U.S. stock exchanges will soon have to adopt policies that require public companies to claw back incentive-based executive pay if it is awarded due to accounting fraud or mistakes.
The Securities and Exchange Commission is set to vote Wednesday on adopting such a rule, one of the few remaining that were mandated by the 2010 Dodd-Frank financial reform law passed in response to the financial crisis of 2007-2010.
The rules “would strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors,” SEC Chairman Gary Gensler said in a statement.
If adopted, companies listed on U.S. exchanges would be required to establish compensation-recovery policies that would be triggered any time the company restates its earnings. If the misstatements led to incentive-based compensation, the company must recover those funds.
The rule would require companies to claw back compensation when it finds both “big R” earnings restatements, which require companies to alert investors and reissue financial reports from previous years, and “little r” revisions, which are less serious and don’t require that investors be alerted.
Financial-reform advocates have worried since the rule was first proposed in 2015 that a decline in the number of more serious earnings restatements and a rise in the number of less serious revisions is being driven by companies pressuring accountants and auditors into massaging results in order to reduce the need for full restatements.
The 2015 proposal would not have required that “little r” revisions trigger a clawback analysis, but the rule now under consideration does.
If adopted, the rule would take effect 60 days after being published in the federal register, and exchanges would then have 90 days to propose listing standards on clawbacks. Those standards would be required to go into effect one year after publication.
The SEC is also on track to amend its rules around required disclosures to retail investors in exchange-traded funds and mutual funds to mandate that shareholders receive “concise” and “visually engaging” annual and semi-annual reports that would typically run three or four pages, versus the much longer documents currently sent to investors.
“Today’s final rules would require fund companies to share a concise set of materials that get to the heart of the matter,” Gensler said. “The final rules would require funds to transmit shareholder reports that highlight key information such as a fund’s expenses, performance, holdings and material changes.”