SEC Eyes Broadened ‘Clawback’ Restrictions; Firms whose financial statements contain errors may have to revoke some executives’ pay

http://www.wsj.com/articles/sec-eyes-broadened-clawback-restrictions-1433285178

SEC Eyes Broadened ‘Clawback’ Restrictions; Firms whose financial statements contain errors may have to revoke some executives’ pay

SEC Chairman Mary Jo White is under pressure to advance long-delayed post-financial-crisis rules, including several related to executive compensation. PHOTO: ANDREW HARRER/BLOOMBERG NEWS

ANDREW ACKERMAN

June 2, 2015 6:46 p.m. ET

WASHINGTON—U.S. companies whose financial statements contain errors may soon have to “claw back” some of their top executives’ compensation as a result. The Securities and Exchange Commission will soon propose long-awaited rules forcing companies to claw back, or revoke, some of their top officials’ incentive pay if they have to restate the financial results that led to it, according to people familiar with the agency’s internal deliberations.Unlike existing rules, in which clawbacks are triggered only in a narrow set of circumstances involving misconduct at companies that restate earnings, the SEC’s proposal would apply to all manner of restatements—including those issued because of mistakes.

The rules, if finalized, could force an executive who received stock options after the company met a performance target, such as a revenue figure, to return some or all of that compensation if a misstatement shows revenue fell below the executive’s performance target.

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The rules would also apply to a larger group of executives than existing rules, people familiar with the proposal said, although it isn’t clear how many top executives would be covered under the restrictions. Existing rules passed in the wake of accounting scandals in the early 2000s only affect a company’s chief executive and chief financial officer.

Supporters say the SEC’s effort—which is required by the 2010 Dodd-Frank financial law—will better align executive compensation with the accuracy of a firm’s financial reporting.

The five-member SEC is tentatively set to vote on the clawback proposal July 1, according to people familiar with internal deliberations at the agency. The SEC would have to collect public comment on the measure and vote on it a second time before it could go into effect.

SEC Chairman Mary Jo White is under pressure from congressional Democrats to advance long-delayed post-financial-crisis rules, including several executive-compensation provisions that remain incomplete.

The SEC has previously finalized rules on so-called say-on-pay votes that require companies to put executive-compensation packages up to a nonbinding shareholder vote at least once every three years. But it still must finalize rules requiring companies to disclose the pay ratio between chief executives and their employees as well as measures telling investors how the pay of top management tracked the firm’s financial results.

The agency, along with five other regulators, is also expected to soon re-propose rules to discourage compensation packages at Wall Street firms that could lead to excessive risk taking. (A 2011 proposal failed to gain traction.)

The coming rules may include requirements that certain employees at financial firms hand back bonuses for egregious blunders or fraud, The Wall Street Journal reported earlier this year.

An SEC official said Ms. White is committed to completing the pay-ratio rule by the fall.

The clawback proposal is expected to be less controversial than the pay-ratio measure, in part because it is widely seen as a move that is beneficial in the long term to shareholders. In contrast, Republican SEC commissioners and business groups say the pay ratio is designed to shame chief executives and is unrelated to a company’s bottom line.

“Unlike the median-pay-ratio provision, which puts special interests ahead of shareholder interests, a properly designed clawback rule could yield real benefits to shareholders,” Michael Piwowar, a Republican member of the SEC, said to the Journal on Tuesday in a written statement.

The clawback rules would require stock exchanges such as Nasdaq OMX Group Inc. andIntercontinental Exchange Inc.’s New York Stock Exchange to force listed companies to disclose—and enforce—clawback policies. Failure to comply with the requirements would result in a firm’s delisting.

“It’ll certainly be a step in the right direction, we just don’t know how big a step,” saidNell Minow, vice chairman of ValueEdge Advisors, which promotes good corporate-governance practices and shareholder rights.

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.

Financial firms have occasionally invoked clawbacks, largely for clear-cut wrongdoing, but data on banks’ clawback efforts are scarce.

The rule would address that issue by requiring firms to both establish clear clawback policies and disclose when they are enacted.

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