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Proposed SEC Clawback Rules to Cut Out Erroneous Compensation

Author: Dan Brecher|July 14, 2015

Earlier this month, the Securities and Exchange Commission (SEC) proposed new rules that would require companies to adopt policies that require executive officers to pay back incentive-based compensation that they were awarded erroneously.

Proposed SEC Clawback Rules to Cut Out Erroneous Compensation

Earlier this month, the Securities and Exchange Commission (SEC) proposed new rules that would require companies to adopt policies that require executive officers to pay back incentive-based compensation that they were awarded erroneously.

These SEC clawback rules for executive compensation, which are required under Section 954 of the Dodd Frank Act, are intended to improve the quality of financial reporting and provide enhanced accountability to investors.

“These listing standards will require executive officers to return incentive-based compensation that was not earned,” said SEC Chair Mary Jo White.  “The proposed rules would result in increased accountability and greater focus on the quality of financial reporting, which will benefit investors and the markets.”

Key provisions of the rules

The rule proposal is more than 100 pages, which does not make for light reading.  Below is a brief summary of several key provisions of Proposed Rule 10D-1 under the Securities Exchange Act:

  • Listing standards: The proposed rule mandates that national securities exchanges and associations establish listing standards that require companies to adopt recovery policies that, in the event of an accounting restatement, “claw back” incentive-based compensation from current and former executive officers that they would not have received based on the restatement.
  • Definition of executive officer: The rule’s definition of “executive officer” includes the company’s president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business unit, division or function, and any other person who performs policy-making functions for the company.
  • Applicability: The listing standards would apply to incentive-based compensation that is linked to accounting-related metrics, stock price or total shareholder return.  Recovery would apply to excess incentive-based compensation received by executive officers in the three fiscal years preceding the date a listed company is required to prepare an accounting restatement. In addition, recovery would be required without regard to fault.
  • Disclosures: Each listed company would be required to file its recovery policy as an exhibit to its annual report under the Securities Exchange Act.  In addition, a listed company would be required to disclose its actions to recover in its annual reports and any proxy statement that requires executive compensation disclosure if, during its last fiscal year, a restatement requiring recovery of excess incentive-based compensation was completed, or there was an outstanding balance of excess incentive-based compensation from a prior restatement.
  • Timelines: Under the proposed rule, the exchanges would be required to file their proposed listing rules no later than 90 days following the publication of the adopted version of Rule 10D-1 in the Federal Register. In addition, the listing rules must become effective no later than one year following the publication date. Listed companies would subsequently be required to adopt recovery policies no later than 60 days following the date on which the listing exchange’s listing rule becomes effective.
  • Violations: Companies would be subject to delisting if they fail to adopt a compensation recovery policy, disclose the policy in accordance with SEC’s rules, or comply with the policy’s recovery provisions.

The proposed SEC clawback rules are now available for public comment and may undergo substantial changes before they are finalized. However, businesses should begin to review any corporate documents that may be impacted by the new requirements, including company bylaws, articles, executive compensation agreements, and directors and officers insurance policies.

Proposed SEC Clawback Rules to Cut Out Erroneous Compensation

Author: Dan Brecher

These SEC clawback rules for executive compensation, which are required under Section 954 of the Dodd Frank Act, are intended to improve the quality of financial reporting and provide enhanced accountability to investors.

“These listing standards will require executive officers to return incentive-based compensation that was not earned,” said SEC Chair Mary Jo White.  “The proposed rules would result in increased accountability and greater focus on the quality of financial reporting, which will benefit investors and the markets.”

Key provisions of the rules

The rule proposal is more than 100 pages, which does not make for light reading.  Below is a brief summary of several key provisions of Proposed Rule 10D-1 under the Securities Exchange Act:

  • Listing standards: The proposed rule mandates that national securities exchanges and associations establish listing standards that require companies to adopt recovery policies that, in the event of an accounting restatement, “claw back” incentive-based compensation from current and former executive officers that they would not have received based on the restatement.
  • Definition of executive officer: The rule’s definition of “executive officer” includes the company’s president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business unit, division or function, and any other person who performs policy-making functions for the company.
  • Applicability: The listing standards would apply to incentive-based compensation that is linked to accounting-related metrics, stock price or total shareholder return.  Recovery would apply to excess incentive-based compensation received by executive officers in the three fiscal years preceding the date a listed company is required to prepare an accounting restatement. In addition, recovery would be required without regard to fault.
  • Disclosures: Each listed company would be required to file its recovery policy as an exhibit to its annual report under the Securities Exchange Act.  In addition, a listed company would be required to disclose its actions to recover in its annual reports and any proxy statement that requires executive compensation disclosure if, during its last fiscal year, a restatement requiring recovery of excess incentive-based compensation was completed, or there was an outstanding balance of excess incentive-based compensation from a prior restatement.
  • Timelines: Under the proposed rule, the exchanges would be required to file their proposed listing rules no later than 90 days following the publication of the adopted version of Rule 10D-1 in the Federal Register. In addition, the listing rules must become effective no later than one year following the publication date. Listed companies would subsequently be required to adopt recovery policies no later than 60 days following the date on which the listing exchange’s listing rule becomes effective.
  • Violations: Companies would be subject to delisting if they fail to adopt a compensation recovery policy, disclose the policy in accordance with SEC’s rules, or comply with the policy’s recovery provisions.

The proposed SEC clawback rules are now available for public comment and may undergo substantial changes before they are finalized. However, businesses should begin to review any corporate documents that may be impacted by the new requirements, including company bylaws, articles, executive compensation agreements, and directors and officers insurance policies.

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