SEC Requires Executives to Pay Back Bonuses Tied to Flawed Financial Reports

October 27, 2022 by Tom Ramstack
SEC Requires Executives to Pay Back Bonuses Tied to Flawed Financial Reports
U.S. Securities and Exchange Commission

WASHINGTON — The U.S. Securities and Exchange Commission on Wednesday finalized a rule that eliminates the right of corporate executives to collect bonuses if there are accounting errors in their companies’ regulatory filings.

One of the agency’s motivations is to prevent executives from profiting off quarterly reports that exaggerate their companies’ earnings.

Inflated reports to the SEC are a persistent problem that often spills over into where investors put their money in the stock market, sometimes only to be surprised when the inaccuracy is discovered and the stock value falls.

The new rule says executives must return their bonuses if the errors are found within three years after they file their financial disclosure reports and even if they are not responsible for them.

Corporate boards of directors normally tie the bonuses to their companies achieving financial targets.

The SEC rule represents an effort to comply with integrity provisions of the Dodd-Frank Act approved by Congress in 2010.

The law overhauled financial regulation in response to corporate credit abuses contributing to the Great Recession that started in 2008. The changes affected all federal financial regulatory agencies and most of the nation’s financial services industry.

The rule the SEC approved Wednesday says Congress did not intend to “punish wrongdoing, but to require executive officers to return monies that rightfully belong to the issuer and its shareholders.”

“Executive officer” is defined broadly under the rule. It includes the principal financial officer; principal accounting officer or controller; vice presidents in charge of business units, divisions or functions such as sales administration or finance; and any other officer involved in policymaking at either the parent company or a subsidiary.

Errors that initiate “clawback” requirements on bonuses could include minor errors, or “little r” mistakes, that might become major if they are left uncorrected.

SEC Commissioner Jaime Lizárraga defended the broad scope of the rule by saying corporate financial restatements “have made up an increasingly high share of all financial restatements in recent years.”

Including them in the rule ensures “executives do not have an incentive to opportunistically classify material errors,” Lizárraga said.

The nonprofit financial industry watchdog group Better Markets issued a statement praising the new rule.

“We are particularly gratified to see that it will cover a broad range of accounting restatements, not only those necessary to correct the very worst accounting abuses,” the statement said. “This rule is necessary because evidence has surfaced that some companies have been mischaracterizing their accounting restatements to avoid having to claw back their executives’ inflated and undeserved compensation.”

Republican SEC commissioners expressed misgivings that the rule might be too broad, perhaps ensnaring executives who were blameless.

Tom can be reached at [email protected] and @TomRamstack

A+
a-
  • executive bonuses
  • financial reports
  • Securities and Exchange Commission
  • In The News

    Health

    Voting

    Regulation

    Biden Announcing New Rule to Protect Consumers Who Purchase Short-Term Health Insurance Plans

    President Joe Biden on Thursday announced new steps to protect consumers who buy short-term health insurance plans that critics say amount to junk. A... Read More

    President Joe Biden on Thursday announced new steps to protect consumers who buy short-term health insurance plans that critics say amount to junk. A new rule finalized by the Democratic president's administration will limit these plans to just three months. And the plans can only be renewed for a maximum... Read More

    March 26, 2024
    by Dan McCue
    Consumers Warned to Avoid Certain Topical Pain Relief Products 

    WASHINGTON — The Food and Drug Administration warned consumers on Tuesday not to use certain over-the-counter pain relief products marketed... Read More

    WASHINGTON — The Food and Drug Administration warned consumers on Tuesday not to use certain over-the-counter pain relief products marketed for topical use before, during or after certain cosmetic procedures. The warning came after the agency issued warning letters to six companies for marketing these products... Read More

    March 21, 2024
    by Dan McCue
    DOJ, 16 States Sue Apple Over Alleged Smartphone Monopoly

    WASHINGTON — The Justice Department and 16 state attorneys general sued Apple on Thursday accusing the Cupertino, California-based tech giant... Read More

    WASHINGTON — The Justice Department and 16 state attorneys general sued Apple on Thursday accusing the Cupertino, California-based tech giant of operating an illegal monopoly in the smartphone market. According to the lawsuit, which was filed in federal court in New Jersey, Apple has used the... Read More

    Trump Suggests He'd Support a National Ban on Abortions Around 15 Weeks of Pregnancy

    NEW YORK (AP) — Donald Trump suggested Tuesday that he’d support a national ban on abortions around 15 weeks of pregnancy, voicing... Read More

    NEW YORK (AP) — Donald Trump suggested Tuesday that he’d support a national ban on abortions around 15 weeks of pregnancy, voicing for the first time support for a specific limit on the procedure. The Republican former president has taken credit for striking down a federally guaranteed right... Read More

    March 15, 2024
    by Dan McCue
    EPA Sets Tougher Limits on Gas Used to Sterilize Medical Devices

    WASHINGTON — The Environmental Protection Agency on Thursday finalized tougher restrictions on ethylene oxide, a cancer-causing gas commonly used to... Read More

    WASHINGTON — The Environmental Protection Agency on Thursday finalized tougher restrictions on ethylene oxide, a cancer-causing gas commonly used to sterilize medical devices. The new standards specifically target commercial sterilization facilities. The agency called them “the strongest measures in U.S. history to reduce emissions of EtO,”... Read More

    March 15, 2024
    by Dan McCue
    EPA Proposes New Limits on Gas Distribution Facilities

    WASHINGTON — The Environmental Protection Agency on Thursday finalized a rule strengthening toxic air pollution standards at gasoline distribution facilities,... Read More

    WASHINGTON — The Environmental Protection Agency on Thursday finalized a rule strengthening toxic air pollution standards at gasoline distribution facilities, including storage tanks, loading operations and equipment leaks.  The action — from which gas stations are exempt — is expected to reduce emissions of air toxics,... Read More

    News From The Well
    scroll top