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What you need to know about the new SEC clawback rules

On Behalf of | Dec 22, 2023 | Fraud

Most people who deal with federal compliance for their companies are familiar with U.S. Securities and Exchange Commission (SEC) clawback provisions. They’ve become increasingly common in executive compensation packages. The SEC gave publicly held companies until Dec. 1 to revise their policies to include recent changes to these rules.

Clawback rules were incorporated into the Sarbanes-Oxley (SOX) Act – one of the federal laws enacted after high-profile corporate scandals rocked the financial world. The “corporate failures and fraudresulted in substantial financial losses to institutional and individual investors,” according to the SOX website. The Dodd-Frank Act of 2010 provided further protections for investors, customers and taxpayers after a number of “too-big-to-fail” companies did just that.

Clawback provisions have allowed businesses to take back incentive compensation paid to executives like CEOs and CFOs if their actions or decisions “turn out to be ethically and legally questionable, thus imposing financial and reputational liabilities on the company,” as the Society for Human Resource Management (SHRM) describes it.

The rules apply to anyone who received more incentive pay than they should have

Last year, the SEC broadened these rules. Among the new requirements is that any time a public company has to provide an accounting restatement because of a material error, they must recover the amount of incentive compensation paid erroneously as a result from all executives who were overpaid. That’s the case whether an executive had anything to do with the error or not.

Although the SEC clawback rules apply only to public companies, which can lose their place on stock exchanges if they fail to comply with the rules and the changes, more private companies are adopting them as well as an incentive for their executives to act ethically and to help provide added peace of mind to investors.

The challenges of retrieving the money

Having clawback rules in place is one thing. Recouping the money is another. It can involve lawsuits against former executives. Some of these have totaled well into the millions of dollars. 

One way to help avoid this is not to make any “golden parachute” or severance payouts to executives who leave the company for up to a year. It’s generally not long after someone involved in wrongdoing leaves that their misdeeds are discovered.

Whether you have questions or concerns about the revised clawback rules or you need help dealing with an investigation of your company or individual employees, it’s often wise to get solid legal guidance as soon as possible.