Center Comments to SEC on Proposed Clawback Rules Stress Need for Additional Discretion, Changes to

Executive Pay Plan Design

The Association's Center On Executive Compensation filed comprehensive comments this week with the Securities and Exchange Commission regarding its proposed rule implementing the Dodd-Frank clawbacks requirement, making a strong case that a final rule should provide sufficient discretion to allow company boards to always act in a manner which fulfills their fiduciary duties to the company and its shareholders.  The Center's comments explain that, although the proposed rule is largely reasonable on its face and provides limited discretion for boards to decline to pursue a clawback in certain circumstances, further changes are needed.  Accordingly, the Center made the following key suggestions in its comments:

• Expand the permitted use of discretion to allow a more complete evaluation of the costs of a clawback:  The proposed rule limits the ability of a company to exercise discretion to decline to exercise a clawback to occasions when the costs of hiring a third party to effectuate recovery exceeds the recoverable amount.  The Center's comments argue that companies should be allowed to consider other direct and indirect costs.
  
  
• Permit companies to decline to exercise a clawback where it would result in a violation of foreign law:  The proposed rule only permits foreign companies to decline to exercise a clawback if it would violate that company's home country law.  The Center argues that the focus should instead be on whether an executive, not a company, is located in a country where clawback is illegal.
  
  
• Consider the cancellation of granted and outstanding compensation as an accepted method of clawback recovery:  The Center's comments explain why the SEC should consider the cancellation of granted and outstanding compensation as a valid manner of clawback recovery which "effectuates the purpose of the clawback regulation" and thus is consistent with the proposed rule.
  
  
• Insulate a company's determination of the clawback "date" from hindsight judgment:  The proposed rule uses a "reasonably should have concluded" standard as a method of determining the date, creating the substantial likelihood a company's date determination is later subject to hindsight judgment by critics.  The Center's comments make the case that the decision should be insulated from second guessing so long as it was made in good faith.