SEC Considers Clawback Provisions for Executive Pay When Financial Statements are in Error

The Securities and Exchange Commission (“SEC”) will vote on new clawback provisions that would penalize executive pay when a company’s financial statements contain errors. These new provisions are part of the SEC’s executive compensation rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the new rules, companies with errors in their financial statements would be required to “claw back” some of the compensation paid to top company executives. Currently, clawbacks may be imposed on executives at companies where certain types of misconduct result in a restatement of earnings. The new rules would broaden those circumstances to include restatements of earnings due to error.

Executives that receive stock options for reaching predetermined performance targets would be required to return a percentage of that compensation if a restatement results in the company failing to meet its target for executive bonuses. The new rules would broaden the application of clawback provisions to other company executives beyond chief executive officers and chief financial officers.

The SEC will vote on the new clawback provisions on July 1, 2015. A comment period will follow that vote, and then a second vote will be taken following the comment period.

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