On July 1, 2015, following a 3-2 vote, the U.S. Securities and Exchange Commission (SEC) announced proposed rules that would implement the incentive-based compensation recovery (clawback) provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. With this announcement, the SEC has completed its task of producing proposals on all executive compensation rules required by Dodd-Frank.
The proposals would significantly expand the range of situations in which such clawbacks would be required. Under existing rules, clawbacks are triggered only in a narrow set of circumstances involving misconduct that results in the restatement of a company’s financial statements. Under this proposal, clawbacks would apply to all manner of accounting restatements due to material non-compliance of the company, including non-compliance that is the result of erroneous data.
Under the proposed rules, companies listed on U.S. stock exchanges, including foreign private issuers such as Canadian companies using the multijurisdictional disclosure system (MJDS), would be required to claw back top executives’ incentive pay if their financial statements were later found to be non-compliant with a financial reporting requirement under U.S. securities laws. This would apply to public companies of all sizes and to any executive officer who makes policy decisions and who has received incentive compensation, including stock options. Significantly, it would apply without regard to the executive officer’s responsibility for preparing the company’s financial statements. Previously, the rules applied only to CEOs and CFOs.
Under the proposals, companies would have to claw back any amount of incentive compensation that exceeds what the executive officer would have received based on the accounting restatement. Companies would also be required to disclose the names of executives who are more than 180 days past due on their paybacks, as well as the names of executives who are not targeted for clawbacks. However, the companies would only be required to disclose an aggregate number for clawbacks that are recovered, without naming individuals.
Companies that do not adopt such clawback policies could have their shares delisted by stock exchanges. Companies will have 60 days to comment on the proposals.