SEC Proposes Clawback Rule

The Securities and Exchange Commission (SEC) has proposed rules directing national securities exchanges and associations to establish listing standards requiring companies to adopt policies that require executive officers to pay back incentive-based compensation that they were awarded erroneously.


Under the proposed new Rule 10D-1, listed companies would be required to develop and enforce recovery policies that  in the event of an accounting restatement, “claw back” from current and former executive officers incentive-based compensation they would not have received based on the restatement.

Recovery would be required without regard to fault.  The proposed rules would also require disclosure of listed companies’ recovery policies, and their actions under those policies.

“These listing standards will require executive officers to return incentive-based compensation that was not earned,” said SEC Chair Mary Jo White.  “The proposed rules would result in increased accountability and greater focus on the quality of financial reporting, which will benefit investors and the markets.”

Under the proposed rules, the listing standards would apply to incentive-based compensation that is tied to accounting-related metrics, stock price or total shareholder return.  Recovery would apply to excess incentive-based compensation received by executive officers in the three fiscal years preceding the date a listed company is required to prepare an accounting restatement.

Each listed company would be required to file its recovery policy as an exhibit to its annual report under the Securities Exchange Act.  In addition, a listed company would be required to disclose its actions to recover in its annual reports and any proxy statement that requires executive compensation disclosure if, during its last fiscal year, a restatement requiring recovery of excess incentive-based compensation was completed, or there was an outstanding balance of excess incentive-based compensation from a prior restatement.

Dennis Kelleher of Better Markets, a frequent critic of the SEC, gave the SEC rule a mixed review.

“The prospect of hundreds of billions of dollars in bonuses incentivized pervasive reckless, illegal and criminal conduct all across Wall Street in the years before the 2008 crash. For too many, getting the biggest annual bonus possible overwhelmed every other consideration,” Kelleher said. “Wall Street’s dangerous and irresponsible conduct will not change until those irresistible incentives and the corrupt bonus culture are changed.”

“We applaud the SEC for finally proposing a rule to claw back the pay of executives who are richly rewarded even when their companies’ commit misconduct. However, making the claw backs contingent on a formal restatement of the financial results will almost certainly be ineffective. After all, not one Wall Street firm that caused the financial crisis, almost went bankrupt and required hundreds of billions in bailouts ever restated their financial results because of that behavior. Thus, the rule proposed today may be little more than public relations unless it is substantially strengthened before it is finalized, which Better Markets will be advocating for.”

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