Finally, the Commission should leave to the discretion of the board whether to disclose the names of current and former executives who have been unable to pay back amounts subject to recoupment.  In this regard, Section 954 of the Dodd-Frank Act only requires disclosure of an issuer’s clawback policy.  The Commission, however, went further by proposing mandated disclosure of the names of current and former executives who have been unable to pay back amounts subject to recoupment.  Given the range of potential factors including, for example, security or safety concerns, the likelihood of ongoing confidential legal negotiations, or the potential personal impact of disclosure, the Commission should afford independent directors the discretion to omit individuals’ names, consistent with their fiduciary duties, provided the issuer discloses that the independent directors have exercised this discretion.

 

 

Rule 10D-1 would define an “accounting restatement” as “the result of the process of revising previously issued financial statements to reflect the correction of one or more errors that are material to those financial statements,”  and a restatement due to “material noncompliance” as a “restatement to correct an error that is material to previously issued financial statements.”   These statements are a step in the right direction, but to help ensure there is no disconnect between the Rule 10D-1 requirements and what is required by applicable accounting requirements, the Commission should revise the Proposed Rule so that it is more explicitly tied to those requirements.  Specifically, the Commission should define an “accounting restatement” in the final rule as occurring when the issuer is required by applicable accounting standards to issue restated financial statements to correct one or more errors that are material to previously issued financial statements.

 

Similarly, Proposed Rule 10D-1 defines the date on which an issuer is required to prepare an accounting restatement as the earlier of: (1) “[t]he date the issuer’s board of directors, a committee of the board of directors, or the officer or officers of the issuer authorized to take such action … concludes or reasonably should have concluded, that the issuer’s previously issued financial statements contain a material error;” and (2) “[t]he date a court, regulator or other legally authorized body directs the issuer to restate its previously issued financial statements to correct a material error.”  We believe that the inclusion of any date on which the board “reasonably should have concluded” that the issuer’s previously issued financial statements contain a material error introduces an unnecessary element of uncertainty.  We also note that Section 954 of the Dodd-Frank Act does not restrict the SEC’s ability to interpret the characterization of the date on which an accounting restatement occurs; therefore, the Commission should remove this portion of the characterization.  The benefits of this alternative approach would outweigh the complexity and potential confusion that would result from the proposed approach.      

 

The SEC also requests comment on whether an issuer that evaluates the materiality of certain errors and concludes that such errors are immaterial or are not the result of material noncompliance should be required to disclose its evaluation.  It is an enduring tenet of the federal securities laws that disclosure of immaterial information is not required.  The proposing release provides no compelling data, information or reasoning that would constitute a basis for making an exception for the circumstances covered by Proposed Rule 10D-1.  Indeed, adding this unnecessary requirement would only exacerbate the longstanding concern of disclosure overload. 

 

 

The Commission should exempt from the final rule the recoupment of equity awards where the executive officer continues to hold either the equity award itself or the number of shares issued under such award (net of any shares sold to pay taxes).  As proposed, Rule 10D-1 would require recovery policies to include equity awards that are granted or become vested based wholly or in part on satisfying a financial reporting measure performance goal, including awards based on stock price or total shareholder return (TSR).

 

Wholesale inclusion of these awards is overly broad.  A more reasonable approach would be to permit issuers to carve out from clawback policies equity-based awards that are settled solely in shares, provided that the awards (or any underlying shares) are still held by the executive officer at the time that recoupment is required.  This approach would prevent the need to recoup shares that have yet to result in any compensatory benefit and that may be required to be held pursuant to stock ownership guidelines.  Indeed, the underlying value of the award or value of the shares will reflect the impact of any accounting restatement.  In addition, this approach would avoid the difficult task (even with the use of reasonable estimates) of determining what the stock price or TSR would have been but for the error in the financial statements.

 

 

The final rule should not apply retrospectively.  Rather, it should provide that recovery policies apply only to incentive-based awards granted after the effective date of the relevant exchange listing standards.