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Statement at an Open Meeting on Dodd-Frank Act “Clawback” Provision

Chair Mary Jo White

July 1, 2015

Good morning.  This is an open meeting of the U.S. Securities and Exchange Commission on July 1, 2015 under the Government in the Sunshine Act.  The Commission today will consider a recommendation from the Division of Corporation Finance for a rule proposal to implement the mandate of Section 954 of the Dodd-Frank Act to require national securities exchanges and associations to adopt listing standards for companies to recover incentive compensation erroneously awarded to executive officers.

This proposal, often referred to as the “clawback” rule, is the last of the Dodd-Frank Act executive compensation rulemakings that remains for the SEC to propose.  Beginning in 2013, we have proposed rules to implement statutory mandates for new disclosures concerning pay ratio, pay-for-performance and hedging policies, and today’s proposal to implement the clawback provision, if approved, would be a significant complement to those efforts.

The objective of this rule is an important one.  Simply put, executive officers should not be permitted to retain incentive-based compensation that they should not have received in the first instance, but did receive because of material errors in their companies’ publicly reported financial statements. The proposed rules are designed to prevent that from happening.  By providing for recovery of compensation that was based on inaccurate financial reporting measures, the proposed rules should increase accountability and bring greater focus to the quality of financial reporting.

The clawback rule would provide for the recovery of erroneously awarded compensation from both current and former executives at listed companies.  The amount that would be clawed back would be the amount that was received in excess of what should have been paid after the accounting restatement of a company’s financials.

Under the proposal, there is no requirement that any misconduct has occurred in connection with the problematic accounting that necessitated a restatement.  Nor is there any requirement that the executive officer had a role in the preparation of the company’s financial statements.  The statutory provision and proposal would also apply to the defined group of executive officers, which is a broader group than in the clawback provision of Section 304 of the Sarbanes-Oxley Act, which applies only to the CEO and CFO.

While the principle of the clawback is simple, the proposal recognizes the complexities of putting it into practice and sets forth a carefully considered approach to the issues.  I am very interested in receiving public comment on the proposal, and the questions raised in the release about the choices made and potential alternatives to those choices.

Under the proposal and consistent with the statute, recovery would apply to incentive-based compensation that is based on either accounting-related metrics or stock price and total shareholder return metrics.  There are differing views on whether stock price and total shareholder return should be considered as financial information required to be reported by the federal securities laws.  Some believe that they should not because estimating the stock price impact of a restatement could add to the complexity and burden of determining how much compensation must be recovered.  Others persuasively argue that, because stock price and total shareholder return are frequently used metrics for performance, excluding them would create a significant loophole that would diminish the statute’s objective.  The proposal seeks to strike a balance between these competing considerations, and I am interested in commenters’ thoughts, including detailed views on any particular challenges there would be in estimating the impact on a company’s stock price of an accounting restatement.

The proposal would also require listed issuers to file their recovery policies, and if a restatement is completed that requires recovery, to disclose instances in which executives did not repay promptly, or the issuer exercised its limited discretion not to pursue recovery.  I am interested in views on how boards would make such determinations and on how this information would be used, including by shareholders in making their investment or voting decisions.  I look forward to the comments on these and other issues.

Before I turn the proceedings over to Keith Higgins, the Director of the Division of Corporation Finance, to discuss the recommendations, I would like to thank the staff for their hard and careful work on this proposal.  Specifically, I would like to thank Keith Higgins, David Fredrickson, Anne Krauskopf, Joel Levine, Carolyn Sherman, and Jennifer Riegel in the Division of Corporation Finance; Annie Small, Rich Levine, Bryant Morris, Brian Ochs, and Connor Raso in the Office of the General Counsel; Mark Flannery, Scott Bauguess, Vanessa Countryman, Simona Mola Yost, Jonathan Kalodimos, Chyhe Becker, and Walter Hamscher in the Division of Economic and Risk Analysis; Sharon Lawson and Ira Brandriss in the Division of Trading and Markets; Elizabeth Osterman, Rochelle Plesset, and Alan Dupski in the Division of Investment Management; Jeffrey Minton, Blair Petrillo and Carlton Tartar in the Office of Chief Accountant; and Song Brandon, Kristen Lever, Lochlann Boyle and Cathy Block in the Office of Compliance Inspections and Examinations.

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