While negotiating an Executive Employment Agreement on behalf of a publicly reporting client, I recently ran into issues with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), which was signed into law in July 2010.

The Act provides that every public company must adopt a “clawback” policy whereby the company must recover from any current or former executive officer any incentive-based compensation (including stock options) that was paid to such officer in the three years prior to a restatement of the company’s financials due to material noncompliance with any financial reporting requirement under the securities laws. The company must recover an amount equal to the difference between the incentive-based compensation actually paid to the executive and the incentive-based compensation that would have been paid to such executive if the compensation had originally been calculated based upon the restated financial results. One consequence for failure to adopt a “clawback” policy is being delisted from the national securities exchange that the company is currently trading on.

The Act goes beyond what is required under Section 304 of the Sarbanes-Oxley Act of 2002 (“SOX”) in four key ways: (1) The Act increases the recovery period from one year to three years; (2) The Act applies to all of the company’s current and former executive officers while SOX Section 304 only requires disgorgement from the company’s CEO and CFO; (3) Under the Act, a recovery must be sought by the company if there is a restatement resulting from material noncompliance with applicable accounting principles, an allegation of misconduct does not need to be made as is required under SOX Section 304; and (4) In addition to enforcement actions brought by the SEC, plaintiffs’ attorneys may enforce the Act in derivative cases if the company fails to seek the recovery.

A deadline for the SEC to issue rules to the national securities exchanges, and for the national securities exchanges to pass such rules, has not be given, but most experts expect further guidance from the SEC as to implementation and effectiveness of the new rule sometime in late 2011.

In the mean time, we recently added the following provision to the Executive Employment Agreement noted above:

“Section 2.7 Clawback Provisions. Notwithstanding any other provisions in this Agreement to the contrary, any incentive based compensation, or any other compensation, paid or payable to Employee pursuant to this Agreement or any other agreement or arrangement with the Company which is subject to recovery under any law, government regulation, order or stock exchange listing requirement, will be subject to such deductions and clawback (recovery) as may be required to be made pursuant to law, government regulation, order, stock exchange listing requirement (or any policy of the Corporation adopted pursuant to any such law, government regulation, order or stock exchange listing requirement). Employee specifically authorizes the Corporation to withhold from his future wages any amounts that may become due under this provision. This Section 2.7 shall survive the termination of this Agreement for a period of three (3) years.”