The place: Washington D.C.
The situation: The SEC proposes rules for executive compensation claw back provisions required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The SEC has finally proposed the long-awaited rules for executive pay claw back. Rule 10D-1 describes who, what, when and how “erroneously awarded executive compensation” must be returned to the company.
Who: The net is fairly deep and broad.
Recovery would be required from current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement to correct a material error. The recovery would be required on a “no fault” basis, without regard to whether any misconduct occurred or an executive officer’s responsibility for the erroneous financial statements.
The definition of “Executive Officer” is modeled after that of “Officer” under Section 16 of the Act. This includes the company’s president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business unit, division or function, and any other person who performs policy-making functions for the company.
Applies to all listed companies except certain registered investment companies to the extent they do not provide incentive-based compensation to their employees.
What: Incentive Pay, long-term and short-term (especially equity compensation).
Any incentive pay received during the three fiscal years prior to the required restatement. Incentive-based compensation that is granted, earned or vested based wholly or in part on the attainment of any financial reporting measure would be subject to recovery. Financial reporting measures are those based on the accounting principles used in preparing the company’s financial statements, any measures derived wholly or in part from such financial information, and stock price and total shareholder return.
When: Soon, There are several dates of which to be aware.
August 30, 2015 – final date to submit comments before rule is finalized
90 days after rule is adopted: The national securities exchanges and associations must file their proposed rules to the SEC.
60 days after exchange rules are final: Listed companies must adopt a recovery policy for any qualifying incentive compensation that is received after the final version of Rule 10D-1 is published.
How: Disclosure of both policy and claw backs
Companies must disclose their recovery policy in their annual report.
They must also disclose the date in which they were required to prepare a restatement, the aggregate incentive compensation amount that will need to be recovered and the aggregate dollar amount of all incentive compensation that remained outstanding at the end of the last fiscal year.
The company must provide the name of each person that it will pursue for claw back along with the amounts due and any reasoning of why a specific individual is not being pursued for recovery.
If the executive does not pay back amounts due within 180 days of the recovery effort beginning, their name and the amount due will be disclosed in the annual report.
Conclusion: Claw backs will become formal some time after January 2016, and they will be pretty much what was expected.
Performensation will post updates as they become available. Unlike many recent Dodd-Frank-related rules claw backs will apply to nearly all publicly-listed companies, regardless of size of date of IPO. If you do not have a formal recovery policy in place, now is a good time to start internal discussions.