July 2, 2015
SEC Issues Proposed Executive Compensation “Clawback” Rules
The U.S. Securities and Exchange Commission (SEC) issued proposed rules to require companies to establish policies to recover erroneously-awarded compensation to executives, also called a “clawback.” The rules, released on July 1, would implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, and would apply to the three fiscal years prior to when the company is required to file a restatement.
The proposed rules apply to “executive officers,” defined as the president, chief financial officer, chief accounting officer and vice presidents in charge of business units, as well as those who craft company policy. That proposed definition is broader than the Sarbanes-Oxley Act’s (SOX) clawback provision, which would only reach back one year.
The rules would direct the national securities exchanges and national securities associations to establish “listing standards that would require each issuer to develop and implement a policy providing for the recovery, under certain circumstances, of incentive-based compensation based on financial information required to be reported under the securities laws that is received by current or former executive officers, and require the disclosure of the policy.” The rules are aimed at recovering awarded compensation that exceeds what should have been paid according to an accounting restatement, if the restatement is required because of “material noncompliance” with securities laws.
Non-compliance with the rules could result in a company being delisted from national securities exchanges. Erroneous compensation would have to be recovered, regardless of the executive officer's accountability for any misconduct or responsibility for the incorrect financial statements. Companies would also be forbidden from exempting officers from recovery.
The proposed rules follow April 29 proposed rules that would require public companies to disclose the relationship between “executive compensation actually paid” and the financial performance of the company for select employees, implementing relevant provisions of the Dodd-Frank Act. These actions reflect continued efforts by the SEC to tie executive compensation more closely to actual financial performance of the company.