The NASPP Blog

It’s been a long time since I’ve heard much buzz about the Sarbanes-Oxley Act of 2002 (affectionately known as “SOX”). Yet in the past week, I think I’ve heard more about it than in the past several years combined. That’s probably because SOX has been around for over a decade and nothing has changed, leaving not too much to discuss. Last week, in what I think is my first blog ever about a SOX related matter, I covered the SEC’s pursuit of a clawback under Section 304 of SOX. As more firms have taken notice of the SEC’s action, it’s becoming clear that there are some emerging signals from the SEC on clawbacks that should be of note to companies.

To learn about the background of SOX 304 and the impact on clawbacks, see A CFO’s (Non) Misconduct Brings Clawback Under SOX.  Last week’s blog centered on the former CFO of Marrone Bio, who was required to pay back 11k in bonuses he received after financial disclosures that later required restatement. The interesting nugget in the SEC’s action is that the CFO was not accused of any wrongdoing, but was deemed to be in violation of SOX 304 since he did not repay his bonuses to the company. This is a significant example of how the SEC views misconduct under SOX 304, because often companies seem to think that clawbacks under SOX are only necessary if the CFO or CEO engaged in misconduct themselves, which is not the case.

As more discussion around this topic has ensued over the past week, details of another case came to light. In a settlement action involving Monsanto Company of St. Louis, the company was found to have materially misstated earnings over a three-year period. The company’s former COO was charged with wrongdoing. In announcing that they had settled the case with the company for an $80 million penalty (among other requirements), the SEC clarified that the CEO and CFO were not charged with misconduct and no clawback would be sought because the executives had already voluntarily reimbursed the company for certain bonuses and stock awards paid during the period in question. However, the SEC was clear that the reimbursement was necessary under SOX 304.

A recent Davis Polk & Wardwell memo on the topic opined that:

“Although the Monsanto and Marrone Bio actions are interesting in that they illustrate the SEC’s focus on financial reporting and disclosure and the SEC’s willingness to charge individuals believed to be engaged in wrongdoing, what is most noteworthy about these cases is whom the SEC did not pursue in its actions against the companies. These actions appear to signal the SEC’s evolving approach to Section 304 enforcement, including an expectation of reimbursement of some forms of compensation, a willingness to forego an enforcement action if reimbursement is made, and a willingness to pursue an enforcement action to compel what the SEC considers appropriate (indeed required) reimbursement.”

Companies involved in restatements should take careful note of the SEC’s recent 304 actions in considering whether reimbursement of compensation (including stock compensation) is necessary. The Commission seems to be sending a fairly clear message that reimbursement is expected in restatements born from misconduct, even if not on the part of the CEO or CFO. In both of the recent cases, the CEO and CFO were not found to have engaged in misconduct, yet still were obligated to comply with the clawback of their incentive compensation. The difference between the two is that the SEC had to bring a clawback action in the the case where the CFO did not voluntarily reimburse the company. In the other case, voluntary reimbursement had already occurred and no further action was needed. The difference between the two resolutions can be a lot of time and expense, so voluntary reimbursement seems much more practical than waiting for the SEC to bring a clawback option.

-Jenn