Erroneous Executive Incentive Pay Must be Recovered, Says SEC

The SEC adopted a new rule requiring securities exchanges to create and enforce listing standards that require issuers to recover executive incentive pay that was improperly awarded, sometimes referred to as a “clawback.”

This requirement was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which amended the Securities and Exchange Act of 1934. The SEC issued this rule in 2015, but renewed the public comment period until June 2022, and then finalized the rule Wednesday.

In the event a securities firm has to publish an accounting correction, it must recover any executive incentive pay from current and former executives if that incentive pay was predicated on the incorrect accounting information, and they must do so for the three years prior to the date the issuer was required to prepare the restatement. The issuer must also disclose its compensation recovery policy.

Exchanges must require a written policy for recovering such incentive pay.

The SEC provides for three exceptions to this rule:

1. If the direct expenses of recovery would exceed the amount to be recovered.
2. If the recovery would violate the laws of the firm’s home country.
3. If the recovery would cause a retirement plan to fail to meet its legal obligations to the IRS.

This rule comes into effect 60 days after its entry into the Federal Register.