Jul. 08, 2022
To whom it may concern: Major contributors to the 2008 financial crisis were misaligned incentives generally and executive compensation policies in particular at many financial institutions. Those compensation policies motivated corporate leaders to engage in high-risk activities for short-term profit and huge bonuses. Eliminating the incentives for executive management to play fast and loose with the rules to juice their compensation was a key focus of Congress as it sought to reform Wall Street, and it is why Congress included Section 954 in the Dodd-Frank Act. That section required the SEC to institute rules requiring that, when a company has to prepare an accounting restatement because of material noncompliance with SEC rules, it must recover any excessive compensation paid to executives as a result of the errors that led to the accounting restatement. The SEC issued its original rule proposal to implement Section 954 back in 2015. However, contrary to the broad language used in Section 954, the SECs 2015 proposal would only have required issuers to claw back undeserved compensation resulting from a subset of accounting restatements, i.e. so-called big R restatements that require re-issuance of previously issued financial statements. It didnt cover situations where a company issued a little r restatement, representing a correction for current periods but not re-issuance of prior year accounting statements. Since then, substantial evidence has emerged suggesting that companies that adopted claw back policies in response to the 2015 proposal have been mis-classifying big R restatements as little r restatements specifically to avoid potentially triggering a claw back. Thus, because companies have already made clear how they will avoid recovering undeserved compensation under the SECs proposed rule, it is essential that the SEC close that loophole and require claw back of erroneously awarded compensation that results from any accounting restatement, not just a subset of accounting restatements. Thats what I am advocating and I encourage all interested stakeholders to weigh in. Sincerely, James Fox, Phd.