(Reuters) – The new Democratic leadership of the US Securities and Exchange Commission has a message for the company's high-paid executives in the United States: if your company screws up, your salary is at risk. an important part of the US Securities and Exchange Commission's agenda when it hits corporate dishonesty, increasing the stakes of thousands of executives who could potentially lose millions of dollars in bonuses and profit sales.
"Clawbacks can be an important factor in accountability," said John Coffee, a professor at Columbia University Law School. "If implemented properly, they can be much more effective than they are at present."
Last week, the SEC said it would revive a rule not completed by the 2007-09 financial crisis that would require U.S. listed companies to implement a plan to reimburse executives if they have to correct financial statements due to non-compliance.
But behind-the-scenes compliance talks with companies, the SEC has already dusted off a narrower recovery force created in 2002 after Enron and WorldCom's accounting scandals, according to four lawyers familiar with the private discussions.
That rule enables the SEC to compel the CEO or CFO of a public company to repay bonuses or other incentive-based salaries if the company reverses its performance due to misconduct.
For nearly two decades, however, the SEC has used the 2002 recall force sparingly, despite potentially hundreds of opportunities to do so, and only 15 times to punish executives who were not directly accused of misconduct, according to a new analysis by Covington and Burling LLP. said it was unclear why the SEC had implemented so few such measures, but that "perceived injustice" was a possible cause.
The SEC seems to be changing its mind about the issue.
Its executive staff has recently proposed using the clawback power in private conciliation negotiations on cases involving financial reorganization where the CEO and CFO are not accused of misconduct, said four lawyers involved in the separate cases, in what appears to be a change in strategy.
Among them are Joseph Dever, a lawyer with Cozen O & # 39; Connor LLP and a former SEC executive lawyer.
"Staff seem to take up this cure much more often now than in the past," he said.
At one point, the staff suggested that a manager's compensation be taken back after the issue with the company had been resolved, said one of the three other lawyers, adding that it was very unusual.
The three lawyers asked to remain anonymous to discuss private matters.
Reuters could not determine how often the SEC generally proposed clawbacks in conciliation discussions.
But Allison Lee, a Democratic commissioner who was a senior lawyer for the firm from 2015 to 2018, told Reuters in an interview that power in 2002 has been "underused."
While Lee said she could not comment on enforcement probes over which she now has no oversight, she said of the power: "I would like to see us ensure that we confirm the recourse it provides to shareholders.] When applied to In the right way, clawbacks can improve accountability at a time when corporate auditors view checks to appease regulators as a cost to doing business, proponents say.
Goldman Sachs Group Inc., for example, failed to recover compensation from former CEO Gary Cohn over the Wall Street Bank's involvement in Malaysia's 1MDB sovereign wealth fund scandal, donating the money to charity instead.
It is therefore, tighter regulatory clawback tools are important, experts say.
Last week, the SEC reopened an additional clawback rule for public comment. as it first proposed in 2015 but was never completed. The comment period closes on November 22
Required under the 2010 Dodd-Frank Act, that rule would go beyond the 2002 power and capture a wider range of corporate roles and situations where incentive-based compensation could be recovered.
Although it places the responsibility for implementing and applying clawbacks on companies and stock exchanges, Lee said it can be a "powerful" accounting tool.
"It is based on common sense that you should not retain incentive-based comps that were not actually earned," she said in a follow-up statement. "I am glad that we are finally moving towards the implementation of that mandate." ]