TheCorporateCounsel.net

One of the topics that I discussed on the SEC All Stars panel at Friday’s 18th Annual Executive Compensation Conference was the SEC’s reopening of the comment period on the Dodd-Frank Act mandated clawback rule proposal. The two big issues from the reopening release that I discussed at the conference were the Commission’s questions about little “r” restatements and the determination of when the three-year lookback period runs.

The Commission acknowledges in the release that the proposed definition of an accounting restatement would not require a recovery where an issuer’s previously issued financial statements are required to be restated in order to correct errors that were not material to those previously issued financial statements, but would result in a material misstatement if: (i) the errors were left uncorrected in the current report; or (ii) the error correction was recognized in the current period. One of the commenters in the original comment period noted that such “little ‘r’ restatements” would allow an issuer to potentially avoid application of the clawback provisions. So now the Commission is asking whether “an accounting restatement due to material noncompliance” should include all required restatements to correct an error in previously issued financial statements – including little “r” restatements – and solicits comment on that approach.

Also, for purposes of triggering the three-year lookback period, the proposed rules would establish the date on which an issuer is required to prepare an accounting restatement as the earlier of:

• the date the issuer’s board of directors, a committee of the board of directors, or the officer or officers of the issuer authorized to take such action if board action is not required, concludes, or reasonably should have concluded, that the issuer’s previously issued financial statements contain a material error; or
• the date a court, regulator or other legally authorized body directs the issuer to restate its previously issued financial statements to correct a material error.

Some commenters expressed concern that the “reasonably should have concluded” standard adds unnecessary uncertainty to the determination. The Commission now asks about removing that “reasonably should have concluded” standard and possibly changing the formulation as to the timing of the trigger for the three-year lookback.

All indications are that the Commission hopes to act on this rulemaking in the near term. The comment period is open for 30 days from publication of the release in the Federal Register.

– Dave Lynn