SEC clawback regs shine light on erroneous compensation

Twelve years after Dodd-Frank became the law of the land, the feds are finalizing “clawback” rules that address recovery of erroneously awarded compensation.

The Securities and Exchange Commission (SEC) is mandating that “national securities exchanges establish listing standards that would require listed issuers to adopt and comply with a compensation recovery [aka a clawback policy] and require issuers” to disclose those standards.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 added Section 10D to the Securities Exchange Act enacted in 1934. Rule 10D makes recovery of a mistakenly awarded bonus or other compensation necessary, except in cases where:

• recovering the amount awarded via fees paid to a collections agency would exceed the amount paid out. Caveat: The issuer must make a reasonable attempt to get the money that was paid out in error first.
• recovery would violate home country law that existed at the time of the rule’s adoption and the issuer can provide the opinion of legal counsel to the SEC, or
• recovery would likely cause a tax-qualified retirement plan to fail to meet requirements of the Internal Revenue Code.

Biden administration makes sure clawback policy is a go

Congress inserted Rule 10D and other provisions of Dodd-Frank to increase transparency on Wall Street and inform shareholders of potentially excessive compensation paid out to the executives of publicly traded companies.

“Through today’s action and working with the exchanges, we have the opportunity to fulfill Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials,” SEC chair Gary Gensler said. 

The clawback regs follow a similar SEC rulemaking in August that require companies disclose executives’ compensation and company earnings. The so-called Pay Versus Performance Disclosure rules also implement a Dodd-Frank mandate.

The SEC first proposed clawback rules in 2015, then reopened the comment period on the proposal in October 2021 and again in June 2022.

For the final clawback rules click here. They become effective 60 days after they’re published in the Federal Register. To see an SEC frequently asked questions sheet on the regs, click here.