SEC Revisits Executive Pay Clawbacks

Thoughtware Article Published: Nov 04, 2021
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On October 14, 2021, the SEC reopened the comment period and updated proposed amendments first issued in 2015 as part of 2010 Dodd-Frank Act requirements. The proposal addresses standards for exchange-listed companies for the recovery of erroneously awarded compensation to executive officers, known as a clawback policy. This would generally apply to the issuer’s president, principal financial officer, principal accounting officer, any vice president in charge of a principal business unit, division, or function, and any other officer that performs policymaking functions. The original proposal would, among other things:

  • Require national securities exchanges and associations to establish listing standards that would require listed companies to adopt and comply with a compensation recovery policy in which: 
    • Recovery is required: 
      • From current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date on which the issuer is required to prepare an accounting restatement to correct a material error
      • On a “no-fault” basis, without regard to whether any misconduct occurred or an executive officer’s responsibility for the misstated financial statements
    • The recovery amount is the incentive-based amount received by an executive that exceeds the amount that would have been received if the incentives were based on the restated financial statements
    • Issuers must recover in compliance with their recovery policies except to the extent that it would be impracticable to do so, e.g., if the direct expense of enforcing recovery would exceed the recovery amount 
    • Issuers are prohibited from indemnifying current and former executive officers against the loss of recoverable incentive-based compensation
  • Require each listed company to provide disclosure about its recovery of excess incentive-based compensation and file its clawback policy as an exhibit to the issuer’s annual report, including: 
    • The date on which the issuer was required to prepare each accounting restatement, the aggregate dollar amount of excess incentive-based compensation attributable to the restatement, and the aggregate dollar amount of excess incentive-based compensation that remained outstanding at the end of its last completed fiscal year
    • The name of each individual subject to recovery if the issuer decided not to pursue recovery, the amounts due from each individual, and a brief description of the reason the issuer decided not to pursue recovery
    • If at the end of the issuer’s last completed fiscal year, amounts of excess incentive-based compensation are outstanding from any individual for more than 180 days, the name of, and amount due from, each such individual

The updated proposal clarifies that a recovery would not be required when an issuer’s previously issued financial statements are required to be restated to correct errors that were not material to those previously issued financial statements but would result in a material misstatement if the errors were left uncorrected in the current report or the error correction was recognized in the current period.

The revised proposal also seeks feedback on whether “an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws” should be read more broadly than originally proposed and whether the “reasonably should have concluded” standard for triggering a lookback should be revised. 

The comment period closes 30 days after publication in the Federal Register.  

If you have questions about these changes, contact your BKD Trusted Advisor™ today.

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