The Advisors' Blog

As I’ve reiterated time & time again, the Reg Flex Agenda that the SEC publishes reflects the priorities of the Chair and isn’t a commitment to a particular rulemaking schedule. However! The Commission sure does seem to be on a pretty fast clip – and SEC Chair Gary Gensler seems to be committed to tying up loose “Dodd-Frank” ends. With pay versus performance rules adopted in August, there’s reason to believe that clawback rules are also coming soon. Both of those rules were slated for being finalized by October in the most recent Reg Flex Agenda – and it’s now *checks calendar* … mid-September. Clawbacks are complicated. There may be some component of a “little r” restatement in the final rule, once the SEC acts and the exchanges get around to following through with their own rules.

A blog this week from Jun Frank and Paul Hodgson at ISS Corporate Solutions summarizes comments on the reoopened proposal, current market practices, and an ISS policy clarification from earlier this year. Here’s an excerpt:

Earlier this year, Institutional Shareholder Services announced a clarification of its position on clawback policies. In order to receive credit for having a clawback policy under ISS methodology on equity plan evaluation, the policy “should authorize recovering upon a financial restatement and cover all or most equity-based compensation for all NEOs.” The policy notes that no credit will be given if the clawback covers only the limited requirements under the Sarbanes-Oxley Act nor if a company says it will wait until the SEC’s proposed rule is finalized before introducing a policy.

The SEC aims to release the final regulations by October, which may finally result in companies being required to adopt a clawback policy. While a number of businesses plan to adopt a clawback policy only after the rules are finalized, the majority already have such a policy in place.

The scope of clawback policies has also evolved over the years, with more and more boards expanding their reach to enable the recovery of compensation for actions that materially harm the company and its shareholders. The final rules may give companies an opportunity to re-examine their policies to see whether their scope is reasonable considering the firm’s operations, incentive structures and peer practices.

It makes sense that most companies already have some form of clawback policy, due to Sarbanes-Oxley provisions and market norms around non-competes, misconduct and other employment-related issues. But companies will need to pay close attention to what the new rules require and revisit their policies and agreements to make sure they conform. Plus, the SEC’s Enforcement Division is already on a tear to recover incentives under SOX 304, so it’s worth reminding executives of those ins & outs, too (the bottom line: file accurate financials…or else.)

Make sure you’re ready for this complex requirement. There are sure to be tons of questions from your higher-ups if you have to make any changes that could remotely affect their arrangements – so you’ll want to have a very clear understanding of exactly what’s required and the consequences for not complying. Register for our “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – to get the crash course on “Clawbacks: Preparing for Final SEC Rules” with Davis Polk’s Kyoko Takahashi Lin, Gibson Dunn’s Ron Mueller, Hogan Lovells’ Martha Steinman, and Mike Melbinger. Plus, 17 other panels, including an interview with Corp Fin Director Renee Jones. The Conference is being held virtually over 3 days – October 12th – 14th. Sign up online (via the “conference” drop-down and “PDEC” options), email sales@ccrcorp.com, or call 1-800-737-1271.

– Liz Dunshee