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

Commissioner Kara M. Stein

July 1, 2015

As my colleagues have done, I would like to start by thanking all of the staff who put in significant time and effort working on this proposed rule. In particular, I would like to thank David Fredrickson, Jenny Riegel, Ann Krauskopf, Joel Levine, Carolyn Sherman, Bryant Morris, Jeff Minton, Blair Petrillo, Simona Mola Yost, and Jonathan Kalodimos for all your hard work.

The financial crisis had a wide range of causes and has required a wide range of reforms. Some public company executives pocketed hefty sums, not for success, but for putting themselves before shareholders and before long-term company performance. A 2010 study examined compensation arrangements at two large financial firms, Bear Stearns and Lehman Brothers, and noted that top executives "cashed out" shares and options before the stock price plummeted and the firms collapsed.[1] Another study found that long-term shareholders suffered substantial losses from excessive risk-taking despite executives profiting substantially from such behavior.[2]  Unfortunately, certain executive pay arrangements—often designed by executives—may focus on short-term results and insulate management from any downside.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") attempts to realign compensation arrangements and structures to concentrate on long-term performance. Accordingly, today’s proposed rule requires the majority of listed issuers to adopt a recoupment, or clawback, policy for when an executive’s incentive-based pay is based on erroneous financial reports. This rule targets the lack of accountability and the inflated compensation that helped contribute to excessive risk-taking in the run-up to the financial crisis. With this proposal, the Commission takes another step toward implementing the Dodd-Frank executive compensation mandates, which are aimed at focusing executives on quality of earnings rather than on engineering short-term results.

"Clawing back" ill-gotten compensation is not a new concept. In fact, after the WorldCom and Enron scandals, Congress required that companies recover certain undeserved compensation from chief executive officers and chief financial officers.[3] Moreover, five years after the passage of a new clawback mandate by Congress, at least 90 percent of Fortune 100 companies recently studied have already voluntarily adopted clawback policies.[4] Investors should not be left holding the bag while executives reap benefits when reporting false financial results.  

Today’s proposal undertakes Dodd-Frank’s objective to recover funds that should not have been paid out in the first place. It aims to increase accountability and refocus executives on long-term results. This proposal picks up where prior executive compensation recovery rules left off by mandating that the issuer clawback erroneous or incorrectly awarded compensation. This is fundamental for shareholders. This means that the burden will not be on shareholders to engage in expensive litigation to recover money that rightfully belongs to them.[5]

One aim of both the statute and today’s proposal is to discourage artificially inflated financial statements. This is done by requiring companies to clawback incentive-based executive compensation any time there are material errors in the company’s financial statements—not just when there is misconduct. The proposal also defines incentive-based compensation to include, among other things, stock price and total shareholder return. Including these metrics is important, as these compensation measures are often factors used to determine incentive-based pay, particularly for long-term incentive plans. Accordingly, including them in the incentive-based pay definition is fundamental to ensure this rule has its intended effect.

In line with the Commission’s recent proposed rule on Pay Versus Performance, this proposal provides that disclosures will be tagged in eXtensible Business Reporting Language, or XBRL. As I have noted before, tagging increases comparability across companies. It also improves investors’ and other market participants’ ability to search for the information they care about.  I am pleased to see that we are continuing to include tagging in our proposed rules and are recognizing the importance of structured data going forward.

I look forward to comments from investors, issuers, and other interested parties. Are our definitions, including our definitions of "executive officer" and "incentive-based compensation," effective and workable? Are the required disclosures sufficient to ensure compliance? Overall, does the proposal hold executives accountable for errors or mistakes on their watch? I look forward to hearing from you.

Once again, I would like to thank the staff for your hard work. I am pleased to support this proposal, and I look forward to getting robust comment from investors, issuers, and other market participants.

Thank you.

[1] Lucian A. Bebchuk, Alma Cohen, & Holger Spamann, The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008, 27 Yale J. on Reg. 257, 257-82 (2010), available at

[2] Sanjai Bhagat & Brian J. Bolton, Bank Executive Compensation and Capital Requirements Reform (May 22, 2013), available at

[3] See Section 304 of Sarbanes-Oxley; 15 U.S.C § 7243; see also 148 Cong. Rec. p S7361 (2002) (statement of Mr. Schumer), available at ("The [Section 304 clawback] legislation pending before us will make it harder for companies to lie about their assets. That’s the least we can do in re-establishing the public confidence in corporate America. Our common purpose today is to ensure that the Enron’s, the Tyco’s, the WorldCom’s never happen again.").

[4] PriceWaterhouseCoopers, Executive Compensation: Clawbacks 2014 Proxy Disclosure Study (Jan. 2015), available at; see also PriceWaterHouseCoopers, Clawbacks are Top of Mind For the C-Suite: Remuneration Clawbacks are Getting More Airtime – In the News and the Boardroom (Mar. 11, 2015), available at

[5] See Report of the Senate Committee on Banking, Housing and Urban Affairs to accompany S. 3217, S. REP. NO. 111-176 (2010)("This proposal will clarify that all issuers must have a policy in place to recover compensation based on inaccurate accounting so that shareholders do not have to embark on costly legal expenses to recoup their losses or so that executives must return monies that should belong to the shareholders. The Investor's Working Group wrote ‘federal clawback provisions on unearned executive pay should be strengthened.’").

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