SEC Revives Claw Back Rule for Executive Compensation

by | Oct 27, 2021 | Blog | 0 comments

Securities and Exchange Commission voted on October 14, 2021 to bring back an unfinished rule from 2015[1] relating to executive compensation. The rule requires U.S. listed companies to have a plan in place to claw back executive compensation in the event the company corrects their financial statements due to compliance failure. The rule would allow the SEC to force a public company’s executives engaged in policymaking decisions and receiving incentive-based pay, to return such pay if the Company misreports its earnings.

 As SEC increasingly cracks down on misconduct by listed companies, the latest step shows the aggressive stance of the Regulator. The claw back provision puts thousands of executives on notice of potentially losing millions of dollars in pay checks and bonuses. The rule would apply to all public companies irrespective of the size

 The question whether the SEC has any such powers to force the executives to return their paychecks and bonuses was settled in 2016[2]. A federal court has previously ruled that the SEC can, in fact, recoup executive pay from CEOs and CFOs who are not directly accused of misconduct. The court reasoned that the executives should not profit from the misconduct and therefore allowed the SEC to claw the proceeds back.

Under the 2015 rule, the claw back provision is triggered under narrow circumstances like restatement of earnings as explained above. But under the new proposal, SEC intends to widen the scope. The proposed rule would apply to wider set of restatements[3], including those where a company’s financial results had errors. The rule would also require stock NYSE and NASDAQ to compel companies listed on these exchanges to disclose their claw back provisions.

The SEC is asking for public feedback and reopening the comment period to factor in the regulatory and market developments since 2015[4]. The SEC is specifically requesting comments on whether its current definition of “restatement” should be widened. The comment period is open for 30 days.

[1] SEC Press Release, SEC Proposes Rules Requiring Companies to Adopt Clawback Policies on Executive Compensation (July 1, 2015),

[2] See Opinion, SEC v. Jensen, No. 2:11-CV-05316 (9th Cir. Aug. 31, 2016).

[3] SEC defines “restatement” as “as the process of companies revising previously issued financials to reflect the correction of one or more errors that materially affects those statements, without describing the types of errors that would be considered material to investors.”

[4] SEC Press Release, SEC Reopens Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation (Oct. 14, 2021),