SEC Approves Clawing Back Executive Compensation as Retribution When Company Restates its Financials

The Party's Over

Recently, the U.S. Securities and Exchange Commission revived a rule from 2015 that would expand its powers to clawback executives' compensation when a company has to restate its financials. After seeking public comment on the plan, the SEC approved the regulation on October 26, 2022.

The Rule

The regulation applies to public companies of all sizes and to any executive officer who performs policymaking decisions and who has received incentive compensation, including stock options, and dramatically expands the scope of the agency's existing clawback powers, which were created in 2002.

The regulation applies to compensation from current or former executives that was paid during the three years leading up to the restatement - "regardless of whether the misstatement was due to fraud, errors, or any other factor." The recoverable amount is the difference between the incentive-based compensation that was received and what it would have been if it were based on the restated financial measure.

The regulation directs U.S. stock exchanges to establish listing standards that require each issuer to develop and implement such a policy. Issuers that do not adopt and comply with compensation recovery policies in line with the rule's standards will be subject to delisting.

The Impact

According to SEC Chair Gary Gensler, the regulations “build in greater incentives that senior executives look after the financials and make sure that they’re accurate.” This is especially necessary when a company ties executive compensation to the company's financial performance. Fraudulent financial misstatements can have a significant impact on executive pay, and may even reward executives for reaching a milestone that was never met. When left unchecked, executives are free to muddy up the financials to hide the company's poor performance and line their wallets, at the company and shareholders' expense. With this regulation on the books, executives will think twice before reporting any false financials knowing they can be stripped of their unwarranted compensation.

Robbins LLP assists shareholders to hold corporate executives accountable for their wrongful behavior, including when they negligently or fraudulently report the company's financial statements. If you suspect wrongdoing by corporate fiduciaries or want to learn more on how to hold executives accountable, contact one of our shareholder rights attorneys for a free consultation.