The SEC has announced rules that require issuers to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers.

The Commission proposed compensation recovery rules in 2015 and reopened the comment period on the proposal in October 2021 and again in June 2022.

Strengthen transparency

“I believe that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors,” said SEC Chair Gary Gensler.

“Through today’s action and working with the exchanges, we have the opportunity to fulfill Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials.”

The new rules implement Section 10D of the Securities Exchange Act of 1934, a provision added by the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

Material errors

Gensler said in a further statement: “Corporate executives often are paid based on the performance of the companies they lead, with factors that may include revenue and business profits. If the company makes a material error in preparing the financial statements required under the securities laws, however, then an executive may receive compensation for reaching a milestone that in reality was never hit. 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.”

The SEC also announced new oversight requirements for certain services outsourced by investment advisers.