The SEC approved a rule to claw back compensation from executives of companies that must materially correct their financial statements, raising the bar for highly paid CEOs of Corporate America.
“Corporate executives are often paid based on the performance of the companies they lead, with factors that may include company revenue and profits,” SEC Chairman Gensler said in a statement. “If the company makes a material error in preparing the financial statements required under securities laws, an executive may receive compensation for reaching a milestone that, in reality, was never reached. inaccuracies are due to fraud, error or any other factor, the current rules would implement procedures that require issuers to recover erroneous compensation, a process known as “clawback”.
The vote took place during the open meeting of the Commission on Wednesday.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010 in the wake of the Great Financial Crisis, mandated the SEC to adopt rules directing national stock exchanges to require clawback policies as part of their listing standards. The SEC first proposed this clawback rule in 2015 and reopened it for public comment in 2021 and 2022 to review recent changes in the markets and how companies publish restatements of financial data.
The new rule will require U.S.-listed companies to put in place a clawback plan for incentive compensation paid to their current or former executives in situations where an issuer is required to restate its financial statements.
The SEC will also require national stock exchanges to create standards requiring publicly traded companies to adopt and comply with a clawback policy and require issuers to provide details of implemented policies.
The rule will come into full effect in a year and two months, unless issuers have complied sooner.
Also on Wednesday, the SEC is expected to pass a rule that would simplify shareholder reporting to help retail investors better understand the performance of mutual funds and exchange-traded funds.
The SEC would require funds to provide investors with a 3-4 page report instead of 100 pages, consolidating information on highlights of fund spending, performance, holdings and any material changes. Investors would still have access to all required information, including full financial statements online.
This post was updated after the vote.
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