The SEC adopted rules on Wednesday last week that will require companies to have a policy to claw back erroneously awarded incentive compensation paid to current or former executives. The policy must also be filed with a company’s annual report.
SEC Chair Gary Gensler said, “I believe that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors.” And, through the rules and working with exchanges, the SEC has “the opportunity to fulfill Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials.”
The final rules, 17 CFR Parts 229, 232, 240, 249, 270, and 274 (Release Nos. 33-11126; 34-96159; IC-34732; File No. S7-12-15), are available here: Final Rule: Listing Standards for Recovery of Erroneously Awarded Compensation (sec.gov)
The SEC originally proposed compensation recovery rules like these in 2015. According to the Wall Street Journal, “Accounting Errors to Cost Executives Their Bonuses Under SEC Rule” – WSJ, the rules passed last week are broader than what was proposed in 2015. The WSJ wrote that the 2015 proposal would have required clawbacks only if companies identified major accounting errors that required financial statements to be restated. The rules that the SEC just adopted also require companies to claw back bonuses paid to executives if they find smaller errors.