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SEC Revives a Proposal to Require Compensation Claw Backs After Restatements

The SEC has restarted rulemaking that would compel U.S. listed companies to adopt policies requiring recovery, on a no-fault basis, of incentive compensation paid to executive officers on the basis of accounting measures that are subsequently restated. The 2010 Dodd-Frank Act mandated that the SEC direct the exchanges to implement a claw back requirement as a listing standard. The Commission originally proposed such a rule in 2015. See SEC Proposes to Require Companies to “Claw Back” Executive Compensation Following a Restatement, July 2015 Update. After receiving comment on that proposal, the Commission took no further action, but has now issued a release again inviting the public’s views. In a written statement, SEC Chair Gensler described the proposal as “an opportunity to strengthen the transparency and quality of corporate financial statements as well as the accountability of corporate executives to their investors.”


Under proposed Securities Exchange Act Rule 10D-1, each listed company would be required to develop a compensation recovery policy. The policy would have to provide that, in the event of an accounting restatement to correct a material error, the company will recover from current and former executive officers any incentive-based compensation received during the prior three fiscal years that exceeds the amount that would have been received under the restatement. Recovery would be mandatory, regardless of whether the officers were responsible for the errors that resulted in the restatement and regardless of whether the inaccurate financial reporting was the result of mis-conduct. A company would be subject to delisting if it failed to adopt or enforce the recovery policy.


Many companies already have voluntarily adopted such compensation recovery policies. As the disincentives to restate increase, audit committees need to be vigilant in making sure that they are fully and evenhandedly informed in situations in which a restatement is a possibility. The claw back policies may also have an impact on compensation policy. Executive officers may seek to receive more of their compensation as base salary or in other forms that are not linked to financial reporting measures.

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