SEC adopts ‘clawback’ rules for erroneously awarded incentive pay

The Securities and Exchange Commission today adopted rules requiring public companies to recover incentive-based executive compensation if that pay was awarded in error because of an inaccurate financial statement. Company policies for recovering erroneously awarded compensation must be filed as an exhibit in their annual reports, which must also disclose recoveries.

The SEC first proposed new rules for executive compensation disclosure in 2015 but they were never finalized. The commission reopened consideration of the rules last year. In August, it adopted a new requirement that a reporting company’s proxy statement and other disclosures include a table showing executive compensation and financial performance measures.  The new rules adopted yesterday will “strengthen the transparency and quality of corporate financial statements, investor confidence in those statements and the accountability of corporate executives to investors,” SEC Chairman Gary Gensler said.

“If the company makes a material error in preparing the financial statements required under the securities laws … then an executive may receive compensation for reaching a milestone that in reality was never hit,” Gensler added. “Whether such inaccuracies are due to fraud, error or any other factor, today’s rules would implement procedures that require issuers to recover erroneously rewarded pay, a process known as a ‘clawback.’”