Failure to Earn: What Scattershot Enforcement of Sarbanes-Oxley Clawbacks Tells Us About Paybacks Under Dodd-Frank

MarketWatch asks me to write something long every six weeks or so that is a feature article.  Last month I wrote about the SEC’s proposed Dodd-Frank clawback rule.  If you’ve been reading here for a while you know that I don’t believe the Sarbanes-Oxley clawback rule was enforced much. So you can imagine I don’t have much confidence Dodd-Frank will be either.

Along the way I ran into a curious phenomenon. Whether the clawback is enforced under the SOx or Dodd-Frank law, all clawbacks require a restatement as a gateway condition.

No restatement? No clawback.

In preparation for the Dodd-Frank clawback rule, the SEC and companies who have been trying to get ahead on writing the required internal policies aren’t addressing one scenario: positive restatements.  They happen more than you might imagine. I wrote about that scenario as a Day 2 story, back to back with my feature.

When the SEC issued the new rule on July 2 I wrote about the apparent loophole that may mean we’ll see few or no Dodd-Frank clawbacks at all.

SEC’s clawback proposal leaves a big loophole

Another issue I ran into that didn’t make the article cut was how the SEC decided whether or not to pursue a clawback enforcement action. One strategy for companies that would have liked to avoid SOx clawback litigation that doesn’t seem to have been used is Section 304(b) which allows for exemptions. There is no public record of any company requesting one or the SEC granting one.

Luis Aguilar is a Democrat Commissioner on the Securities and Exchange Commission whose term expired in June of this year but whose successor has not yet been appointed. He told me, in response to a question about the exemption provision that, “during my tenure as a Commissioner, the Commission has not received a request for an exemption from a Section 304 clawback.”

He also added that, in contrast to the lack of transparency over the SEC’s processing of waiver requests, “the Commission has not provided the staff with delegated authority to issue exemptions from the application of Section 304(a) clawbacks.” 

Read, “Rarely enforced SEC rules may give green light to earnings manipulation”

and “New rules could let executives ask for extra bonuses” at MarketWatch.