SEC Proposes Mandatory Compensation Clawbacks: Would Require Clawback of Excess Incentive-Based Compensation Earned by Executive Officers During the Three Fiscal Years Preceding an Accounting Restatement to Correct for Material Error; Does Not Appear to Require Issuers to Reassess Discretionary Award Determinations (Positive or Negative) in Light of Restatement

Sullivan & Cromwell LLP - July 7, 2015
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As expected, last week the SEC proposed to direct the national securities exchanges to require listed companies to implement policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding an accounting restatement to correct a material error.  The excess compensation would be based on the amount the executive officer would have received had the incentive-based compensation been determined using the restated financials, but the proposal does not appear to require the listed company to reassess discretionary award determinations (either positive or negative).  The proposal would apply to all listed companies without regard to the types of securities listed, other than certain registered investment companies, clearing agencies and unit investment trusts.
 
Consistent with other recent compensation-related SEC proposals, the clawback proposal was approved by a 3 to 2 vote, with Chair White being joined by Commissioners Aguilar and Stein in voting for the measure and Commissioners Gallagher and Piwowar voting against.  The dissenting Commissioners raised concerns regarding the number of executives covered and the “no-fault” nature of the proposal.

Comments are due 60 days after publication of the proposal in the Federal Register.