A top executive at the large consumer product maker, Church & Dwight, was forced to forfeit $200,000 in stock awards because he deleted texts on his personal phone that the company wanted to review for an undisclosed legal matter, the WSJ reported.

Church & Dwight is the large company behind well-known brands like Arm & Hammer, Nair, and OxiClean.

Barry Bruno, the chief marketing officer at the company did not follow the company’s instructions to preserve texts on his phone, Church & Dwight said in a May securities filing. 

In that filing, Church & Dwight said that while it was able to retrieve a significant number of deleted communications after help from outside counsel, it required Bruno to forfeit some of his stock options for violating company policies. 

“We do not believe the underlying legal matter is material,” a spokesperson for the company said.

When asked why the company would make the disclosure, given that the legal matter isn’t material, the spokesperson said it had compensation implications for a named executive officer.

Bruno did not respond to a request for comments from the WSJ.

Clawbacks at Church & Dwight

Bruno is also the company’s US consumer president and has been at Church & Dwight since 2013. His total compensation in 2022 was $1.3m, including about $661,000 in stock options and about $588,000 in salary and bonus, according to the company’s mid-March proxy filing. 

When companies do recoup compensation, they must disclose it in the annual proxy statement filed with the SEC at the end of the year. They don’t typically disclose it midyear as Church & Dwight did, said Robin Ferracone, founder of the compensation consulting firm Farient Advisors, who commented for the WSJ story. “They’ve been very explicit here,” she said. “I commend this company for transparency.”

Interestingly, this is not the first time the company has penalized an executive for the act of deleting company-related communications. In 2012, the company clawed back the annual performance bonus of James Craigie, who was chief executive at the time, after he was found to have deleted emails related to a FTC investigation. 

In June of that year, the FTC told the company that it had decided not to take action in the matter and closed its investigation, and the company disclosed that fact in a proxy statement.

Clawbacks of executive comp

Congress is debating legislation that would help regulators claw back compensation from bank executives responsible for bank failures, and on October 26, 2022, the SEC adopted Rule 10D-1, a rule requiring companies to recover erroneously awarded incentive-based compensation based on mistakes in the companies’ financial reporting. The SEC’s rule became effective on January 27, 2023.

The new requirements apply to public companies of all sizes and to any executive officer who performs policymaking decisions and who has received incentive compensation, including stock options, dramatically expanding the scope of the agency’s existing clawback powers, which were created in 2002. Under the enhanced rule created in January, companies have to recover compensation in excess of what the executive concerned should have received in the event the companies’ financials are restated due to “material noncompliance” with US securities laws.

The rule applies to compensation paid in the three years leading up to the restatement, regardless of whether the misstatement was due to fraud, errors, or any other factor.

Archiving, supervising comms

On September 27, 2022, the SEC announced charges against 15 broker-dealers and one affiliated investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.

Employees at these firms routinely used personal devices to communicate about business matters and ‘the substantial majority of these off-channel communications’ were neither maintained nor preserved by the firms.

The firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws (namely, Section 17(a) and 17a-4 of the Exchange Act), and agreed to pay combined penalties of more than $1.1b.

Gurbir S. Grewal, Director of the SECs Division of Enforcement, said that the actions and penalty size underscored “the importance of recordkeeping requirements”, which he also called “sacrosanct.” He pointed out that proper recordkeeping is required in order to enable the SEC to “determine what happened” in cases of allegations of wrongdoing and misconduct.

More recently, on May 11, the SEC charged HSBC Securities (USA) Inc. and Scotia Capital (USA) Inc. for widespread and longstanding failures by both firms and their employees to maintain and preserve electronic communications. To settle the charges, HSBC and Scotia agreed to pay penalties of $15m and $7.5m, respectively.

The SEC Chair, Gary Gensler, linked the charges against the broker-dealers and investment adviser to the critical role that trust plays in finance. He said that “By failing to honor their recordkeeping and books-and-records obligations” the market participants “have failed to maintain that trust.”

FINRA’s report reminds entities to file a financial notification when selecting or changing an archival service provider, document the review of correspondence, and confirm individuals are not conducting supervisory reviews of their own correspondence.

In 2022, FINRA published its annual Report on FINRA’s Examination and Risk Monitoring Program, which discussed the risk involved in communications, particularly the risks posed by the use of personal devices and apps found on all mobile ones. The self-regulatory organizations said it was concerned with apps being set up in a way that encourages retail investors to engage in trading activities and strategies that may not be consistent with their investment goals or risk tolerance.

And, like the SEC, FINRA was concerned with firms’ adherence to Exchange Act Rules 17a-3 and 17a-4, FINRA Rule 3110(b)(4) (Review of Correspondence and Internal Communications) and FINRA 4510 Rule Series (Books and Records Requirements) (collectively, Books and Records Rules) requiring a firm to, among other things, “create and preserve, in an easily accessible place, originals of all communications received and sent relating to its business as such.”

FINRA’s report reminds entities that they must file a financial notification when selecting or changing an archival service provider, to document the review of correspondence, and confirm that individuals are not conducting supervisory reviews of their own correspondence. And it instructs firms to do its due diligence on such vendors to ensure those providers appreciate the firm’s obligations under Review of Correspondence and Books and Records requirements.