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The Dodd-Frank Act and the Sarbanes-Oxley Act both have provisions for clawbacks.  Public companies need to be familiar with all of these provisions.


Section 954 of the Act requires national securities exchanges to adopt rules as directed by the SEC, which rules will require issuers to develop and implement a policy providing:

  • for disclosure of an issuer’s policy on incentive compensation that is based on financial information required to be reported under securities laws; and
  • that, if an accounting restatement is prepared, the issuer will recover any excess incentive-based compensation from any current or former executive officer who received such incentive-based compensation in the three preceding years.

The Dodd-Frank Act does not provide any required timeline for implementation of these rules.  The exchanges and the SEC will have to make a number of important interpretive calls, including:

  • What incentive compensation is covered?
  • Is incentive compensation that is based on financial metrics but not required to be reported subject to a clawback?
  • How is “excess incentive based compensation” calculated?
  • How is the “preceding three years” calculated—where does the period begin and end?


Section 304 of the Sarbanes-Oxley provides that if an “issuer” is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for:

  • any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and
  • any profits realized from the sale of securities of the issuer during that 12-month period.

The definition of “issuer” in Sarbanes-Oxley requires the issuer to have a class of securities registered under Section 12 of the Exchange Act.  It is therefore applicable to a broader class of companies than Dodd-Frank, which only applies to issuers with securities listed on a national securities exchange, such as the NYSE, Amex or NASDAQ.  As a result, issuers traded in the “pink sheets” and other over-the counter markets are not subject to Dodd-Frank, but most likely are covered by Sarbanes-Oxley.

In SEC v. Jenkins, a federal district court held Section 304 could be used to return incentive compensation even when the CEO had no personal involvement in the fraud.  The SEC has used Section 304 in other actions to enforce the return of equity based compensation without proving fraud by the CEO and CFO.  See SEC v. Walden O’Dell.

What Does All This Mean?

Compensation committees for exchange listed companies should begin to inform themselves about the design of clawback policies and available choices so they are in a position to make a decision once applicable rules are promulgated.  One important consideration will be how many other employees should be covered by the policy in addition to the “executive officers” referred to in Dodd-Frank.  Some companies may considered delayed payment of a portion of equity compensation until the three year period covered by Dodd-Frank has run.  There is probably no clawback policy that will be eagerly accepted by management, so fairness to management, to the extent permitted by Dodd-Frank, will be an important consideration.  For instance, a Dodd-Frank policy should give credit for any amounts clawed back by the Sarbanes-Oxley provision.