Ever since I blogged on the availability of insurance to protect executives from compensation clawbacks, reporters, seminar attendees and others ask me for more information on these policies. Until this week, there was no new information. Well, apparently Congress was listening too, because on Wednesday, Barney Frank introduced legislation that would prevent officers, directors and employees of financial firms from purchasing insurance to prevent them from having to pay a compensation clawback or a civil penalty. The Executive Compensation Clawback Full Enforcement Act of 2012 provides:
IN GENERAL.—An officer, director, employee, or other institution-affiliated party of a depository institution, depository institution holding company, or nonbank financial company who is required by a Federal financial regulatory law that provides for personal liability, or any rule or order promulgated by a Federal financial regulatory agency thereunder, to repay previously earned compensation or pay a civil money penalty—
- shall be personally liable for the amounts so owed; and
- may not, directly or indirectly, insure or hedge against, or otherwise transfer the risks associated with, personal liability for the amounts so owed.
Importantly, this proposed Act only applies to financial institutions and only clawback or personal liability required by federal financial regulatory law or agency rule. Thus, it would apply to FDIC clawbacks under Dodd-Frank Act Section 210 [see: FDIC Finalizes Rules for the Recoupment of Compensation from Executives of Failed Financial Institutions], but would not apply to clawbacks from executives outside the financial industry under Dodd-Frank Act Section 954.
Additionally, the proposed legislation does not preclude a financial institution from (i) providing funds or insurance to defend against a previously earned compensation recovery or civil money penalty or (ii) obtaining insurance that protects officers or directors from being held personally liable for unintentional outcomes associated with the ordinary exercise of trade or business judgment, unless the effects of such judgment result in personal liability under a Federal financial regulatory law that provides for personal liability.
Of course, Congress could modify this proposed legislation to broaden its application. However, as a practical matter, I am not sure that we should expect any legislation to pass out of Congress during the next six months.
As always, we will keep you apprised of future developments.
On June 1, 1918, the Battle of Belleau Wood began (ended June 26) during the German 1918 Spring Offensive in World War I, near the Marne River in France. The 3rd Battalion 5th Marines, commanded by Maj. Benjamin S. Berry, and the 3rd Battalion 6th Marines, commanded by Maj. Berton W. Sibley, advanced into Belleau Wood as part of the second phase of the Allied offensive. The Marines had to advance through a waist-high wheat field into murderous machine gun fire. One of the most famous quotations in Marine Corps lore came during the initial step-off for the battle when Gunnery Sergeant Dan Daly, recipient of two Medals of Honor and who had previously served in the Philippines, Santo Domingo, Haiti, Peking and Vera Cruz, prompted his men of the 73rd Machine Gun company forward with the words: "Come on, you sons of bitches, do you want to live forever?" The battle helped earn the Marines their well-deserved reputation as fierce fighters. After the battle, General Pershing (Commander of the Allied Expeditionary Force) said: "The deadliest weapon in the world is a Marine and his rifle!"