transition period, financial advisers subject to the BIC Exemption will satisfy its requirements by complying with the impartial conduct standards, even if the adviser recommends proprietary products or investments that generate commissions or other payments that vary with the investment recommended. The DOL, however, expects financial institutions to adopt the policies and procedures that they reasonably conclude are necessary to ensure that the advisers comply with the impartial conduct standards during the transition period.

Take-Aways

Financial advisers and institutions that provide investment advice must be in compliance with the Fiduciary Rule as of 11:59 PM on June 9, 2017. For the BIC Exemption, Principal Transaction Exemption and the prohibited transaction exemptions amended by the DOL in connection with the Fiduciary Rule, implementation will be phased, beginning on June 9, 2017 with full compliance on January 1, 2018, subject to further action by the DOL. During the transition period, financial institutions and advisors must work diligently and in good faith to comply with the impartial conduct standards of the Fiduciary Rule.

While Congress’ attention has most recently been focused on the American Health Care Act, that bill will most likely not be the only proposed legislation that Congress will consider in 2017. It appears that a tax reform plan (the “2017 Tax Proposal”), which could also have a wide-reaching impact, is also on the agenda.

If the 2017 Proposal includes provisions relating to defined contribution retirement plans sponsored by private employers, such as 401(k) plans, the impact will be felt by employers and investment managers, as well as by plan participants. While the Trump Administration has stated that the current version of its 2017 Tax Proposal does not reduce pre-tax contributions to 401(k) plans, speculation continues that a later draft may include curtailment of these contributions or other changes with a similar impact.

Reduction of benefits under defined contribution plans as a means of raising tax revenues is not a novel idea. The Tax Reform Act of 2014 (the “2014 Tax Proposal”), which was introduced in 2014 by former Republican Congressman Dave Camp, included various provisions that would have potentially reduced the availability of, or tax benefits under, 401(k) plans and other defined contribution plans.  A summary of certain of these provisions follows, along with an analysis of the potential impact on participants, plan sponsors and investment managers:

Reduce pre-tax contributions. Under the 2014 Tax Proposal, participant pre-tax deferrals into 401(k) plans would have been limited to 50% of the Internal Revenue Code limits for pre-tax contributions and catch-up contributions. Participants could make contributions in excess of the 50% limit (up to 100% of the limits) as Roth contributions, which are made on an after-tax basis. For 2017, the limits on pre-tax and catch-up contributions are $18,000 and $6,00 respectively. This provision would have made similar changes to plans sponsored by tax-exempt organizations and state and local governments.

Impact:  For participants who traditionally make the maximum pre-tax deferrals permitted, this provision would increase their annual income taxes and potentially reduce their retirement savings.  This provision could also decrease participant investments in 401(k) plans, which would reduce the amount of retirement plan assets available for management by investment managers.  Sponsor of plans that do not permit Roth contributions may feel obligated to amend their plans to permit Roth contributions, which would involve expenses that generally could not be paid from the plan.

Accelerate required minimum distributions. The 2014 Tax Proposal would have required participants who became 5% owners of their employer after age 70 ½, but before retirement, to begin to take distributions by April 1 of the following year. Under current law, the required date is April 1 of the year following retirement. Additionally, the 2014 Tax Proposal would have required that distributions to certain beneficiaries be made within five years following the death of the participant.. Under current law, distributions may, in some cases, be over the life expectancy of the beneficiary.

Impact:  This provision would accelerate income taxes on the minimum required distributions to 5% owners and certain beneficiaries, as minimum required distributions are not eligible for rollover to an IRA. Investment managers would feel the impact of this change to the extent that the affected participants reduce their contributions to pay the taxes due on these accelerated required minimum distributions.

Suspend inflation adjustment to contribution limits. The 2014 Tax Proposal would have suspended the inflation adjustment for the annual limit on employee pre-tax contributions to 401(k) plans and other defined contribution plans. Under current law, these limits are indexed annually for inflation.

Impact:  Suspension of the inflation adjustment on pre-tax contributions would reduce contributions to defined contribution plans.  This reduction would result in increased income taxes and potentially reduced retirement savings for participants and reduced retirement plan assets available for management by investment managers.

No new SEPs or SIMPLE 401(k) plans. The 2014 Tax Proposal would have prohibited employers from establishing new Simplified Employee Pensions (“SEPs”) and Savings Incentive Match Plans (“SIMPLE 401(k)s”). Under current law, certain employers may make contributions to SEPs up to the maximum permitted, which, for 2017, is the lesser of $54,000 and 25% of compensation. In a SIMPLE 401(k), which is available to employers with no more than 100 employees, participants may make deferrals on a pre-tax basis (up to $12,500 in 2017) and employers make either a 2% matching contribution for the employee deferrals or a 3% profit-sharing contribution to all eligible employees.

Impact:  By prohibiting adoption of new SEPs and SIMPLE 401(k)s, this provision would have restricted employers’ ability to design a compensation and benefits program that met the needs of their business and employees.  Their employees would be denied the ability to make pre-tax contributions and to defer income tax on those deferrals to a later date, which would affect their current tax obligations and, potentially their retirement savings.  This provision also would reduce the amount of retirement plan assets available for management by investment managers.

Conclusions

While the details of the final version of the 2017 Tax Proposal are not yet knowable, the 2014 Tax Proposal provides some insight into the types of provisions that ultimately could be included. Given the potential impact of the 2017 Tax Proposal on defined contribution plans, plan sponsors may want to defer significant amendments to their plans until the extent of that impact is more certain.

Amid challenges regarding Philadelphia’s upcoming law prohibiting employers from requesting an applicant’s salary history, the City has agreed not to enforce the upcoming law until after the court has finally resolved the injunction request.

The law, which was set to become effective May 23, 2017, has been challenged by the Chamber of Commerce for Greater Philadelphia (the “Chamber”). The Chamber’s lawsuit alleges that the pending law violates the First Amendment by restricting an employer’s speech because, among other reasons, “it is highly speculative whether the [law] will actually ameliorate wage disparities caused by gender discrimination.” It is also alleged that the law violates the Commerce Clause of the U.S. Constitution, the Due Process Clause of the Fourteenth Amendment, and Pennsylvania’s Constitution as well as its “First Class City Home Rule Act” by allegedly attempting to restrict the rights of employers outside of Philadelphia.

On April 19, a judge for the Eastern District of Pennsylvania stayed the effective date of the law, pending the resolution of the Chamber’s motion for a preliminary injunction. Prior to resolving the injunction, the parties will first brief the court on the Chamber’s standing to bring the lawsuit. This issue, regarding whether the Chamber is an appropriate party to bring this lawsuit, will be fully briefed by May 12, 2017, before the law is set to become effective. However, there are several other issues to be resolved as part of the lawsuit. The City’s decision to stay enforcement of the pending law until all issues are resolved is intended to help employers and employees avoid confusion during the pendency of the lawsuit.

Although the City of Philadelphia will not enforce this law in the interim, employers with any operations in Philadelphia should review their interviewing and hiring practices in case the lawsuit is decided in favor of the City. Further, employers in Massachusetts and New York City will also be subject to similar restrictions on inquiring about an applicant’s salary history when those laws go into effect. Massachusetts’ law is scheduled to become effective in July 2018, and New York City’s law will become effective 180 days after Mayor de Blasio signs the law, which may occur as soon as this week.

Advisers and financial institutions that provide fiduciary investment advice have an additional 60 days before having to comply with the final regulations defining who is a fiduciary under the Employee Retirement Income Security Act of 1974, as amended (the “Fiduciary Rule”).  On April 4, 2017, the Department of Labor (“DOL”) issued a final rule (the “Final Rule”), which delays the applicability date of the Fiduciary Rule until June 9, 2017 and also extends for 60 days the applicability dates of the Best Interest Contract Exemption (the “BIC Exemption”) and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRA (the “Principal Transaction Exemption” and collectively, the “Exemptions”).  Advisers and financial institutions relying on the Exemptions as of June 9 need only comply with the impartial conduct standards (as explained below), as the remaining conditions of the Exemptions will not become effective until January 1, 2018, if not withdrawn or revised.  The 60-day delay was proposed by the DOL on March 2, 2017, in response to a directive from President Trump to review the Fiduciary Rule (the “President’s Memorandum”), as explained in this article.

In the Final Rule, the DOL explains that, while its review of the Fiduciary Rule is likely to take more than 60 days, a delay in the application of the Fiduciary Rule and impartial conduct standards for an extended period would not be appropriate, given the DOL’s previous findings of ongoing injury to retirement investors. The impartial conduct standards require advisers and financial institutions to:

  • Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components – prudence and loyalty;
  • Charge no more than reasonable compensation; and
  • Make no misleading statements about investment transactions, compensation, and conflicts of interest.

For this reason, the DOL concludes that it can best protect the interests of retirement investors in receiving sound advice, provide greater certainty to the public and minimize the risk of unnecessary disruption by extending the applicability date to June 9, 2017 for the Fiduciary Rule and the impartial conduct standards in the Exemptions. Compliance with the other conditions of the Exemptions, such as requirements to make specific disclosures and representations of fiduciary compliance in written communications with investors is not required until January 1, 2018, by which time the DOL intends to complete the examination directed by the Presidential Memorandum.

The DOL cites the following advantage of the approach set forth in the Final Rule:

  • With the June 9,2017 applicability date for the impartial conduct standards, provides retirement investors with the protection of basic fiduciary norms and standards of fair dealing, while honoring the directive in the President’s Memorandum to review any potential undue burdens.
  • By delaying implementation of the other conditions of the Exemptions until January 1, 2018, eliminates or mitigates the risk of litigation in the IRA marketplace, which was one one of the chief concerns expressed by the financial services industry in connection with the Fiduciary Rule and the Exemptions.
  • Addresses concerns of the financial services industry about uncertainty over whether they need to immediately comply with all of the requirements of the Exemptions.

The DOL leaves open the possibility that it may further extend the January 1, 2018 applicability dates or to grant additional interim relief. The DOL states that the Final Rule does not foreclose the DOL from considering and making changes to the Fiduciary Rule and the Exemptions, based on new evidence or analyses developed pursuant to the President’s Memorandum.

Takeaways for Advisers and Financial Institutions

Effective June 9, 2017, advisers and financial institutions that provide fiduciary investment advice to retirement plan investors will have to comply with the Fiduciary Rule and the impartial conduct standards in the Exemptions. Since, in the view of the DOL, these provisions are generally the least controversial aspects of the DOL’s changes to the rules related to fiduciary investment advice, compliance with the June deadline most likely will not be difficult, especially in light of the 60-day delay.

However, advisers and financial institutions should also look past June 9 to the January 1, 2018 deadline and determine if they will delay or adjust their implementation schedule to meet that deadline. Those advisers and institutions that assume the Fiduciary Rule and Exemptions will be significantly revised or rescinded may want to consider significantly delaying the implementation process pending additional guidance from the DOL.  Alternatively, some of these advisers and institutions may want to consider whether they will incorporate all or portions of the Fiduciary Rule and Exemptions into their business practices, even if rescinded by the DOL.

Last August, we reported on two significant cease-and-desist orders issued by the SEC that, for the first time, found certain language in the confidentiality and release provisions of separation agreements to violate the SEC’s Rule 21F-17(a), which precludes anyone from impeding any individual (i.e., a whistleblower) from communicating directly with the agency.[1] Since then, the SEC has continued its aggressive oversight of separation and confidentiality agreements, with substantial repercussions for some employers. These orders, a select number of which we summarize here, have companies engaging in a serious review and rethinking of their confidentiality restrictions and other relevant provisions in their agreements and handbooks, and considering whether and what remedial steps to take proactively to cure any issues with the language in these key documents.

In Anheuser-Busch InBev SA/NV (Sept. 28, 2016), the company entered into a separation agreement in late 2012 with a specific employee after his termination and subsequent mediation of various alleged employment law claims. The separation agreement contained provisions (i) prohibiting the employee from disclosing confidential or proprietary company information, with no carve-out for reporting to government agencies; (ii) prohibiting the employee from disclosing the substance of the separation agreement; and (iii) imposing a $250,000 liquidated damages provision in the event that the employee breached the confidentiality provisions. After signing the agreement, the employee, who had been voluntarily communicating with SEC in connection with an ongoing investigation, ceased doing so.

The cease-and-desist order—which is a negotiated resolution of the matter once the SEC determines that a company has violated its rules or regulations—did not require the company to make any additional changes to its separation agreements because, in September 2015, the company had amended separation agreements to state:

I understand and acknowledge that notwithstanding any other provision of this Agreement, I am not prohibited or in any way restricted from reporting possible violations of law to a governmental agency of entity, and I am not required to inform the Company if I make such reports.

The order required the company to contact only certain former employees identified by the SEC to inform them that they were not prohibited from providing information to the SEC, rather than all employees who had signed separation agreements since the rule was implemented in August 2011, as has been required in other cases. In addition, unlike other cases, it appears that there was no separate monetary penalty against the company for violating Rule 21F-17(a).

In NeuStar, Inc. (Dec. 19, 2016), the company’s severance agreements included a non-disparagement clause with the following language:

Except as specifically authorized in writing by NeuStar or as may be required by law or legal process, I agree not to engage in any communication that disparages, denigrates, maligns or impugns NeuStar . . . including but not limited to communication with . . . regulators (including but not limited to the Securities and Exchange Commission . . .) [emphasis added].

Any breach of this clause by the employee resulted in the required forfeiture of all but $100 of the severance paid under the agreement. The SEC found that “at least one” former employee was impeded by this clause from communicating with the agency—although the SEC does not hesitate to find violations of Rule 21F-17(a) even where there is no evidence that anyone has actually been impeded.

To settle the matter, the company agreed to pay a civil penalty of $180,000 and to contact 246 former employees to inform them that the severance agreements they signed between August 12, 2011, and May 21, 2015, did not prevent them from communicating concerns about potential violations of law or regulation to the SEC. No remedial revisions to the company’s template severance agreement were required because the company had voluntarily, after commencement of the investigation, removed the reference to “regulators” from the non-disparagement clause and included a more common provision that stated, “In addition, nothing herein prohibits me from communicating, without notice to or approval by NeuStar, with any federal government agency about a potential violation of a federal law or regulation.”

Most recently, in HomeStreet, Inc. (Jan. 19, 2017), certain severance agreements used by the company had contained common waiver language used, in form and substance, by many employers:

This release shall not prohibit Employee from filing a charge with the Equal Employment Opportunity Commission or discussing any matter relevant to Employee’s employment with any government agency with jurisdiction over the Company but shall be considered a waiver of any damages or monetary recovery therefrom [emphasis added].

The SEC previously found that employees might interpret such waivers as applying to the agency’s whistleblower monetary incentive award program and, therefore, would unlawfully impede employees from coming forward to the SEC or reporting potential violations of the securities laws. The SEC reached the same conclusion in this case.

Prior to the investigation, however, the company had voluntarily revised its standard severance agreement to substitute the following:

Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with any federal, state or local government agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be commenced by any Government Agency including providing documents or other information without notice to the Company. This Agreement does not limit the Employee’s right to receive an award for information provided to any Government Agencies [emphasis added].

Thus, the cease-and-desist order did not require further revisions to the severance agreement because the foregoing language largely tracks revised language that the SEC had required in one of the previous orders issued last summer. Notwithstanding its proactive revisions to its agreements, the company still had to agree to a $500,000 civil penalty and to contact certain former employees who had signed the agreement to provide a link to the order and inform them that severance agreements did not prevent them from reporting information to the SEC or seeking and obtaining a whistleblower award from the SEC.

The NeuStar and HomeStreet orders serve to highlight that, even when a company has revised its agreements voluntarily to comply with Rule 21F-17(a), the SEC may still impose monetary penalties and potentially burdensome and undesirable obligations to contact former employees who have signed problematic separation agreements to inform them that, notwithstanding the money they were paid in conjunction with their separation agreements, they remain free to report any company wrongdoing—real or perceived—to the SEC.

What Employers Should Do Now

Companies wishing to avoid SEC scrutiny should do the following:

  • Review current separation and severance agreement templates to determine whether they are in compliance with Rule 21F-17, which would include a review of provisions such as, among others,
    • future monetary waivers,
    • non-disclosure of confidential information, and
    • non-disparagement clauses.
  • If necessary, work with legal counsel to determine appropriate revisions or “carve-outs” to bring those agreement templates into compliance.
  • Discuss with legal counsel whether to take affirmative steps to remedy past uses of confidentiality or waiver provisions that would be unlawful under the SEC orders.
  • Review other types of confidentiality and waiver agreements with employees, in whatever form they are used, to ensure that those agreements do not similarly violate Rule 21F-17.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

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[1] See the Epstein Becker Green Act Now Advisory titled “SEC Finds Certain Separation Agreement Provisions Unlawful Under Dodd-Frank Whistleblower Rule” (Aug. 18, 2016).

Equal pay for equal work has been required for many years, but, as of late, this rather static requirement has become the focal point of regulators, state and local governments, and activists. In order to achieve equality in compensation, the efforts are becoming increasingly creative with new pushes for transparency, privacy, and/or disclosures. Financial services firms are often the target and should not only be aware of these innovative measures and requirements but also consider what proactive actions to put in place.

Eliminating Pay Secrecy

The National Labor Relations Board made it clear years ago that “employees” (as defined under the National Labor Relations Act) could not be restricted from discussing the terms and conditions, including compensation, of their employment, based on their rights to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Yet, many employers continue to have policies or agreements, or informal rules, which restrict employees from doing so. Recently, there has been a concentrated effort to prevent employers from designating employee compensation as “confidential” and/or restricting discussion of it. For example, in connection with the former administration’s determination to eradicate equal pay impediments in the workplace, in a 2014 executive order, then-President Barack Obama prohibited federal contractors from retaliating against employees who talk about their salaries or other compensation information.

A number of states and localities that have been passing their own equal pay laws have been addressing pay secrecy as well. Such states include the following:

  • California: The California Fair Pay Act, which became effective as of January 1, 2016, takes pay secrecy head on. It not only restricts policies that prevent employees from discussing their own compensation but also prevents them from prohibiting an employee from disclosing the employee’s own wages, discussing the wages of others, inquiring about another employee’s wages, or aiding or encouraging any other employee to exercise his or her rights under the law.
  • Connecticut: Connecticut’s Act Concerning Pay Equity and Fairness (“Connecticut Act”) prohibits an employer from (i) barring employees from disclosing or discussing the amount of his or her wages or the wages of another employee of such employer that have been disclosed voluntarily by such other employee, (ii) inquiring about the wages of another employee of such employer, or (iii) requiring employees to sign documents waiving their rights under the Connecticut Act or taking actions against employees. The Connecticut Act does note, however, that it will not be construed to require any employer or employee to disclose the amount of wages paid to any employee.
  • New York: New York State recently enacted the Achieve Pay Equity Act (“APEA”), which modified the existing equal pay law in a number of respects. One particular change bars an employer from prohibiting an employee from “inquiring about, discussing, or disclosing” the employee’s wages or the wages of another employee. However, the APEA specifically provides for limitations. The APEA states that employers may maintain, in a written policy, reasonable workplace and workday limitations on the time, place, and manner for inquiries about, discussion of, or the disclosure of wages. Also, the APEA provides that no employee is required to discuss his or her wages with another employee, and employees who have access to other employees’ wage information as a result of their job duties (e.g., human resources staff) may be limited in the disclosure of such information by their employer.

Prior Compensation: Don’t Ask, Don’t Tell

Another focus of equal pay activists has been on employers’ asking employees for their current pay information to be used in determining their pay rates. Opponents to this practice claim that it perpetuates wage gaps for women that may “follow” women from job to job. Massachusetts is the first state to take the issue head on and prohibit employers from seeking information about applicants’ compensation history in the hiring process. The Massachusetts equal pay law, which becomes effective in 2018, bars employers from asking about an applicant’s salary history on an application or during interviews for employment. Pursuant to the law, after an offer of employment with compensation terms has been negotiated and made, a prospective employer may seek or confirm a prospective employee’s wage or salary history.

Activist Investors Turn Their Sights to Wall Street

In an effort to push for pay equality, activist investors have begun to exert pressure on large financial institutions to disclose compensation information. Such investors have already filed proposals with a number of large financial services institutions, such as Citigroup, Bank of America Corp., and Wells Fargo & Co. The investors are demanding that these institutions publish statistics about the race and gender of employees, as well as compensation information. Last year, activist investors took similar initiatives with respect to large technology firms, the majority of which complied with making public pay gap information and taking steps to close any gaps.

What Employers Should Do Now

In light of this increased focus on pay information, policies, and procedures, employers should do the following:

  • Undertake pay audits to determine any disparities and the genesis of such disparities. Pay audits should be conducted with legal counsel to maintain the information in a privileged manner as much as possible.
  • Thoroughly review their pay-setting policies and procedures. If you are a Massachusetts employer, take specific steps to ensure that pay information is not improperly requested through the hiring process. While most states and localities do not prohibit an employer from asking employees for their pay histories, relying solely on such information for setting starting pay may lead to pay inequities.
  • Determine appropriate compensation ranges based on factors other than pay history—such as market conditions, job requirements, experience, and skills, among other things.
  • When providing raises or determining bonuses, consider and document an employer’s rationale for compensation decisions in order to defend against any claims of inequity based on gender or another improper reason.
  • Consider training managers not to restrict (or appear to restrict) employees from discussing wages in compliance with applicable local laws. Managers may be unfamiliar with the new focus on prohibiting pay secrecy and could be improperly handling such matters.
  • Review their policies and agreements as they relate to sharing pay information to make sure that they are compliant with applicable laws, contain non-retaliation provisions, and direct employees to avenues for complaints.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

A month into the Trump presidency, there have been a number of important statements from the executive branch on the regulation of executive compensation impacting the financial services industry. On February 3, 2017, President Trump issued a statement on the core principles for regulating the U.S. financial system (“Core Principles”). The statement requires the Treasury and all heads of member agencies of the Financial Stability Oversight Council to report within 120 days (by June 3, 2017) all existing laws, treaties, guidance, regulations, etc., that promote the Core Principles, and all such laws, etc., that inhibit the Core Principles. The Core Principles provide some insight into future regulation or repeal efforts by the Trump administration impacting executive compensation.

The Core Principles

The Core Principles include empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth. This statement appears to favor a more hands-off approach to individual investment decisions. The Core Principles also require regulations that foster economic growth through more rigorous regulatory impact analysis addressing “systemic risk and market failures, such as moral hazard and information asymmetry.” This would presumably require a more extensive review of the regulatory cost of compliance favoring deregulation. However, the focus on systemic risk arising from moral hazard and information asymmetry could impact executive compensation to the extent compensation practices are seen to further individual conduct that could lead to systemic risk. The Core Principles further require regulations to enable American companies to be competitive with foreign firms in domestic and foreign markets and to advance American interests in international financial regulatory negotiations and meetings. The other Core Principles include preventing taxpayer-funded bailouts; making regulations more efficient, effective, and appropriately tailored; and restoring public accountability within federal financial regulatory agencies and rationalizing the regulatory framework, arguably all in favor of deregulation or possibly regulation by stated principles rather than by strict construction.

Potential Impact on Executive Compensation

Based on review of the Core Principles and recent regulatory statements from the Trump administration, including the reduction of two regulations for every one regulation added, the re-proposed rules under Section 956 of Dodd-Frank are not likely to be approved in their final form given the scope and breadth of the regulations. Arguably, these rules would go against the Core Principles favoring deregulation and could inhibit American competitiveness with foreign firms in domestic and foreign markets as to the recruitment and retention of talent. Also, given that the re-proposed regulations were based on international executive compensation standards (particularly, regulatory guidance promulgated in Europe), adopting the re-proposed rules might not be viewed as advancing American interests in international financial regulatory negotiations.

Presumably in furtherance of these Core Principles, on February 6, 2017, the Acting Chairman of the SEC, Michael S. Piwowar, issued a statement requesting comments from the public within the next 45 days (by March 23, 2017) on the challenges that issuers are facing with compliance with the CEO pay ratio disclosure rule under Dodd-Frank. The CEO pay ratio disclosure rule requires public companies to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO. Gathering data to prepare the calculation has been challenging for large employers with a diverse domestic and global workforce, and the ratio itself has been criticized as not providing meaningful information. Based on comments, the SEC Acting Chairman stated that SEC staff will be directed to determine whether additional relief is appropriate. As to the review of other executive compensation provisions under Dodd-Frank that are currently in effect, such as say-on-pay and clawback requirements, they likely will be subject to the overall regulatory review, but their repeal might not be first on the agenda.

The final area of interest is President Trump’s pre-election criticisms of the treatment of carried interests, which generally are tax-favored partnership interests that, when sold, frequently generate profits that are paid to private equity fund managers as compensation. However, that compensation may be taxed at a long-term capital gains rate of 20 percent or less, rather than as ordinary income. Thus far under the new presidency, there have been no official statements in this area, but the discussion of carried interests could become part of the broader tax reform agenda expected from the Trump administration.

This year, financial services organizations can expect a new direction on executive compensation to take shape.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

The Immigration Law Group at Epstein Becker Green released a Special Immigration Alert that will be of interest to our readers.

Topics include:

  1. President Trump Issues Revised Executive Order on Travel
  2. USCIS Suspends Premium Processing for H-1B Petitions Starting April 3, 2017: All H-1B Petitions, Including H-1B Cap Petitions, Are Affected!
  3. Use of New Form I-9 Is Now Mandatory
  4. IRS Announces That Delinquent Taxpayers Face Revocation/Denial of U.S. Passports
  5. DHS Issues Two New Memos on Enforcement/Border Security

Read the full alert here.