Public companies whose financial statements contain errors would be forced to recoup their executives’ bonuses under a rule the Securities and Exchange Commission is set to consider on 26 October.
The SEC’s five commissioners are set to vote on the rule in a meeting that starts at 10am ET. Also on the docket are a final rule that would require mutual funds to provide their shareholders with simpler disclosures, and a proposal to limit investment advisers’ ability to outsource certain functions to third-party service providers.
Required by the 2010 Dodd-Frank Act to discourage fraud and accounting mischief, the so-called clawback rule’s implementation has been delayed for years amid resistance from corporate executives. SEC chair Gary Gensler reopened a 2015 proposal last year to collect fresh public feedback on the idea.
Gensler, a Democrat appointed by President Biden, said on 26 October that the rule, if finalised, would strengthen investor confidence in corporate reporting, as well as the accountability of managers. Democrats hold a majority of the commission’s seats.
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“Corporate executives often are paid based on the performance of the companies they lead, with factors that may include revenue and business profits,” Gensler said. “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.”
The final version of the rule is broader than the 2015 proposal, which would have triggered clawbacks only if companies identified major accounting errors that required a restatement of prior years’ financial results. Under the rule being voted on on 26 October, companies will also have to recover executive bonuses if they find smaller errors that affect only the latest year’s results.
SEC economists estimate the latter category of accounting errors, known as “little r” restatements, are about three times as common as the more serious type.
Firms would also have to start including check boxes on the front page of their annual reports to highlight whether an error correction or clawback analysis has been conducted.
Companies would have to adopt policies to recover wrongfully awarded incentive pay from both current and former executives, going back as many as three years. The rule would take effect in roughly one year.
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This article was published by The Wall Street Journal, a fellow Dow Jones Group service