SEC proposes rules requiring clawbacks after company restatements

By Sarah N. Lynch, Reuters

Public companies that re-state their financial results would be required to "claw back," or recover, any excess incentive compensation earned by their corporate executives under a new rule proposed on Wednesday by U.S. regulators.

The Securities and Exchange Commission's plan sparked debate among the agency's five members, with some saying it goes too far and should not be applied to smaller-sized companies.

Republican SEC Commissioner Daniel Gallagher said the plan creates the "potential for substantial injustice" because it could force people to pay back compensation even if they had nothing to do with the restatement.

The proposed rule is one of several compensation-related measures required by the 2010 Dodd-Frank Wall Street reform law.

It would apply to public companies of all sizes and to any executive officer who performs policymaking decisions and who has received incentive compensation, including stock options.

Under Wednesday's plan, stock exchanges would need to incorporate the clawback requirements into their listing standards.

Companies would have to recover any amount of incentive compensation that exceeds what an executive officer would have received based on the accounting restatement.

For compensation based on stock price or total shareholder return, companies could use a reasonable estimate on the effect of the restatement. They would also have some discretion to decline to recover compensation if the expense of doing so would exceed the amount recovered.

Companies would be required to disclose the names of executives who are more than 180 days past due on their paybacks, as well as the names of executives who are not targeted for clawbacks.

However, the companies would only be required to disclose an aggregate number for clawbacks that are recovered, without naming individuals.

"Today’s proposal undertakes Dodd-Frank’s objective to recover funds that should not have been paid out in the first place," SEC Democratic Commissioner Kara Stein said.

The 2002 Sarbanes-Oxley law already empowers the SEC to force chief executives and chief financial officers to reimburse their company for bonuses and other compensation if re-statements arise out of misconduct.

Moreover, the SEC estimates about 64 percent of S&P 500 companies already have some voluntary clawback policy in place.

Wednesday's plan is broader than the Sarbanes-Oxley rules. It would trigger clawbacks even when misconduct is not at issue and it covers a broader swath of corporate executives.

In addition, the SEC's plan covers a three-year period from the date of a restatement, versus a one-year period in the Sarbanes-Oxley rule.