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New SEC Rules Will Impact Clawback Policies
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Companies must expand their clawback policies once new rules are enacted by the Securities and Exchange Commission.

Summary: Companies must expand their clawback policies once new rules are enacted by the Securities and Exchange Commission.

Although it was signed into law nearly five years ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act still contains gaps throughout its text, according to The U.S. Securities and Exchange Commission is still working to fill in parts of the law, and, recently, it worked to provide additional clarity on “clawbacks” of executive compensation.


Last year, the SEC examined the how cyber attacks may threaten Wall Street.

The proposed rules expand the scope of individuals who may have part of their compensation taken away if the company issues an accounting restatement. The rules must go through a 60-day comment period and an additional commission vote, companies should begin thinking about how they will respond to these changes.

The proposal passed 3-2 in the most recent vote. According to the National Law Review, “incentive-based compensation” subject to clawback is any compensation that is granted, earned, or vested based either entirely or in part on the attainment of a financial reporting measure.

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In 2009, Dewey settled a clawback suit.

Many were not happy with the proposed rules. Even Daniel Gallagher, an SEC commissioner, said the approach was “tortured and nightmarish.”

The standards create a new penalty for companies that are listed on SEC exchanges: incentive-based executive compensation that is tired to accounting-related metrics, total shareholder, or stock price may be clawed back if the company has to modify its financial statements. Companies must take back the difference between what the pay was with inaccurate statements and what it would be with the accurate statements.

All companies that are covered by the proposed rule will have to file their clawback plans with the SEC and include additional information, such as the names of executives who did not have compensation clawed back with the reasons why.

Most publicly traded companies have been required to have clawback policies under the Sarbanes-Oxley Act of 2002. Some have enhanced their requirements beyond what SOX requires, but it is likely that most companies will have to complete additional work on their policies now that the plans have been announced by the SEC.

Regina Olshan, a partner at Skadden, Arps, Slate, Meagher & Flom said, “I’d be surprised if there are many policies out there that don’t have to be revised.” Olshan is also the global head of the firm’s executive compensation and benefits group.



Olshan added that current requirements that companies use “give much more flexibility and discretion to the compensation committee about seeking recovery and determining the amount of recovery than is proposed under this rule.”

Last year, HP agreed to settle embezzlement, tax evasion, and bribery charges brought by the SEC for $108 million.

A significant change to the rules is how far back in time the claws may reach. SOX only required compensation to be taken back for one year after the accounting misstatement. The new rules will go back three years before the restatement was issued. However, the New York Times noted that if the cost of pursuing the executive would exceed any amount the company may recover, reclaiming a bonus may not be required.

Adam Myron, a shareholder at Richman Greer, added, “Recovery would also be required from current and former executive officers. So you night not even be employed by the company anymore, but you could be liable.”

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Another major change is that there will be an expansion in the type of executives who may have their compensation taken back. Under SOX, only the chief executive officer and the chief financial officer were eligible for clawbacks. Now, the principal accounting officer; vice presidents in charge of principal business units, divisions or functions; and others who perform policymaking functions for a company may be eligible.

It is not yet known whether this means the general counsel’s compensation is eligible for a clawback. Olshan commented, “It’s an interesting dynamic. General counsel are one group that are sometimes treated as executive officers and sometimes not. So I think that is one type of role that is very much split between whether or not it is considered an executive officer role. Certainly those that are executive officers will be subject to these clawback rules.”

SEC guidance seeks comments on whether chief legal officers should be named in these recovery policies, so the issue will eventually be addressed. Even if CLOs remain ineligible for clawbacks, companies will still need to address their organization charts to examine who may be subject to clawbacks and then use this study to create and enforce a compliant compensation recovery policy.

Yet another challenge is the fact that the SEC has noted that recovery of pay is “no-fault.” Therefore, it does not matter who made an accounting error that initiated changes to a company’s financial statements, other executive officers may be held liable anyway. Myron explained, “If that CFO’s compensation was based upon those incorrect revenues and they were misstated, then the innocent CFO is going to be required to pay back that money to the company under this proposed rule.”



There are still several months before these rules become final, but companies should begin preparing now. Susan Markel, a managing director in the financial advisory services group at AlixPartners, said, “I think it’s something that companies were waiting for, and now that it is here they really have to think hard about it. First, it’s making the extra effort to make sure they are getting financial statements right; and second, looking at the way they’re doing their compensation structures and if this is something they might want to think about changing.”

Markel added that those boards that wish to reduce the threat of clawbacks should consider changes to how executives are compensated. “I think it could be an inflection point,” she noted. A model based on discretionary pay may protect executives from such risks, for example.


Photo credit:, (Olshan), Flickr (Myron)



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