Ann Graham, JD, MBAProfessor of LawDirector, Business Law InstituteHamline University School of LawBanking Law Prof Blog: http://lawprofessors.typepad.com/banking/

Executive Compensation

Clawbacks

Executive Compensation Clawbacks

Public Outrage: Make the Bad Guys Give the Money Back!!!

Sarbanes-Oxley (SOX) § 304 (2002)

Sarbanes-Oxley § 304 CEOs and CFOs of Public Companies Bonus, Incentive/Equity based compensation, Stock Sale

profits 12 Months following incorrect public disclosure or SEC

filing Due to Material Non-compliance with financial reporting Due to Company’s Misconduct Only SEC can bring action

SEC initially used for “personal involvement”Moving to “no-fault” casesSEC v. Jenkins – Settlement 11/15/2011 ($2.8M of

$4M) Maynard L. Jenkins – former CEO of CSK Auto

Troubled Asset Relief Program (TARP) Clawbacks

Emergency Economic Stabilization Act of 2008 (10/3/08) – (“EESA”)– Establishes TARP

Requires Financial Institutions receiving TARP funds to establish clawback standards

Trigger: Bonus or incentive compensation paid is based on statements of earnings, gains, or “other criteria” that are later proven “materially inaccurate”

NOTE: Misconduct not required, Restatement not required

Senior Executive Officers: CEO, CFO, next 3 most highly compensated execs

Compensation recovered: Bonuses & Incentive Compensation

TARP Clawbacks

Big Banks repaid TARP funds, avoided clawbacks & executive compensation caps

Smaller Banks repaid Capital Purchase Plan (CPP) funds from other government programs

GAO Report (3/8/2012) - http://www.gao.gov/products/GAO-12-301

Other Bank Bailout statutes & regs have different standards:

1. TARP Press Release – Guidance (2/4/09)2. Capital Purchase Program (CPP) – Guidance3. American Recovery & Reinvestment Act of 2009

(2/17/09)

TARP/ARRA Clawbacks

Institutions receiving TARP funds5 SEOS and next 20 most highly-

compensatedBased on statements of earnings, revenues,

gains, or other criteria that are materially inaccurate

Note: Misconduct not requiredAccounting Restatement not requiredDuration: Clawback requirement applicable

during period financial assistance remains outstanding

FDIC Clawback Regulations

Senior Executives & Directors – substantially responsible for the failure of an insured institution

Recover: Any compensation received during the 2-year period prior to FDIC’s appointment as Receiver

In the case of FraudAuthority: § 203(b) of Dodd-FrankFDIC: “Compensation” is salary, bonuses,

incentives, benefits, severance pay, deferred compensation, golden parachute & all other compensatory items

ISSUE: D&O Insurance Rider

Executive Compensation Clawbacks

Dodd-Frank Act – July 21, 2010 - § 954SECNational Securities Exchanges – Listing standards

must require LISTED COMPANIES to adopt a Compensation Recovery Policy:

Adoption of Mandatory Recoupment Policies: Any current or former Exec Officer Any incentive-based compensation, including stock options Three-year period preceding date Accounting Restatement is

required is based on erroneous data – No executive wrongdoing required

Clawback amount: Excess paid on basis of Restatement

Disclosure of Clawback Policy for incentive-based compensation paid out based on erroneous financial information reported under the Securities Laws

SEC Timeline & Open Questions

July – December 2012Consequence for company: Possible delistingWhen does triggering period commence?

Decision to file restatement or when it occursDefinition of “Executive Officer”Definition of “Incentive-Based Compensation”Clawback based on award or payment of

compensation?

CLAWBACK POLICIES

“Bad Boy” Provisions in Employment Contracts Disclosure of confidential information Violation of company rules & policies Engaging in “detrimental conduct”

State “Wage & Hour” Law IssuesTax Treatment of Clawbacks

Income to Employee in Year of Actual or Constructive Receipt

Employee takes a Loss Deduction in Year of Clawback Employer takes Deduction in Year of Payment Employer Income for Year of Repayment

Drafting Clawback Policies

StatuteCompany Purpose: SH, EE, Public PerceptionDraft NarrowlyCovered EmployeesDefine Compensation TriggerReachbackDiscretion?Who Administers?Is It Enforceable?Get consent of affected executives in writing up frontBest Practice for Private Company?