Clawback policies provide for the recovery of compensation from executive officers in the event of fraud, malfeasance and/or a material financial restatement for the amount awarded in excess of what would have been paid under the restatement. The Sarbanes Oxley Act allows the SEC to require clawbacks of CEO and CFO compensation in the event of misconduct by the company that results in a material financial restatement. In Section 954 of the Dodd-Frank Act included a clawback provision which requires the SEC to implement rules requiring companies to adopt “no-fault” clawback policies for current and former executive officers, triggered only by a material financial restatement. On July 1, 2015, the SEC proposed rules implemeneting the Dodd-Frank Clawback. In the Center's comments to the SEC on the proposed rule, the Center supported the generally workable framework for clawbacks provided in the proposed rule. The Center's comments voiced some concerns that there still would be situations where a company could be forced to pursue a clawback when the resutling cost-incursion would outweigh any benefits. Among our key recommendations provided to the SEC for a final rule include:
- Perform an evaluation of all direct and indirect costs of clawback execution to de-termine whether or not the total costs of a clawback outweigh the recoverable amount.
- Decline to exercise a clawback where an executive is located in a country where clawback exercise would violate the laws of that country.
- Cancel granted and unvested compensation as a cost effective and approved means of effectuating clawback recovery.
- Accommodate the proposed rule’s requirement that clawback amounts be recovered on a pre-tax basis by permitting discretion to potentially recover lesser amounts to avoid imposing substantial hardships on an executive.
The Center supports “no-fault” clawback policies but believes there needs to be flexibility in their implementation. The Center believes that the SEC may address the proposed clawback rules in the second half of 2017 once a Trump SEC is stituated and up and running.