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SEC to Vote on Final Clawbacks Rules Next Week

The SEC has announced it will vote on final rules relating to Dodd-Frank clawback provisions next Wednesday, October 26 at 10 am. The meeting will be webcast at www.sec.gov and will be open to the public. The SEC re-opened comments for the proposed rule twice in the past two years – once in 2021 and once in 2022 – following on the original proposal in 2015.

Current clawback rules apply to the CEO and CFO and provide for employers to recover incentive compensation from these executives in circumstances of misconduct and fraud. According to the just-released Meridian 200 study (see below) 99% of those companies disclose a clawback and 53% do NOT require fraud or misconduct (a significant increase over last year and likely related to anticipation of the SEC rule).  Many employers have voluntarily expanded their policies to include all Named Executive Officers (NEOs) as well as the scope of workplace violations covered. However, any company with an “at fault” recovery policy will fall short of the SEC’s new rules, which will require companies to recoup pay in the event of a material financial restatement even in the absence of wrongdoing.

In addition, the final SEC rule will likely require employers to analyze the impact of “Big R” financial restatements as well as “little r” errors to determine if excess payments were made and would apply to current and former executive officers who received incentive-based compensation during the three fiscal years preceding the accounting restatement.

Clawbacks were one of the rules thought to possibly be delayed by the SEC’s recent announcement regarding a technical snafu with comment submission. The fact that the final rule will be voted on next week calls into question whether any of the SEC timeline will be affected by the technical glitch, which caused a number of comment submissions to fail to be received by SEC staff.

The Center will provide updates in real-time once the final clawback rules are published.

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Authors: Ani Huang

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