Five years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the U.S. Securities and Exchange Commission (“SEC”) has issued the last of its proposed rules to implement the executive compensation provisions of Dodd-Frank. 

Highlights of Proposed Rules:

  • Clawbacks are triggered by an accounting restatement due to a company’s material non-compliance with any financial reporting requirement under the securities laws.
  • Covers incentive-based compensation tied at least in part to financial reporting measures, paid in the three years preceding the date the restatement is required.
  • Covers all listed companies, even foreign companies, but not certain registered investment companies.
  • Covers all current and former executive officers, regardless of misconduct or responsibility.
  • Companies are prohibited from indemnifying executive officers against clawbacks or from paying insurance premiums to fund recovery obligations.
  • Many companies may need to update their existing clawback policies and agreements.

On July 1, 2015, a divided SEC proposed rules (the “Proposed Rules”) to implement Section 954 of Dodd-Frank that would require national securities exchanges (the “Exchanges”) to establish listing standards that would provide that listed companies would be subject to delisting if they do not:

  • adopt a compensation recovery policy (a “clawback policy”);  
  • disclose the clawback policy in accordance with SEC rules; and
  • comply with the clawback policy’s provisions. 

The clawback policy would need to provide that in the event the company is required to prepare an accounting restatement due to its material noncompliance with financial reporting requirements, the company will recover from its executive officers compensation they received in excess of what they would have been paid under the accounting restatement. The Proposed Rules would also require disclosure of information about actions taken pursuant to the clawback policy.1

This Dechert OnPoint provides a brief update on the status of the Dodd-Frank executive compensation provisions and a summary of the SEC’s newest Proposed Rules designed to implement the Dodd-Frank clawback provision.


In the wake of the Enron and WorldCom collapses and the 2008 financial crises that erased more than US$16 trillion in household wealth and deeply undermined confidence in the integrity of the financial markets, Congress enacted several laws to address issues that it believed contributed to those circumstances. Congress gave particular focus to what it believed was the misalignment of executive compensation and the interests of company shareholders, identifying such misalignment as a key issue in causing the near collapse of the financial system.2 Congress included numerous executive compensation provisions in the laws it passed to revamp the financial system, including in the Sarbanes-Oxley Act of 2002 (“SOX”), the Troubled Asset Relief Program, and Dodd-Frank.3

The Dodd-Frank Executive Compensation Provisions

Sections 951-957 of Dodd-Frank address executive compensation. Congress has authorized the SEC to implement Dodd-Frank’s executive compensation provisions. The SEC has already adopted final rules implementing certain of these provisions, and has proposed rules to implement the remaining provisions.

Final Dodd-Frank Rules

  • Section 951 (requiring a non-binding shareholder vote on executive compensation, the so-called “say-on-pay” rules);4 and
  • Section 952 (governing independence of compensation committees and their advisors).5

Proposed Dodd-Frank Rules

  • Section 953(a) (which would require public companies to demonstrate the relationship between compensation actually paid and the financial performance of the company);6
  • Section 953(b) (which would require public companies to disclose the ratio of the median employee pay to CEO pay);7
  • Section 955 (which would require the disclosure of employee and director hedging);8 and 
  • Section 956 (which would prohibit covered financial institutions from offering types of incentive-based compensation that could provide for excessive compensation or could expose the institution to certain inappropriate risks).9

SOX and Dodd-Frank Clawback Provisions

In 2002, Congress began to address the recoupment of incentive compensation awarded to senior executives if it is later determined that misconduct contributed to a financial statement restatement. Section 304 of SOX provides that the CEO and CFO of a public company must reimburse the company for incentive-based compensation in the event the Company is required to prepare an accounting restatement.10 Under the terms of Section 304, the clawback applies only where the restatement was a result of misconduct, and it applies to compensation received during the 12-month period following the filing of the misstated financials.11 Following the recent financial crisis, in 2010 Congress passed Dodd-Frank, including Section 954, which was intended to broaden the scope of the recovery provisions provided in SOX.

The Proposed Dodd-Frank Clawback Rules

The Proposed Rules would expand the scope of the existing clawback provisions, by, among other things:

  • requiring the development and implementation by public companies of policies governing clawbacks; 
  • broadening the scope of executives required to repay incentive-based compensation based on financial misstatements; and 
  • applying clawbacks even to situations where no misconduct occurred.

Clawback Trigger

Under the Proposed Rules, the clawback requirement would be triggered by any accounting restatement that is required due to the company’s material non-compliance with the financial reporting requirements under the federal securities laws. There is no requirement under the Proposed Rules that any misconduct occurred in connection with the problematic accounting that necessitated a restatement. There is also no requirement that the executive officer had a role in the preparation of the company’s financial statements. Rather, the Proposed Rules impose a strict liability standard.

No Indemnification or Insurance

Under the Proposed Rules, companies would be prohibited from mitigating the consequences of their clawback policies by indemnifying any current or former executive officer against the loss of compensation clawed back. The company would similarly be prohibited from paying the premiums on an insurance policy that would have the same effect.

Incentive-Based Compensation Subject to Clawback

Under the Proposed Rules, the company’s clawback policy would have to provide that the company will recover from any current or former executive officer an amount of incentive-based compensation equal to the excess, if any, of the amount that was paid to the executive officer, in the three years preceding the date on which the company was required to prepare the restatement, over the amount that would have been paid to the executive officer based on accurate financial data.

Under the Proposed Rules, “incentive-based compensation” includes “any compensation that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure.” “Financial reporting measures” are measures that are determined and presented in accordance with the accounting principles used in preparing a company’s financial statements and any measures derived wholly or in part from such financial information. Incentive-based compensation also includes compensation tied to stock price and total shareholder return (“TSR”).

The definition of “incentive-based compensation” does not include every form of executive compensation, however. Service-based and time-based awards whose grant or vesting is not based upon the attainment of any financial reporting measures or upon stock price or TSR are not incentive-based compensation. Thus, incentive plan awards that are granted, earned or vested based solely upon the occurrence of certain non-financial events would not be “incentive-based compensation.” This would include awards tied to, for example:

  • opening a specified number of stores,
  • obtaining regulatory approval of a product,
  • consummating a merger or divestiture,
  • completing a restructuring plan, or
  • financing a transaction. 

This is an important point, because companies may begin shifting their executive incentive-based compensation to service-based and time-based awards, to avoid the issues associated with the Proposed Rules.12

Covered Companies

Under the Proposed Rules, the clawback and disclosure requirements would apply to all Exchange-listed companies, including foreign private issuers, emerging growth companies, smaller reporting companies, controlled companies, and issuers of listed debt, but excluding certain registered investment companies. The failure of an Exchange-listed company to comply with the clawback and disclosure requirements would subject the company to delisting.

Covered Executives

The Proposed Rules would apply to all current and former executive officers, not only to named executive officers, and would apply regardless of whether the executive was at fault with respect to the misstated financials.

Executive officers covered under the Proposed Rules would include, among others a company’s:

  • president,
  • principal financial officer,
  • principal accounting officer (or if there is no such accounting officer, the controller),
  • any vice-president in charge of a principal business unit, division, or function (such as sales administration or finance), and
  • any other officer who performs a policy-making function.13

Executive officers of a company’s subsidiaries would also be covered by the clawback policy if they perform policy-making functions for the parent company.

Disclosure Requirements

Under the Proposed Rules, companies would be required to disclose both the substance of their clawback policies and how they implement their policies in practice. Companies would be required to disclose among other things: 

  • whether a restatement that required recovery of excess compensation was completed;
  • whether the company has an outstanding balance of excess incentive-based compensation; and
  • the estimates used to determine the excess incentive-based compensation attributable to a restatement, if the financial reporting measure at issue related to a stock price or a TSR metric.

Further, as discussed below, if a company chooses not to pursue recovery under certain applicable exceptions, additional disclosure may be required. The new disclosure would require XBRL tagging.

A company’s clawback policy would be required to be disclosed and filed as an exhibit to the company’s annual reports on Form 10-K or 20-F.


Under the Proposed Rules, recovery would not be required to be sought where the board’s compensation committee14 determines that:

  • pursuing such recovery would be impracticable because the direct expense of seeking recovery would exceed the recoverable amounts; or
  • pursuing such recovery would violate applicable foreign law for a foreign private issuer.

Before relying on the enforcement cost exception, the company would first need to make a reasonable attempt to recover that incentive-based compensation. In addition, the company would be required to document its attempts to clawback the required incentive-based compensation, and provide that documentation to the applicable Exchange. 

Before relying on the violation of foreign law exception, the company first would need to obtain an opinion of foreign local counsel, acceptable to the Exchange, stating that recovery would result in such a violation. In addition, the company must show that the relevant foreign law was adopted in the foreign country prior to the date the Proposed Rules were published in the Federal Register.


Many public companies will be affected by these Proposed Rules, because such companies often rely heavily on incentive-based compensation, and in particular TSR metrics, to compensate their executives. In addition to implementing a clawback policy that conforms to the Proposed Rules, public companies may also need to review and amend their incentive-based compensation plans and employment agreements to ensure that they conform to the clawback requirements. Finally, public companies will need to be careful regarding how they draft their clawback policies to ensure appropriate treatment of the clawback for tax purposes, including under the tax rules on nonqualified deferred compensation. For example, in the event a clawback is applied to deferred compensation, acceleration of the deferred compensation in order to enable the executive to repay the company may potentially trigger extra income tax, interest and penalties under Section 409A of the Internal Revenue Code.

Next Steps

If the Proposed Rules become effective, Exchanges would be required to file their proposed amended listing standards within 90 days after publication of the SEC’s final rules in the Federal Register. The Exchange listing rules will need to become effective within a year following publication of the final rules in the Federal Register. Exchange-listed companies would be required to comply with the amended listing standards within 60 days after the date on which the listing standards become effective. Due to this time line and the anticipated volume of comments on the Proposed Rules, currently we do not expect clawback policies to be required for the 2016 proxy season. However, Exchange-listed companies that do not already have a clawback policy in place that complies with the Proposed Rules may wish to begin considering the preparation of a clawback policy in order to be ready to comply with the rules when they are ultimately finalized.

The Proposed Rules will be subject to a 60-day public comment period commencing on their publication in the Federal Register. The Proposed Rules were approved by a 3-2 vote, and a second vote will be required following the conclusion of the comment period before the Proposed Rules could become effective.

The SEC has specifically requested comments on a number of issues, including what factors boards might consider in determining not to pursue recovery and how shareholders might use the required disclosure information in making their investment or voting decisions.