If your company is found guilty of corporate misconduct, be prepared for the Securities and Exchange Commission to claw back any excess compensation handed out to the executives. The agency has announced that it plans to crack down on corporate wrongdoing, and clawbacks are part of the plan.
Recently, the SEC announced it was reviving an unfinished rule from the 2007-09 financial crisis. That rule would require companies with U.S. stock listings to recoup executive compensation whenever they have to correct their financial statements as a result of compliance failures. However, it has already started using a narrower clawback power that was created in 2002 after the WorldCom and Enron accounting scandals.
In 2016, a federal court found that the SEC does have the power to force clawbacks of bonuses or other incentive payments when companies restate their results due to misconduct, even when the executives who received those payments were not directly accused of any wrongdoing.
However, according to Reuters, the SEC has used that power sparingly despite having had perhaps hundreds of opportunities to exercise it. A new analysis found just 15 instances of SEC clawbacks against executives who were not directly accused of misconduct.
Now, the agency seems to be changing its stance. At least four anonymous attorneys involved in separate cases said that the SEC is currently considering clawbacks against CEOs and CFOs who weren’t directly responsible for noncompliance that led to a financial restatement.
Allison Lee, a Democratic commissioner, has told Reuters that the SEC’s clawback power has been “underutilized.”
So, the SEC is already using the clawback power it gained in 2002 more aggressively than it had in the past. Now, however, it is seeking additional authority by reopening the public comment period on a clawback proposal that was proposed, but never finalized, in 2015. This new rule would allow clawbacks in a greater range of situations, but it requires companies and exchanges to enforce them.
Ultimately, corporations should be aware of the new proposal and be ready to explain why any financial restatements are not because of legal noncompliance. If the agency finds that your executives haven’t earned the incentive-based compensation they received, it could seek the return of that compensation even if your executives did nothing wrong.