October 25, 2022

SEC and DOJ Focus on Clawbacks

As this Dechert memo notes, and as Liz discussed on The Advisor’s Blog over on, the SEC’s Division of Enforcement and the DOJ have recently launched initiatives targeting executive compensation clawbacks. The Dechert memo notes:

– The SEC is aggressively pursuing SOX 304 compensation clawbacks from Chief Executive Officers and Chief Financial Officers of public companies that have been required to restate financial reports in connection with misconduct at the company—even when the CEO and CFO are not involved and their compensation is not tied to the misconduct.

– DOJ has announced that compensation clawbacks will be considered as a factor in whether to bring and settle criminal charges against corporations. DOJ will evaluate not only whether companies have adopted clawback provisions in executive compensation packages, but also whether companies have, in practice, actually pursued clawbacks.

The Dechert memo indicates that several of the SEC’s recent cases where Section 304 clawbacks were pursued are settled actions involving executives with zero alleged culpability. According to SEC Deputy Director of Enforcement Sanjay Wadhwa, the Enforcement Division views “the Commission’s use of SOX 304 orders against executives who were not charged under any additional provisions” as an “important element” of the recent SOX 304 enforcement actions, with the enforcement theory being that such actions “create[] accountability and establish[] incentives to prevent corporate wrongdoing.”

Further, SEC Enforcement Division Chief Counsel Sam Waldon highlighted three key aspects of how this Enforcement Division is applying SOX 304:

– It is pursuing these cases regardless of whether the CEO and CFO at issue were culpable for the underlying securities law violation.
– It views SOX 304 as not “limited by fraud delta,” meaning the SEC intends to seek “the full amount of the reimbursement that is required by the statute” not merely the amount by which the executive’s compensation was allegedly inflated due to the reporting problem.
– It will seek to prevent director and officer insurance policy proceeds from being used to indemnify covered executives for SOX 304 reimbursements.

As Liz noted in The Advisor’s blog, back in September the DOJ adopted its first-ever Department-wide policy to guide prosecutors on considering corporate compensation programs & clawback policies in criminal enforcement decisions, according to a 15-page memo from Deputy AG Lisa Monaco. The memo notes:

Corporations can best deter misconduct if they make clear that all individuals who engage in or contribute to criminal misconduct will be held personally accountable. In assessing a compliance program, prosecutors should consider whether the corporation’s compensation agreements, arrangements, and packages (the “compensation systems”) incorporate elements such as compensation clawback provisions-that enable penalties to be levied against current or former employees, executives, or directors whose direct or supervisory actions or omissions contributed to criminal conduct. Since misconduct is often discovered after it has occurred, prosecutors should examine whether compensation systems are crafted in a way that allows for retroactive discipline, including through the use of clawback measures, partial escrowing of compensation, or equivalent arrangements.

Suffice it to say, with the SEC’s consideration of clawback rule tomorrow and the recently announced SEC Enforcement and DOJ focus on clawbacks, this is a topic that is going to be grabbing a great deal of attention over the coming months.

– Dave Lynn