On July 1, 2015, the U.S. Securities and Exchange Commission proposed a new set of rules that would result in executives of U.S. publicly-listed companies to pay back incentive-based compensation in the event of a restatement of the company’s financial statements. The long-anticipated rules were designed to address the perceived unfairness that results when executives are permitted to retain incentives that they arguably may not have received had the company’s financials been accurately reported in the first place.
The SEC’s proposal would require national securities exchanges and associations to adopt rules requiring their listed companies to adopt, disclose and enforce so-called “clawback” policies. A clawback would be triggered in the event of an accounting restatement arising from a material error in the original financial statements. In the event of a restatement, the issuing company would be required to recover from executives any amount of incentive-based compensation he or she received that exceeds the amount the executive would have received had the incentive-based compensation been determined based on the accounting restatement.
Other notable aspects of the proposal include the following:
- The definition of who counts as an “executive” is quite broad, ranging from company presidents and chief financial officers, to vice presidents who head up business units, to anyone in a policymaking role in a company.
- The clawback operates on a “no fault” basis, meaning that executives would be required to return compensation even if they did not engage in any misconduct and even if they had nothing to do with the accounting error or the restatement.
- The proposal states that companies that fail to comply with the rules could potentially face delisting from the applicable securities exchange or association.