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SEC proposes executive compensation clawback rule

Published on: 02 Jul 2015

At its meeting yesterday, the SEC issued a proposed rule1 under the Securities Exchange Act of 1934 (the “Exchange Act”) that would require companies to adopt “clawback” policies on executive compensation. Specifically, the proposed rule, which is in response to a mandate in Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), would direct national securities exchanges and associations to establish listing standards that would require listed companies to develop, implement, and enforce policies that, in the event of a material accounting restatement, would result in the recovery or clawback of erroneously paid incentive-based compensation from executive officers.

As noted in the SEC’s press release on the proposed rule, recovery would be required for any incentive-based compensation received by executive officers “during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement to correct a material error.” The amount subject to clawback would be the incentive-based compensation received in excess of what would have been determined in accordance with the accounting restatement on a “no fault” basis (i.e., regardless of whether any misconduct occurred or whether the executive officer had any responsibility for the erroneous financial statements). The proposed rule indicates that incentive-based compensation would be “any compensation that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure.” A financial reporting measure includes accounting-related metrics (based on the accounting principles used in preparing the company’s financial statements and any measures derived wholly or in part from such financial information) as well as stock price and total shareholder return.

The proposed rule would apply to:

  • All listed companies, with the exception of certain registered investment companies that do not provide incentive-based compensation to their employees. There would therefore be no exemption for foreign private issuers, smaller reporting companies, emerging growth companies, and issuers of listed debt and preferred securities.
  • Any current or former “executive officer,” which is based on the definition of “officer” under Section 16 of the Exchange Act.

In addition, companies would:

  • Have discretion not to recover excess incentive-based compensation if pursuing recovery would be impracticable because (1) the cost of enforcing recovery exceeds the recoverable amount or (2) pursuing recovery for foreign private issuers violates home-country laws in specified circumstances.
  •  Be required to disclose their recovery policies as an exhibit to their Exchange Act annual report. To the extent that a restatement occurs and recovery is required, or to the extent that an outstanding balance of excess incentive-based compensation exists related to a prior restatement, companies would need to disclose additional information, including the aggregate excess incentive-based compensation amount attributable to the restatement, any outstanding balance, information related to instances in which the company decided not to pursue recovery, and information related to instances in which an executive officer did not make a timely payment. These proposed disclosures would be block-tagged with XBRL and included in the listed company’s annual reports and any proxy or information statements in which executive compensation disclosure is required.
  • Not be allowed to indemnify executive officers for losses resulting from recovery of erroneous incentive-based compensation. In addition, companies would not be allowed to pay premiums on insurance policies to cover an executive officer’s potential recovery obligations.

The proposed rule, which is the last executive compensation rule to be proposed under the Dodd-Frank Act mandates, is intended to improve the quality of financial reporting and benefit investors by providing enhanced accountability. The comment period ends 60 days after the proposal’s publication in the Federal Register.

For more information, see the SEC’s press release.


1 SEC Proposed Rule Release No. 33-9861, Listing Standards for Recovery of Erroneously Awarded Compensation.

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