SEC Chairman Gary Gensler has directed staff to provide recommendations on a rule for clawing back executive pay, per
Bloomberg. In his statement on the directive, Gensler highlighted that the potential rule will cover clawbacks in the event of a financial restatement.
Currently, clawbacks are only required in the event of fraud or misconduct and only apply to the CEO and CFO. However, Dodd-Frank legislation passed in the wake of the financial crisis stipulated the following:
- Boards would have to claw back incentive payments from the previous three years if those incentives were paid based on subsequently restated financial results.
- Clawbacks would not be conditioned on fraud or misconduct.
- Boards would have some discretion into how the funds are recouped.
It does not appear that the rule would focus on clawbacks in the event of reputational harm outside of a restatement and there is no timetable given for the rule.
Recent high-profile clawbacks attempt may influence the new rule, including clawbacks from former executives tied to violations of personal conduct and international infractions. In those cases, the departed executives opposed the clawback and the cases were either dropped by the company or entered legal proceedings.
The rule will likely need to move through the full rulemaking process, including an economic analysis, a proposed rule, and public comments. It is unlikely that the rule would jump the SEC’s priorities on human capital metrics, climate change, or 10b5-1 plans, but we could expect to see it by late next year.
