Ahead of SEC Rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the topic of amending clawback policies is a sensitive one for companies and boards. At some point we know that rules will be enacted, but companies and boards struggle with what (if anything) to do in advance. The clawback aspects of Dodd-Frank are relatively straightforward and so public companies (particularly the larger ones) are more likely to contemplate (and perhaps even implement) a policy intending to preemptively comply with Dodd-Frank.
Thanks to the Sarbanes-Oxley Act of 2002 (S-OX)), many companies already have a clawback policy in place which can be revised to comply with the new rules, when these are enacted. This should make the process of compliance an easier mandate to tackle. However, there is a wide range of clawback policies that companies have implemented over the last several years so nothing can be taken for granted. S-OX gave the SEC the power to recover compensation and stock profits from CEOs and CFOs of public companies in the event of misconduct resulting in a restatement of financials, whereas Dodd-Frank is more onerous with aspects such as a three-year look back during which even executives not at fault will have to return compensation.
Most small- to mid-sized companies’ clawback policies are likely still of the type contemplated by S-OX, with the intent of waiting until final rules are produced before implementing or amending (as the case may be) policies to conform to the rulemaking under Dodd-Frank. Whereas, larger companies that tend to receive the spotlight on these issues (say more than $10 billion in annual revenue) are more likely than their small- to mid-sized counterparts to have gone ahead and made adjustments to their policies to be more in line with Dodd-Frank.
There is also a bit of an industry bias — financial services companies, due to their closer scrutiny by regulators and the public, are also more likely to have made Dodd-Frank clawback adjustments. The risk is that, depending on the specific SEC rulemaking that is implemented, clawback policies that are intended to be Dodd-Frank compliant and implemented prior to the rules may need further tweaking, but they should be similar to those ultimately required.
Squire Sanders partner Abby E. Brown contributed to a Compliance Week article on this topic, published on December 17, 2013, by Joe Mont, entitled “Companies Getting Ahead of Coming Clawback Requirements.” To view the full article, please log on to Compliance Week.