Divided SEC Proposes Clawback Rule; Looks Back 3 Years, Defines Officer Broadly

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By Rob Tricchinelli

July 1 — A divided Securities and Exchange Commission July 1 proposed a rule requiring public companies to claw back executives’ incentive-based compensation that was improperly awarded.

The proposal would require companies to make policies for recovering compensation paid out that exceeds what should have been paid under an accounting restatement, if the restatement is required because of “material noncompliance” with securities laws.

“Executive officers should not be permitted to retain incentive-based compensation that they should not have received in the first instance but did receive because of material errors in their companies’ publicly reported financial statements,” Chairman Mary Jo White said. “The proposed rules should increase accountability and bring greater focus to the quality of financial reporting.”

When, Whom

The clawback would apply to the three fiscal years prior to when the company is required to file a restatement.

It would apply to “executive officers,” which it defines as the president, chief financial officer, chief accounting officer, any vice president in charge of a business unit and anyone who crafts company policy.

That definition is broader than in the Sarbanes-Oxley Act’s clawback provisions. SOX also reaches back only one year.

‘Dramatic Change.'

Under the proposal, companies would be required to create and disclose their own clawback policies or face delisting from national securities exchanges.

Compensation would be clawed back regardless of the executive officer’s culpability for misconduct or responsibility for the financial statements, and companies would be forbidden from indemnifying officers from any clawbacks.

“This is a fairly prescriptive regime and there are a lot of unanswered questions,” Andrew Liazos, a partner and leader of the executive compensation group at McDermott Will & Emery LLP in Boston, told Bloomberg BNA. “It would be a pretty dramatic change from the clawback rules we see now,” he added.

Company Policies

According to SEC staff analysis, nearly two-thirds of S&P 500 issuers and roughly half of S&P 1500 issuers have their own clawback policy.

If the rule is adopted as proposed, however, “virtually every existing clawback policy will need to be rewritten,” Liazos said.

Before the vote, Mark Flannery, head of the SEC's Division of Economic and Risk Analysis, said the rule would likely prod companies into better financial reporting, but it could also lead to executives demanding that incentive-based compensation make up a smaller portion of their overall pay.


The 3-2 vote included dissents from Republican Commissioners Daniel Gallagher and Michael Piwowar. Democratic Commissioners Luis Aguilar and Kara Stein voted with White to propose the rule.

“The broad approach of today’s proposal is likely to impose a substantial commitment of shareholder resources and, unintentionally, result in a further increase in executive compensation,” Piwowar said.

He also criticized the agency's internal process for drafting the rule and ripped “repeated instances of substantial eleventh-hour modifications by the chair’s office,” which he said stifled discussion and undermined collaborative support. “This happened in pay versus performance, credit ratings and nationally-recognized statistical rating organizations, and swap data repositories and security-based swap data reporting.”

Gallagher called the proposal “tortured and nightmarish.”


The rule is required by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Members of the public will have 60 days to comment on the proposal once it is published in the Federal Register.

It is the last rule to be proposed among the law’s provisions dealing with executive compensation.

In April, the agency proposed rules on pay versus performance.

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

For the proposal, visit https://www.sec.gov/rules/proposed/2015/33-9861.pdf

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