As noted recently, the SEC has reopened the comment period for its proposed rule on clawbacks. However, given the time between the original proposal (2015) and now, the SEC has also requested information on topics that have emerged as current concerns.
Center Advocacy: When the original Dodd Frank requirement and subsequent rule were announced, the Center developed several resources for regulators and other stakeholders highlighting the implications to companies and the issues the SEC needed to address. These included a “Nuts and Bolts” guide, Fact Sheet, and detailed formal comments. The Center’s comments, which were informed by company input, were cited in the recent request for information by the SEC.
The SEC is seeking insights on:
- Should a clawback should be triggered by a “little r” immaterial financial revision vs. a material restatement of financial results? The Center believes immaterial revisions should not trigger the clawback provision as they would have a miniscule impact on pay, create an unneeded burden on companies, and could interfere with getting timely revisions to investors. Rather, the SEC should adopt a good faith standard for the determination of the impact of a material restatement on past stock price and TSR-based metrics.
- Is it too ambiguous to determine the three-year lookback period as of the date the board “reasonably should have concluded” a material restatement would be needed? Ambiguity increases the risk of “second guessing” and there should be a clearly defined period with a cutoff date. Specifically, the Center recommends that the Commission replace the “reasonably should have concluded” approach with one which relies on a board having exercised good faith in making the date determination.
- General employer practices/policies on clawbacks. Much has changed in the past six years, and the SEC seeks information on how companies currently implement clawback policies.
Outlook: The Center is aiming to educate the SEC on how practices have evolved while ensuring the suggestions in the original comments still stand. Clawbacks are a part of an effective pay-for-performance compensation model, but any regulation needs to make them worthwhile and workable.