The Advisors' Blog

The SEC’s Enforcement Division is committed to seeking clawbacks under Section 304 of the Sarbanes-Oxley Act – and they want you to know. Late last week, the Commission announced charges against a company and a former Senior VP of its largest division, related to misstated financials and fraud that the former employee allegedly carried out. The company’s CEO and CFOs faced Section 304 consequences:

In separate administrative proceedings, the company’s former CEO, James H. Roberts, and former CFOs, Laurel Krzeminski and Jigisha Desai, while not charged with misconduct, agreed to return more than $1.4 million, $327,000, and $176,000, respectively, in bonuses and compensation to Granite. These clawbacks were made pursuant to Section 304 of the Sarbanes-Oxley Act (SOX), which requires executives to reimburse certain compensation when an issuer is required to restate its financials as a result of misconduct.

The settlements with Roberts, Krzeminski and Desai follow another clawback settlement only 2.5 months ago. Both of these settlements relied on the SEC’s broad interpretation of Section 304 – which is that the statute supports clawing back incentives from CEOs and CFOs when there is any misconduct at the company, even if the executives were not personally involved. The SEC began applying this interpretation during the 2008 financial crisis, at which point clawback enforcement actions ticked up, and the Ninth Circuit affirmed this approach in 2016.

This action also arrives as we continue to anticipate final Dodd-Frank clawback rules. This Freshfields blog from late last year explains how that provision would differ from the existing Sarbanes-Oxley version. SEC Chair Gary Gensler has signaled that he wants to adopt those rules at about the same time as final “pay versus performance” rules – and that happened last week.

In commenting on the latest enforcement win, Gurbir Grewal, Director of the SEC’s Enforcement Division, reiterated the same warning from the June settlement – that this action should put executives “on notice”:

“We are committed to using SOX 304 as Congress intended: to incentivize a culture of compliance at public companies by ensuring that senior executives are not rewarded when their firms violate core reporting requirements. Executives should be on notice that we view SOX 304 as broad authority in seeking all forms of compensation that should be reimbursed to the company.”

Here is the complaint against the company, which it agreed to settle for $12 million after self-reporting the issue and remediating its controls, policies & procedures – and here’s the complaint against the former employee.

We’ll be sharing critical guidance on how to prepare for the new clawback rules and navigate the current enforcement environment at our “Proxy Disclosure & 19th Annual Executive Compensation Conference” this October. In particular, our session on “Clawbacks: Preparing for Final SEC Rules” – with Davis Polk’s Kyoko Takahashi Lin, CompensationStandards.com’s Mike Melbinger, Gibson Dunn’s Ron Mueller, and Hogan Lovells’ Martha Steinman – will give you practical action steps to take now. Here’s the full agenda for the Conferences – 18 essential sessions over 3 days. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.

– Liz Dunshee