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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.

President Biden signed an Executive Order on March 9, 2022, directing federal agencies to develop a strategy for regulations and policies on digital assets, which include cryptocurrencies. In a fact sheet released the same day, the White House cited survey data that the market cap of cryptocurrencies in November 2021 surpassed $3 trillion, a massive increase from $14 billion five years before. The fact sheet reports that around 40 million Americans have put money in cryptocurrencies. In explaining the basis for the executive order, the White House cited the “substantial implications” of digital assets for “consumer protection, financial stability, national security, and climate risk.”

The Order is aimed at setting the stage for regulation. The first of the objectives identified in the Order includes, in part, “We must protect consumers, investors, and businesses in the United States. The unique and varied features of digital assets can pose significant financial risks to consumers, investors, and businesses if appropriate protections are not in place.”

These risks are often not understood by investors. In our practice, we hear from investors who lost money in outright scams or who are running into issues with crypto exchanges. Some of the fraud impacting digital assets could be mitigated through regulation.

The crypto industry apparently thinks that regulation is coming and has been hiring former government officials, in the words of the Tech Transparency Project, “to help mold the policy landscape in the industry’s favor.” In a report published last month, the Tech Transparency Project said it identified “nearly 240 examples of officials with key positions in the White House, Congress, federal regulatory agencies, and national political campaigns moving to and from the industry.” This includes two former chairs of the SEC, two former chairs of the Commodity Futures Trading Commission, and a former chair of the U.S. Senate Finance Committee.