The NASPP Blog

Category Archives: Clawbacks

February 9, 2017

More Challenges to Dodd-Frank

As I mentioned in my blog on Tuesday, we are starting to see some movement towards repeal or revision of at least parts of the Dodd-Frank Act.  The Administration’s executive order isn’t the only action that has been taken; here are a couple of other developments:

CEO Pay Ratio—The SEC Weighs In

On Monday, February 6, Acting SEC Chair Michael Piwowar issued a statement on the CEO pay ratio disclosure. Piwowar requests comments on “unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed,” and encourages detailed comments to be submitted within 45 days. Piwowar also notes that he has directed the SEC staff to “reconsider the implementation of the rule based on any comments submitted and to determine as promptly as possible whether additional guidance or relief may be appropriate.”

While that’s pretty vague, is does indicate that, in addition to the Secretary of the Treasury and the Financial Stability Oversight Council, the SEC is also looking at the CEO pay ratio rule. Even so, it’s hard to say what this means. As we all know, and as an article in the Wall Street Journal notes (“GOP-Led SEC Considers Easing Pay-Gap Disclosure Rule of Dodd-Frank“), it is difficult for the SEC to move quickly on matters like this:

Republicans on the SEC could be stymied by the commission’s own procedures on the pay-ratio rule because undoing a regulation is handled by an often lengthy process that is similar to creating one. It also is difficult for the SEC to delay it outright, because of the commission’s depleted ranks. There are just two sitting commissioners—Mr. Piwowar and Kara Stein, a Democrat—meaning the SEC is politically deadlocked on most matters. Ms. Stein on Monday signaled opposition to efforts to ease the pay rule. “It’s problematic for a chair to create uncertainty about which laws will be enforced,” she said.

And Then There’s Congress

An article in Bloomberg/BNA reports that the Financial Choice Act is likely to be reintroduced into Congress this year (“Dodd-Frank Rollback Bill Expected in February, Duffy Says“). Originally introduced last year, this bill would repeal or restrict major parts of the Dodd-Frank Act, including reducing the frequency of Say-on-Pay votes, limiting application of the clawback provisions, and repealing the CEO pay ratio and hedging disclosures. Jenn Namazi blogged on the Act last year (see “Post Election: Things to Watch – Part I” and “Part 2“).

The Financial Choice Act is bigger than Dodd-Frank. The bill would also require a joint resolution of Congress before any “major” rulemaking by the SEC and a number of other agencies could go into effect. Mark Borges notes in his blog on (“Acting SEC Chair Weighs in on CEO Pay Ratio Rule“) that the bill is expected to require the major proxy advisory firms to register with the SEC and, among other things, disclose potential conflicts of interest.

Poll: What Are You Doing?

It’s hard to know what to do in response to all this. Preparing for the CEO pay ratio disclosure requires a lot of time and resources, which most on the corporate side would view as wasted if the disclosure is eliminated. But if the disclosure isn’t eliminated, stalling preparations now could result in an implementation time crunch.

In his blog on (“As Predicted—Hitting the Pause Button on the CEO Pay Ratio Rule“), Mike Melbinger says: “Postponement and revision of the rule seems likely. Now might be a good time to stop spending time and money on this calculation.” Take our poll to tell us what your company is doing (click here if the poll doesn’t display below).

– Barbara

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February 1, 2017

Clawbacks, Discretion, and Grant Dates

It is common for boards and compensation committees to have discretion over clawback provisions, either over determining whether the clawback provision has been triggered or, once triggered, whether it should be enforced.  While this discretionary authority is useful from a design and implementation standpoint, it can sometimes be problematic from an accounting perspective.


Under ASC 718, expense associated with an equity award is determined on the grant date, which cannot occur before an employee and employer reach a mutual understanding of the key terms and conditions of the award. Where a key term is subject to discretion, a mutual understanding of the key terms and conditions of the award may not exist until the point at which this discretion can no longer be exercised.

In the case of clawback provisions, if the circumstances under which the board/compensation committee might exercise their discretion are not clear, this could lead to the conclusion that the service or performance necessary to earn the award is not fully defined.  This, in turn, prohibits a mutual understanding of the terms and conditions of the award and delays the grant date. This delay would most likely result in liability treatment of the award.

Recent Comments from SEC Accounting Fellow

Sean May, a professional accounting fellow in the SEC’s Office of the Chief Accountant, discussed this concern in a speech at the 2016 AICPA Conference on Current SEC and PCAOB Developments, held in Washington, DC. May distinguished objectively applied clawback policies from policies that “may allow those with the authority over compensation arrangements to apply discretion.” In addition, he made the following comments:

If an award includes a key term or condition that is subject to discretion, which may include some types of clawback provisions, then a registrant should carefully consider whether a mutual understanding has been reached and a grant date has been established. When making that determination, a registrant should also assess the past practices exercised by those with authority over compensation arrangements and how those practices may have evolved over time. To that end, registrants should consider whether they have the appropriate internal control over financial reporting to monitor those practices in order to support the judgment needed to determine whether a grant date has been established.

Clawbacks and Discretion are Common

68% of respondents to the NASPP’s 2016 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting) indicate that their equity awards are subject to clawback provisions.  83% of those respondents, indicate that the board or compensation committee has some level of discretion over enforcement of the provisions.

If you are among those 83%, it might be a good idea to review the comments May made at the AICPA conference with your accounting advisers to make sure your equity awards receive the accounting treatment you expect.

– Barbara


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February 19, 2016

A CFO’s (Non) Misconduct Brings Clawback Under SOX

This week the SEC announced a settled enforcement action against the former CFO of Marrone Bio Innovations, Inc. At issue were bonuses the former CFO received within 12 months of various financial filings containing results that the company was later required to restate. Using Section 304 of the Sarbanes-Oxlely Act of 2002 (SOX 304), the SEC pursued the clawback of $11,789 in bonuses from the former CFO.

As we await final clawback rules from the SEC (which originate from Dodd-Frank and would apply to national securities exchanges), it’s important to remember that the SEC already has the present ability to enforce clawbacks in certain situations under SOX 304. The SOX provisions apply only to CEOs and CFOs and the courts have determined that only the SEC has the power to enforce clawbacks under SOX. One common misunderstanding about SOX 304 centers on “misconduct.” A Latham & Watkins memo once described SOX 304 as follows: “The statute states that, in the event an issuer is required to prepare an accounting restatement caused by “misconduct,” the CEO and the CFO “shall” reimburse the company for any bonus or other incentive-based or equity-based compensation, and any profits from the sale of the issuer’s securities, received during the year following the issuance of the misstated financial statements.” The memo later explained that the misconduct does not necessarily need to be on the part of the CEO or CFO who is subject to the clawback, a fact sometimes overlooked in our view of the type of misconduct that would trigger a clawback.

The recent SEC enforcement in the case of the former MBI CFO is a prime example that the SEC appears to have determined the misconduct by someone or something other than the person subject to the clawback (the CFO) as a legitimate grounds to demand the repayment of the CFO’s compensation. In this case, the former CFO had to return $11,789 in bonuses, but the SEC did not allege misconduct on his part. They did, however, allege that by not voluntarily returning his incentive compensation once the restatements occurred, he had violated SOX 304. It’s important to understand that in order for the circumstances for a clawback to be ripe, misconduct specifically by the CEO or CFO does not need to be present. Misconduct by someone or something else leading to a restatement can be enough to require the clawback of incentive compensation under SOX 304.

It’s important for companies to evaluate the circumstances regarding any restatement to ensure that appropriate measures have been taken to clawback the appropriate compensation from the CEO and CFO under SOX 304.

The SEC’s proposed clawback rulemaking resulting from Dodd-Frank will require national securities exchanges to adopt standards that, among other things, expand the scope of clawbacks – making them applicable to more individuals and for a longer period of time. The types of compensation subject to the clawback will be more limited under the proposed rules. These rules will not replace SOX 304; the SEC can still continue to rely on SOX 304 as means to enforce clawbacks. For full details on the proposed rules, visit the NASPP Alert on this topic.



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July 7, 2015

The SEC Proposes Clawback Rules

Last Wednesday, the SEC proposed the last set of compensation-related rules required under Dodd-Frank: clawback policies. This is one of those things where the SEC can’t directly require companies to implement clawback provisions, so instead, they are proposing rules that would require the NYSE and NASDAQ to add the requirement to their listing standards for exchange-traded companies.

Clawback Policies

The requirements for clawback policies under Dodd-Frank are much broader than under SOX (which required misconduct and applied only to the CEO and CFO). Here’s the gist of the SEC’s Dodd-Frank proposal:

  • Applies to all officers (generally the same group subject to Section 16) and former officers
  • Clawback is triggered by any material noncompliance with financial reporting standards, regardless of whether intent, fraud, or misconduct is involved
  • Applies only to incentive compensation contingent on the financial results that are subject to the restatement (interestingly, this includes awards in which vesting is contingent on TSR or stock price targets)

Recoverable Amount

The amount of compensation that would be recovered is the excess of the amount paid over what the officer is entitled to based on the restated financials.

In the case of awards in which vesting is contingent on TSR or stock price targets, the company would have to estimate the impact of the error on the stock price.  Which seems a little crazy to me. But I didn’t take a single math, science, economic, or business course in college so my understanding of what drives stock price performance is most charitably described as “rudimentary.”  Perhaps this is more straightforward than I think.

In the case of equity awards, if the shares haven’t been sold, the company would simply recover the shares. If the shares have been sold, the company would have to recover the sale proceeds (good luck with that). If you weren’t in favor of ownership guidelines and post-vesting holding periods for executives before, this might change your mind, possession being nine-tenths of the law and all. Check out our recent webcasts on these topics (“Stock Ownership Guidelines” and “Post-Vest Holding Periods“)


In addition to requiring a clawback policy, the SEC has also proposed a number of disclosures related to that policy:

  • The policy itself would be filed with the SEC as an exhibit to Form 10-K.
  • Companies would be required to disclose whether a restatement that triggered recovery of compensation has occurred in the past year.
  • If a restatement has occurred, the company must disclose the amount of compensation recoverable as a result of the restatement and the amount of this compensation that remains unrecovered as of the end of the year. For officers for whom recoverable compensation remains outstanding for more the 180 days, the company must disclose their names and the amounts recoverable from them.
  • For each person for whom the company decides not to pursue recovery of compensation, the company must disclose the name of the person, the amount recoverable, and a brief description of the reason the company decided not to pursue recovery.

More Info

For more information, check out the NASPP alert on this topic. The memos from Ropes & Gray, Jenner & Block, and Covington, as well as Mike Melbinger’s blogs on, were particularly helpful to me in writing this blog (in case you don’t want to read all 198 pages of the SEC’s proposal).

– Barbara


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