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Volume XI, Number 338

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Navigating the SEC’s Renewed Clawback Rule Proposal

The Renewed Proposal

On Oct. 14, 2021, SEC Chairman Gary Gensler released a statement announcing the SEC would once more open comment on the Dodd-Frank Act rule regarding clawbacks of incentive-based compensation that had been improperly awarded due to since-corrected accounting errors. Should a company not comply or refuse to institute a compensation recovery policy, the SEC proposal goes so far as to threaten delisting.

The rule was originally introduced in 2015 but spent the past six years sitting on ice. Gensler believes the proposal provides “an opportunity to strengthen the transparency and quality of corporate financial statements” in addition to holding executives more accountable to their investors. For more information on what the proposal could mean for you or your company, see below:

Could my company be impacted?

The proposed rules would apply to any listed company, which even includes those companies whose only listed securities are debt securities or preferred stock.

What is incentive-based compensation?

Incentive-based compensation is compensation depending, in whole or in part, on the achievement of a financial reporting measure. This could include hitting a sales target, hitting a certain stock price, or even achieving a certain rate of subscriber growth.

Who at my company could be subject to a clawback?

Clawbacks would apply to both current and former “executive officers.” As proposed, the rule would define “executive officer” in the same manner as the definition of “officer” for the purposes of Section 16. This would include a broad sweep of personnel, such as the company’s president, principal financial officer, principal accounting officer/controller, any vice president in charge of a principal business unit, division, or function; and any other officer or person who performs a significant policy-making function for the company.

What triggers a clawback?

In what might be the least resolved part of the announcement, the statement on reopening the comment period indicated the SEC is requesting comments on whether “an accounting restatement due to material noncompliance” should be broadly expanded to include all required restatements, including those that may not have been material in previously issued financials, but that might become material if they were left uncorrected in the current report or the error was recognized in the current report. This could open the door to any restatement, including those that may not be material (the so-called “little r” restatements). While the number of restatements was generally trending downward the past few years, a change to accounting practices or a notification on interpretation from the SEC can cause restatement numbers to spike, as hundreds of special-purpose acquisition companies discovered earlier this year. Depending on how broadly the SEC decides to cast its net, what formerly may have been thought of as errors that should only require revision could instead escalate to a restatement, thereby triggering a clawback.

How much incentive-based compensation can be clawed back?

Under the Dodd-Frank Act, companies must recover the amount of compensation received in excess of the amount that should have been received, had the measurement been compliant, in the three-year period leading up to the restatement. While this explanation is simplified, and practices like the exercise of positive discretion could lead to deviations, executives should expect that any incentive-based compensation they receive that has at least partially vested could be subject to a clawback within the lookback period.

What can my company do to make sure we are compliant?

  1. Implement an internal procedure to recover compensation that complies with applicable listing standards.

  2. Disclose the policy to the SEC.

  3. Should a revision or restatement be required, comply with the policy’s recovery provisions.

© 2021 Dinsmore & Shohl LLP. All rights reserved.National Law Review, Volume XI, Number 294
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About this Author

David J. Lavan, Dinsmore, Corporate Litigation Attorney, SEC Registration
Partner

David is a partner in the Corporate Department who focuses his practice on all aspects of SEC registration, reporting and compliance. He routinely advises clients on public and private offerings of debt and equity, disclosure matters, corporate governance and accounting issues. As a former government bond broker, David provides clients with unique insights into the financial marketplace, counseling them on transactional and regulatory matters, as well as litigation. He represents both public and private companies, as well as independent board and committee members,...

202-372-9122
Caitlin Throne Law Clerk Dinsmore Law Firm
Law Clerk

Caitlin focuses her practice on corporate law. Her prior experience includes working with private equity clients to evaluate market performance and potential acquisitions. She earned her J.D. from The Ohio State University Moritz College of Law.

Education

  • The Ohio State University Moritz College of Law  (J.D., magna cum laude, 2021)

    • Ohio State Law Journal, executive editor

    • Three CALI Awards for Excellence, including Debtor and Creditor Law

  • Carleton College  (B.A., cum laude, 2015)...

614-227-4222
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