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.
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:
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:
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 CompensationStandards.com, 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).
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