The NASPP Blog

Writing this blog pulls in a lot of information from around the equity compensation industry and its periphery. There are articles to review, Google Alerts to dissect, people to talk to – all to ensure we get relevant information into your hands. Most of the time we are assimilating information we’ve come across into our own words and thoughts. This week I learned that the SEC appears to be nearly ready to propose the long awaited clawback rules required by Dodd-Frank. This news came via the Wall Street Journal (article link below – keep reading). As I prepared to write a blog, Broc Romanek of CompensationStandards.com summarized the facts in his own blog. His summary is on point, and I couldn’t do any better at this point. So in today’s blog I’ll quote Romanek. CompensationStandards.com members can access the full blog on that site.

Before I get to the summary of the issue, I will say that Romanek raises some key questions that will undoubtedly be of concern to many. In approaching the clawback rules, how does a company ensuring the effort is worth the recoupment? Will the SEC take a more “principles” based or “prescriptive” approach?

From CompensationStandards.com

“The big news comes from this WSJ article, which says that the SEC will “soon” propose the clawback rules required by Section 954 of Dodd-Frank.

Here’s my quote in the WSJ piece:

Broc Romanek, a former SEC attorney who edits the websites CompensationStandards.com and TheCorporateCounsel.net, said the SEC should make sure it implements the new clawback requirements in a way that makes practical sense for companies and allows them discretion in determining whether it is economically efficient for them claw back pay, given legal, administrative or other expenses that may be involved. “It would not be ideal if a company is forced to spend more resources clawing back than [what] they would get in return,” he said.

The critical issue is whether the proposed clawback rules will be principles-based or prescriptive (remember how the recent P4P rule proposal was proscriptive, which was surprising to some). “Principles-based” means “just disclose what you have that you treat as a clawback.” And there are lots of tough questions about how a financial misstatement impacts compensation that may be indirectly – but not directly – based on financial performance, such as stock options (ie. how much is the stock price influenced by a restatement, as compared to performance criteria that is tied to EPS which is much more directly influenced).

Whether the proposal is prescriptive or principles-based will in turn impact how much the rules drive a certain type of conduct – the more prescriptive, the more the SEC is making a judgment call and companies will have to come in line with what the SEC determines to be encompassed. And remember as to timing, the SEC’s rulemaking will just be the first step – because SEC will be proposing rules that the stock exchanges then have to adopt standards to implement…”

Stay tuned, folks! When the SEC moves on this, you’ll hear about it here in this blog.

-Jenn