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The SEC – Catching up to the Clawback

In response to the major accounting frauds in the early 2000s, the Sarbanes-Oxley Act required chief executives and chief financial officers to affirm the accuracy of their books.1 In practice, this relevant portion of the Act sought to eliminate the temptation among executives to misstate their companies’ financial positions, which made the company look better financially and allowed the officers to get rich doing so.2  It is a generally accepted principal that executives should return compensation improperly earned.  This compensation recovery, or “clawback,” permits companies to recover compensation paid to officers who engage in certain prescribed behavior, either illegal or unethical.3 Section 304 of the Act requires officers to forfeit any bonus or incentive compensation in the event that the company is required to restate its financial statements due to noncompliance, or misconduct.4 This has encouraged many large corporations to review their internal practices and adopt formal clawback policies.5 The Sarbanes-Oxley Act also allows the S.E.C. to sue to recover pay on behalf of companies.6

In 2010, Congress became involved in monitoring executive compensation by, in relevant part, passing Section 954 of the Dodd-Frank Act. This added section 10D to the Securities and Exchange Act, requiring executive officers to repay the issuer any incentive-based compensation received during the 3-year accounting period preceding the date on which the issuer is required to prepare an accounting restatement, based on the erroneous data.7 Section 954 states that the SEC, under Section 10D, shall direct national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that does not comply with the rules under section 954.8 Congress wanted to broaden the possibilities for recouping pay even if there was no misconduct related to a restatement. The S.E.C. has yet to recommend a proposal implementing the concept of a clawback when there is no fault.9

The failure of the SEC to adopt clawback rules to implement the Dodd-Frank provision has led to large public companies failing to revise their clawback policies in accordance with Dodd-Frank. For example, almost 90 percent of companies have clawback provisions, and 82 percent require evidence of wrongdoing before pay could be recovered.10 Moreover, many companies give great leeway to their boards when deciding whether to recover pay.11 Companies are not updating their clawback policies from Sarbanes-Oxley until the SEC promulgates rules that become effective.12 It does not make sense for companies to update their policies and then immediately revise them under the SEC rules. Since the clawback aspects of Dodd-Frank are relatively straight forward, however, some major companies are looking to implement policies to preemptively comply with Dodd-Frank.13 The SEC is expected to adopt the rule implementing the Dodd-Frank clawback provisions sometime within the next year. Until then, many public companies will fail to update their clawback provisions, continuing to include wrongdoing as a prerequisite to recoup executive compensation.


  1. Gretchen Morgenson, Clawbacks? They’re Still a Rare Breed, N.Y. Times (Dec. 28, 2013), http://www.nytimes.com/2013/12/29/business/clawbacks-theyre-still-a-rare-breed.html?pagewanted=all&_r=0. 

  2. See id

  3. Compensia Thoughtful Pay, Compensation Recovery (“Clawback”) Provisions – Becoming Familiar with the Looming Requirement (Sept. 7, 2012),  http://www.compensia.com/tpa_090912_clawbacks.html. 

  4. Id

  5. Id

  6. Gretchen Morgenson, A Blank Page in the S.E.C. Rule Book, Four Years Later, N.Y. Times (Nov. 8, 2014), http://www.nytimes.com/2014/11/09/business/a-blank-page-in-the-sec-rule-book-four-years-later.html. 

  7. Joseph E. Bachelder III, Executive Compensation Under Dodd-Frank: an Update, The Harvard School Forum on Corp. Gov. and Fin. Reg. (April 17, 2014), http://blogs.law.harvard.edu/corpgov/2014/04/17/executive-compensation-under-dodd-frank-an-update/. 

  8. Theodore A. Paradise, Compensation Clawback under Dodd Frank: Impact on Foreign Issuers (Sept. 7, 2011), file:///C:/Users/USER/Downloads/2011.09.Dodd.Frank.Compensation.Clawback.v3.sep11.pdf. 

  9. Id

  10. Id

  11. Id

  12. Doug Harmon, Clawback Policies-What to Do?, Sec. & Corp. Governance Grp., http://scgg.parkerpoe.com/dougs-note/clawback-policies-what-to-do/. 

  13. Abby E. Brown, Amending Clawback Policies Ahead of SEC Rulemaking – Are Companies Tackling the Issue?, Ass’n Of Corp. Counsel (Dec. 25, 2013), http://www.lexology.com/library/detail.aspx?g=d17df493-457a-4596-90ed-accf23382057. 

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Nicholas Loukides

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