Yesterday, the SEC proposed the long-awaited executive compensation clawback rules under Section 954 of the Dodd Frank Act. Weighing in at over 100 pages, there is a lot to digest. This McGuireWoods client alert provides an in-depth summary, and includes some suggestions for what companies should be considering now that the proposed rules are finally out:

Consider New Arrangements. Companies should consider adding provisions to any newly entered incentive compensation arrangement that would subject the compensation payable under the arrangement to any clawback policy that may be adopted by the company in the future.

Consider Existing Arrangements. With respect to existing arrangements, the proposed rules state that clawback policies would need to apply to any incentive compensation received with respect to a fiscal period ending on or after the effective date of the proposal, including compensation payable pursuant to pre-existing arrangements. In addition, the proposed rules further state that it would not be considered impracticable to recover compensation under existing contracts and arrangements merely because recovery might violate the terms of those arrangements, at least to the extent the arrangements could be amended to accommodate recovery. Issuers should therefore consider whether it is possible and, if possible, whether it is appropriate at this time to amend the terms of existing incentive compensation arrangements to subject compensation payable under the arrangements to any clawback policy that may be adopted by the issuer in the future.

Review Bylaw Provisions.If a company’s bylaws prohibit recovery of compensation that would be required to be recovered under the proposed rules, the company should consider whether it is appropriate at this point to amend its bylaws to allow such recoveries.

Review Indemnification Provisions. Similarly, if a company’s articles or bylaws, or if individual indemnification agreements with executive officers or a company’s D&O insurance policies provide for indemnification of executive officers for loss of erroneously awarded compensation, companies should consider whether it is appropriate at this point to amend these arrangements to eliminate these indemnification rights.

Review Compensation Committee Charters. Companies should consider whether it would be appropriate at this point to amend their compensation committee charters to address the new duties regarding clawback policy administration that would be imposed on compensation committees under the proposed rules.

Consider Clawback Policy Design Changes. Finally, companies that do not have clawback policies in place face the choice of whether to adopt a policy now that reflects the requirements of the proposed rules, or alternatively to wait until the SEC proposal and the exchange standards have been finalized. While the answer to this will depend on each company’s individual situation, consideration should be given to the fact that the rules are only proposed, are likely to receive substantial comment and may undergo substantial changes before being finalized. Similarly, companies with existing clawback policies will face the same choice regarding whether to amend the policies now or to wait and see, and their decisions should be informed by the same considerations.