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Compensation Clawbacks: Compliance First, Rules Later


Rebekah Mintzer, Corporate Counsel

April 07, 2014    |0 Comments

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010. Yet, one of its key provisions, Section 954, which deals with clawbacks of incentive-based executive compensation, has yet to be fully clarified by the U.S. Securities and Exchange Commission.
A recent advisory [PDF] from AlixPartners explains that just because some of the details of theDodd-Frank clawback rules [PDF] are not yet known doesn’t mean that there aren’t plenty of companies proactively creating and disclosing their policies already.
Why worry about complying with a regulation that hasn’t been fully explained? Susan Markel, a managing director in the financial advisory services group at AlixPartners, told CorpCounsel.com that there are benefits to having company clawback policies ahead of SEC rules. “They put the executive officers on notice that this could happen to them,” said Markel. “The thought would be that greater attention is paid to getting it right the first time.” Getting to policy specifics before the SEC does also can show that a company places a premium on corporate governance.
Dodd-Frank requires incentive-based compensation policies be included in financial disclosures, and many companies have already started doing just that. The AlixPartners advisory cites statistics from Equilar Inc., which provides executive compensation data, and found in 2006 only 18 percent of Fortune 100 companies publicly disclosed their clawback policies; by 2013, this number had jumped to 89 percent.
Although clawback requirements were originally promulgated more than a decade ago in the Sarbanes-Oxley Act, Dodd-Frank expands on SOX rules substantially. The advisory explains that under SOX, clawbacks must only happen in relation to financial restatements brought about “as a result of misconduct.” Dodd-Frank drops the misconduct requirement. The look-back period for the clawbacks will also be expanded from the 12 months required under SOX to three years under Dodd-Frank. Under Section 954 of the new law, companies that don’t comply with clawback rules will be barred from national securities exchange listings.
There’s plenty that isn’t clear yet, though. For example, rules for clawbacks under SOX only applied to CEOs and CFOs, but now under Dodd-Frank may apply to more residents of the C-suite. “The language is ‘current and former executive officers,'” said Markel. “So just what does that mean?”
It’s also still unclear, the advisory noted, exactly how Dodd-Frank defines a financial restatement and whether every restatement issued will be considered, for the purposes of the law, a result of “material noncompliance” with financial reporting requirements.
Markel said that—final rules or not—some companies are preemptively expanding the ways they can take back executive compensation. “We’re seeing policies that cover a broader range of triggers for the potential recoupment of funds,” she said, citing financial restatement and ethical misconduct as examples.
Other companies are clawing back more types of incentive-based compensation, mandating that clawback policies cover not just cash bonuses, but awards such as deferred compensation and perquisite accounts, too. “In some cases, companies that already have such policies in place are modifying them in response to shareholder resolutions,” Markel said.
She added that the financial industry has been particularly keen to expand clawbacks. “Still, some companies continue to take a wait-and-see approach in making changes to their existing clawback policies or crafting new ones until the SEC clarifies its view on what the rule under Dodd-Frank will look like,” she said.

Read more: http://www.corpcounsel.com/id=1202649857083/Compensation-Clawbacks%3A-Compliance-First%2C-Rules-Later#ixzz2yCqQqILd





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