Since Sarbanes-Oxley was passed, the Commission has invoked Section 304 to seek the repayment – or clawback – of certain executive compensation. Specifically, in SEC v. Jenkins, Case No. CV-09-01510 (D. Ariz. Filed July 22, 2009), the Commission for the first time sought the repayment of certain discretionary compensation from its former CEO following a restatement of the company’s financial statements. In its complaint, the SEC acknowledged that while there had been wrong doing at the company – CSK Auto Corporation – Mr. Jenkins was not involved (discussed here). Mr. Jenkins moved to dismiss (here). His motion was denied (here). A similar action was subsequently brought against the former CEO of Diebold, Inc. (here). Walden O’Dell, the former CEO of the company, settled. SEC v. O’Dell, Civil Action No. 1:10-CV-00909 (D.D.C. Filed June 2, 2010).
Dodd-Frank incorporates the SOX Section 304 clawback approach in Section 954, now Exchange Act Section 10D, but with modifications. Under this provision, issuers are required to develop a policy which provides for:
• The disclosure of its policy on incentive-based compensation that is based on financial information which is required to be reported under the securities laws; and
• The recovery of any amount of incentive based compensation paid to any current or former executive that exceeds the amount which would have been paid under an accounting restatement in the three years prior to the date on which the company was required to prepare the restatement.
To implement this section, the SEC is required to issue regulations directing the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that does not comply with these requirements.
While Dodd-Frank Section 954 incorporates the same basic clawback approach as SOX Section 304 there are important differences:
• Coverage: Section 304 only applies to the CEO and CFO, while 954 applies to any current or former executive;
• Culpability: Neither section requires that the executive be culpable. However, Section 304 is only triggered if the restatement is “due to the material noncompliance of the issuer, as a result of misconduct . . .” Section 954 does not require misconduct.
• Amount of repayment: Section 304 requires any bonus or incentive based compensation to be repaid as well as any profits realized from the sale of securities of the issuer, while 954 only requires the repayment of the amount of incentive-based compensation (including stock options) which exceeds what would have been paid under the restatement.
• Time period: The SOX section only applies to a twelve month period while Dodd-Frank provision is concerned with a three year time period.
Finally, In Digimarc Corp. Derivative Litig., 549 F.3d 1223 (9th Cir. 2008) the court refused to imply a private right of action under SOX Section 304. While it is too early for any court to have ruled on this question regarding Dodd-Frank Section 954, the implication of a private remedy under the provision seem unlikely in view of Alexander v. Sandoval, 532 U.S. 275 (2001).
Other articles in this series have covered provisions from Dodd-Frank including those concerning rating agencies (here, here and here), SEC Enforcement (here), executive compensation (here), corporate governance (here) and SEC rule making (here).
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