House Financial Services Committee Democrats Urge SEC to Finalize Rule on Improper Executive Pay

WASHINGTON – This week, Reps. Cindy Axne, D-Iowa, and Brad Sherman, D-Calif., chairman of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, led nine Financial Services Committee members in a letter to Securities and Exchange Commission Chairman Jay Clayton asking the SEC to prioritize a rule requiring public companies to recoup unearned incentive-based compensation from executives.

The Dodd-Frank Act, signed into law in July 2010, called for a rulemaking to require that if executives received incentive-based compensation, and then the company restated their earnings, any incentive compensation that was not earned based on the corrected financials would automatically be clawed back. 

Although the SEC proposed a rule in June 2015, that rule has not been finalized, and in fact did not appear in the SEC’s last rulemaking agenda.

“The logic behind clawbacks is simple: incentive-based compensation due to performance that was not actually justified by correct financial statements should be returned to the company,” the members wrote. “Unfortunately, despite being called for under Section 954 of the Dodd-Frank Act more than 10 years ago, and despite a proposed rule being issued more than five years ago, these rules have not only not been finalized, this required rulemaking was removed from the SEC’s priority rulemaking agenda at the beginning of this administration.”

The lack of action on this rule was highlighted by a recent settlement with Bausch Health, formerly known as Valeant Pharmaceuticals. 

The company, which was a major part of the Senate Aging Committee’s 2016 report on price gouging, settled with the SEC based on misleading disclosures and improper revenue recognition. 

Valeant had failed to disclose the extent to which drug price increases were responsible for earnings growth, as well as using a pharmacy named Philidor to shift earnings between quarters to meet targets. 

The settlement included reimbursement of some of their former CEO’s compensation, which likely would have been covered by the “clawbacks” rule.

After information about Valeant’s price gouging and information about their relationship with Philidor came to light in late 2015, Valeant’s stock dropped more than 90%. Meanwhile, CEO Michael Pearson was forced out of Valeant in 2016, leaving with more than $150 million, including a severance package of $12 million, as compared to a total settlement of $700,000.

“Given the extent of the wrongdoing at Valeant during this time, a $700,000 settlement for a CEO who walked away with more than $150 million is just a slap on the wrist, and does little to prevent this kind of behavior in the future,” said Axne. “Pharma CEOs getting rich by hiking prices of life-saving drugs makes me furious, and it’s even worse to know the SEC should have done more to discourage executives from this kind of behavior. Instead of finalizing this rule to protect investors, this SEC has focused their attention on making management unaccountable to shareholders.”

The letter was signed by Reps. Stephen Lynch, D-Mass., Bill Foster, D-Ill., Carolyn Maloney, D-N.Y., Lacy Clay, D-Mo., Ed Perlmutter, D-Colo., Rashida Tlaib, D-Mich., and Sean Casten, D-Ill. 

The full text of the letter can be found here.