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The SEC Proposes Clawback Rules

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July 07, 2015 | Barbara Baksa

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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