The U.S. Securities and Exchange Commission on Wednesday voted to adopt new rules that will require companies that restate their financials due to compliance lapses to claw back excess compensation from their executives. The rule, which Congress mandated following the 2007-2009 financial crisis, was left unfinished in 2015, but was revived by the SEC under Chair Gary Gensler last year as part of a broader effort to crack down on corporate malfeasance by strengthening the agency’s tools for penalizing executives.
SEC commissioners voted 3-2 in favor of the new rules, with the two Republican commissioners voting against the proposal and the two Democratic commissioners voting for it along with Gensler. “I believe that these rules, if adopted, would strengthen transparency, the quality of financial statements, but also beyond that, investor confidence in those statements,” Gensler said ahead of the vote. The new rules 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 new rules, companies will 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 securities laws. The rules apply 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. They also direct U.S. stock exchanges to establish listing standards requiring each issuer to develop and implement such a policy.
