September 24, 2015

Contemplating Potential Dodd-Frank Clawback Exposure

On the heels of the SEC’s controversial clawback proposal (see this convenient Fact Sheet), Audit Analytics provides some context and color around the potential clawback exposure if the new rule is adopted as proposed based on an evaluation of NYSE and Nasdaq company restatements in 2014 that triggered Item 4.02 Form 8-K (non-reliance on previously issued financials) filings.

Interestingly, in 2005, 67% of the total restatements (including but not limited to NYSE/Nasdaq-listed companies) were Item 4.02 restatements – compared to just 24% in 2014. Of the 69 NYSE or Nasdaq companies that filed Item 4.02 Form 8-Ks in 2014, only four mentioned their restatement in the executive compensation section of their proxy statement, and only one actually clawed back compensation from the restatement period.

Pending the new rules, clawbacks would have been prompted either voluntarily or by SOX 304’s clawback provision, which is triggered by a restatement because of material noncompliance, due to misconduct, with financial reporting requirements under the federal securities claws. Although the proposed Dodd-Frank clawback rule is no-fault (i.e., does not require misconduct to trigger the clawback), the number of Item 4.02 Form 8-Ks among listed companies is an indicator of overall potential exposure.

Conflict Minerals Conundrum

Companies reportedly incurred about $709 million and six million staff hours last year to comply with the controversial conflict minerals rules, according to research by Tulane University and Assent Compliance. Additionally:

2014 Conflict Minerals Filings

– 90% of the 1,262 companies that filed conflict minerals reports purportedly couldn’t determine whether their products are conflict-free.
– Less than 24% of companies reached full compliance with the law.
– 2/3 didn’t describe their country of origin
– 43% failed to disclose their due diligence framework

See also this recent study by the American Action Forum revealing that from 2010 – 2014, the Dodd-Frank Act has imposed approximately $22 billion in costs and 61 million paperwork burden hours – including a combined $6 billion in costs for Conflict Minerals and Resource Extraction Issuers rulemaking. About 1/4 of the Act has yet to be implemented. See also this Chamber of Commerce blog illustrating Dodd-Frank’s effects in chart form.

Access our heaps of helpful resources in our “Conflict Minerals” Practice Area.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– CEO Succession: Moving Beyond Fundamentals
– Reaping the Benefits of Board Diversity
– GCs Cite Regulation & Compliance as Chief Concern
– (More) Audit Committee Agenda Items
– How to Brief the Board on IT Matters

– by Randi Val Morrison