June 3, 2015
Clawbacks: SEC Planning to Propose Rules Soon!
– Broc Romanek, CompensationStandards.com
The big news comes from this WSJ article, which says that the SEC will “soon” propose the clawback rules required by Section 954 of Dodd-Frank. If it happens as rumored, this surely is Exhibit A that the SEC’s Reg Flex Agenda is meaningless (as I hammered home in this blog yesterday) – because the SEC’s new Reg Flex Agenda had an April ’16 date for this activity. Here’s my quote in the WSJ piece:
Broc Romanek, a former SEC attorney who edits the websites CompensationStandards.com and TheCorporateCounsel.net, said the SEC should make sure it implements the new clawback requirements in a way that makes practical sense for companies and allows them discretion in determining whether it is economically efficient for them claw back pay, given legal, administrative or other expenses that may be involved. “It would not be ideal if a company is forced to spend more resources clawing back than [what] they would get in return,” he said.
The critical issue is whether the proposed clawback rules will be principles-based or prescriptive (remember how the recent P4P rule proposal was proscriptive, which was surprising to some). “Principles-based” means “just disclose what you have that you treat as a clawback.” And there are lots of tough questions about how a financial misstatement impacts compensation that may be indirectly – but not directly – based on financial performance, such as stock options (ie. how much is the stock price influenced by a restatement, as compared to performance criteria that is tied to EPS which is much more directly influenced). Remember this blog from last year: “Clawbacks & The New Revenue Recognition Rules: On a Collision Course?”
Whether the proposal is prescriptive or principles-based will in turn impact how much the rules drive a certain type of conduct – the more prescriptive, the more the SEC is making a judgment call and companies will have to come in line with what the SEC determines to be encompassed. And remember as to timing, the SEC’s rulemaking will just be the first step – because SEC will be proposing rules that the stock exchanges then have to adopt standards to implement…
With all this SEC rulemaking in the compensation arena, I will soon rejigger the two-day agenda for our big pair of “Proxy Disclosure/Executive Pay Practices” conferences – 2000 attendees in-person and more online – for which a 20% discount expires at the end of this Friday, June 5th! Register now!