SEC Proposing Exec Comp Clawback Rules

     WASHINGTON (CN) – The Securities and Exchange Commission will propose rules requiring companies to adopt clawback policies on executive compensation.
     The SEC announced Wednesday it will propose regulations directing national securities exchanges and associations to establish listing standards requiring companies to adopt policies that demand executives pay back incentive-based compensation awarded erroneously.
     Each company’s annual report would have to include the company’s executive compensation clawback policy and its efforts to recover the money, under the regulation, the SEC announced.
     The policy would come into play in the event of an accounting restatement — the company would “claw back” from current and former executive officers incentive-based compensation they would not have received based on the restatement, according to the announcement.
     The recovery would be required on a “no fault” basis, regardless of misconduct or an executive’s responsibility for the erroneous financial statements, according to an SEC fact sheet.
     “These listing standards will require executive officers to return incentive-based compensation that was not earned,” SEC Chair Mary Jo White was quoted as saying, in an SEC statement. “The proposed rules would result in increased accountability and greater focus on the quality of financial reporting, which will benefit investors and the markets.”
     “Executive officers” are defined in the proposal as everyone in the company who can make policy, with which SEC Commissioner Daniel M. Gallagher disagrees. He also objects to fault not being required. He writes in a dissent that choosing one or the other would have been better. As it is, employees without the ability to control other parts of the company would be subject to having to pay back compensation, without any showing they did something wrong, he writes.
     Gallagher also would prefer that the regulation include a relief valve, by giving broad discretion over clawbacks to boards of directors.
     Under the proposed regulation, the listing standards would apply to incentive-based compensation tied to accounting-related metrics, stock price or total shareholder return, the SEC said.
     Recovery would apply to the compensation received by executive officers in the three fiscal years preceding the date a listed company is required to prepare an accounting restatement.
     For incentive-based compensation based on stock price or total shareholder return, companies could use a reasonable estimate of the effect of the restatement on the applicable measure to determine the amount to be recovered, the fact sheet states.
     Each listed company would have to file its recovery policy as an exhibit to its annual report. The company also would have to disclose its actions to recover, in its annual reports and any proxy statement that requires executive compensation disclosure if, during its last fiscal year, a restatement requiring recovery of excess incentive-based compensation was completed, or there was an outstanding balance of excess incentive-based compensation from a prior restatement.
     The SEC says that now it has completed proposals on all executive compensation rules required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
     The comment period for the proposed rules will be 60 days after publication in the Federal Register, which is expected July 7.

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