On 1 July 2015, the Securities and Exchange Commission proposed rules requiring companies listing securities on a securities exchange to adopt and enforce ‘clawback’ policies. These policies will dictate the rules for recovery of excess incentive-based compensation paid to executive officers in the event of accounting restatements. Generally, compensation is subject to clawback if it was paid on the basis of the achievement of a financial or shareholder return target, and the degree to which the target was achieved was misunderstood because of incorrect financial reporting.

Many companies already have in place clawback policies and others have been anticipating the SEC’s rules for some time, since they were mandated by the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act. Since the new rules are limited to the accounting restatement context, they are, in an important respect, narrower than the policies that many companies have already adopted.

There are a number of noteworthy aspects of the proposed rules. Firstly, the proposed rules would implement a ‘no fault’ approach to clawbacks. That is, the proposed rules would apply to all individuals who served as an ‘executive officer’ at any time during the performance period related to the incentive-based compensation in question, even if the person had no responsibility for the circumstances giving rise to the accounting restatement and even if the person is not serving as an executive officer at the time recovery is required.

Jan-Mar 2016 Issue

Cleary Gottlieb Steen & Hamilton LLP