• Compensation Clawback Policies in 2012
  • August 22, 2012
  • Law Firm: Jones Walker LLP - Washington Office
  • On July 13, 2012, in the most recent high profile financial sector example of executive compensation clawbacks, J.P. Morgan Chase announced that it would seize millions of dollars of compensation from rogue traders. The recovered sums included restricted stock and canceled stock options grants. Prior to such announcement, there have been very few reported internal enforcements of compensation clawbacks for chief executive officers, chief financial officers, and other senior executive officers and employees pursuant to U.S. securities laws.

    Regulatory Genesis of Executive and Employee Compensation Clawbacks

    Section 304 of the Sarbanes-Oxley Act of 2002 ("SOX") requires recoupment by a public company of its chief executive officer’s and chief financial officer’s bonuses, equity, or incentive-based pay and profits on sales of company stock that they receive within the 12-month period following a restatement of financials because of material non-compliance, stemming from misconduct, with SEC financial reporting requirements.

    Clawbacks under Dodd-Frank

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank"), which requires national securities exchanges to implement clawback policies which are more expansive than the current requirements under Section 304 of SOX, and to prohibit the listing of securities of issuers that have not developed and implemented compensation clawback policies in conformity with the final rules. According to the SEC’s Dodd-Frank rule-making schedule, final rules regarding clawbacks will be adopted between now and December of this year. In contrast to SOX, under Dodd-Frank:

    • Broader Clawback Triggers. A company’s clawback policy will be triggered at any time in which a company prepares an accounting restatement resulting from “material” noncompliance with any SEC financial reporting requirement, and is not contingent upon "misconduct" (by comparison, Section 304 of SOX applies only when a financial restatement is "required" under SEC rules and is the result of "misconduct"). It should be noted that the SEC has taken the position in enforcement actions that misconduct by the issuer, not exclusively the chief executive officer and chief financial officer, is sufficient to subject such executives to the SOX clawback.
    • Disclosure Obligations. Dodd-Frank requires disclosure of the listed company’s policy on incentive-based compensation based on financial information required to be reported under the securities laws.
    • Application to All Current and Former Executive Officers. Once the clawback policy is triggered, it would apply to all incentive-based compensation paid to current and former executive officers of a listed company (in contrast, Section 304 of SOX applies only to chief executive officers and chief financial officers).
    • Extended Look-Back Period. Any compensation "received" during the three years immediately preceding the financial restatement is subject to the clawback (in contrast, the look-back period under Section 304 of SOX is twelve months from the date of public release of restated financial information).
    • Increased Amount of Compensation Subject to Clawback. The clawback would recover from any current or former executive officers of the listed company an amount equal to the excess over the amount of total incentive compensation that would have been paid to such executive officers under the restated financial statements. Dodd-Frank explicitly includes stock options awarded as incentive compensation, and presumably, will include other equity grants.