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Jul 01, 2015

SEC to broaden clawback rules

Proposal to recover excess pay in cases of accounting errors completes Dodd-Frank executive compensation requirements

The SEC has proposed rules that would claw back executive compensation in cases where the company made accounting errors or other mistakes that may have inflated the pay. The proposal covers the last of the compensation-related regulations proposed under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The proposal would apply to all types of statements that could affect executive compensation, significantly widening the scope of current clawback regulations that require executives to return part of their pay only in cases of fraud and other misconduct.

The rules would mainly cover executive pay linked to metrics related to accounting, the stock price or total shareholder return, the SEC says in a press release. Any excess pay granted in the three years preceding an accounting restatement would have to be recovered, and the executives would have to give up the excess pay no matter who – if anyone – is at fault.

‘These listing standards will require executive officers to return incentive-based compensation that was not earned,’ says SEC chairman Mary Jo White. ‘The proposed rules would result in increased accountability and greater focus on the quality of financial reporting, which will benefit investors and the markets.’

Under the Securities Exchange Act, all listed companies will have to prepare recovery policies as part of their annual reports. They will also have to disclose actions to recover excess pay in annual reports and any proxy statements related to executive compensation if they completed a recovery or any balance was outstanding from a recovery.

The five-member commission voted three to two in favor of the proposal, with Republican commissioners Daniel Gallagher and Michael Piwowar voting against it. The SEC will allow a 60-day period for comments on the proposal.