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SEC Proposes New Executive Compensation Rules

By  Jeffrey B. Coopersmith
July 2015
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The SEC has recently proposed new rules concerning two aspects of executive compensation.  On April 29, 2015, the SEC proposed rules under the Dodd-Frank Act requiring companies to disclose the relationship between the pay of top executives and the company’s financial performance. A summary of the proposed rules and a link to the text can be found here. Under the SEC’s proposal, companies would have to disclose executive pay and performance information for itself and companies in a peer group in a table and tag the information in an interactive data format. Depending on the size of the company, the information would have to be disclosed for the past three or five fiscal years. 

On July 1, 2015, the SEC proposed rules directing national securities exchanges to establish listing standards requiring companies to adopt policies to claw back incentive-based executive compensation that would not have been earned based on an accounting restatement.  A summary and the proposed rules are available here. The rules are designed to implement Section 954 of the Dodd-Frank Act, which added Section 10D to the Securities Exchange Act of 1934. The rules would require claw-back from current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date on which the company is required to prepare restated financials to correct a material error. Failure to adopt a recovery policy would subject the company to delisting. 

Under the proposed rule, the definition of executive officer would include the company’s president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business unit, division, or function, and any other person who performs policy-making functions.  This is substantially broader than section 304 of the Sarbanes-Oxley Act, 15 U.S.C. § 7243, which applies only to a company’s CEO and CFO, and requires forfeiture of certain compensation and profits from securities sales only for the 12-month period following the issuance of the financial statement that need to be restated.  Under the proposed rules, recovery would be required if the restated financials do not support the incentive-based compensation, regardless of fault or scienter.  Section 304 similarly does not require fault or scienter.

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