TheCorporateCounsel.net

As Liz noted last week, tomorrow the SEC will consider adoption of the final rule amendments to implement the provisions of Section 954 of the Dodd-Frank Act, which added Section 10D to the Exchange Act. Section 10D requires the SEC to adopt rules directing the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with Section 10D’s requirements for disclosure of the issuer’s policy on incentive-based compensation and recovery of incentive-based compensation that is received in excess of what would have been received under an accounting restatement.

Why, over a dozen years after the enactment of the Dodd-Frank Act and more than seven years since the rules were initially proposed, is the Commission considering these rules on Wednesday? I guess one answer is that it had to happen sooner or later – Congress gave the SEC a specific directive to adopt the rules, and in the ensuing twelve years various SEC Chairs and Commissioners opted to kick the can down the road, but now Chair Gensler is committed to closing out the open Dodd-Frank Act rulemakings directives (with the SEC adopting the pay versus performance disclosure requirement over the summer). Why did those before Gensler and the current Commission choose to kick the can down the road on the clawback rules and pay versus performance? Partly because they had other more pressing things on their agenda, and perhaps partly because they recognized that both the clawback and pay versus performance directives were already largely obsolete given that the world had “moved on” since the post-financial crisis Dodd-Frank Act measures were first contemplated.

The reality is that compensation recovery has become a key feature of compensation programs at many companies, seen as an important tool in managing risks associated with compensation plans. While there is no uniform model for compensation clawback policies, companies have been able to adopt policies that are best suited for their particular circumstances. Few (if any) compensation recovery policies go as far as the SEC’s proposed rules would contemplate, with recovery required on a “no fault” basis, without regard to whether any misconduct occurred or to an executive officer’s responsibility for the erroneous financial statements. Further, clawbacks are never triggered by little “r” restatements, as the SEC’s reopening release suggests the Commission may be considering.

Now, when the dust settles on the SEC rulemaking and the stock exchange standard-setting that the SEC’s rules will direct, the many years of “private ordering” on clawback policies will be undone, and companies will be forced to adopt a one-size-fits-all approach that is not tailored to their own particular circumstances. While this action will allow the SEC to check this Dodd-Frank era rulemaking off its To Do list, I am not sure I would call it “progress” when it comes to investor protection.

– Dave Lynn