The Dodd-Frank Wall Street Reform and Consumer Protection Act became law on July 21, 2010, introducing a variety of executive compensation-related regulations, including with respect to shareholder say-on-pay voting and independence requirements for members of the compensation committees and their advisers.  Almost five years following the enactment of the Dodd Frank Act, the rules enacting the incentive compensation clawback provisions under Dodd Frank Act Section 954 have not even been proposed. 

That is expected to change next week, as the SEC issued notice yesterday of an open meeting on July 1 to consider whether to propose amendments under Section 10D of the Securities Exchange Act of 1934 to implement the Dodd Frank Act’s clawback requirements.  Please see the SEC’s notice (available here) for further details with respect to the open meeting.

Entitled “Recovery of Erroneously Awarded Compensation,” Section 954 of the Dodd Frank Act generally directs the SEC to issue rules requiring the national securities exchanges and associations to prohibit the listing of any security of an issuer that has not developed and implemented policies regarding the recovery of excess incentive-based compensation paid to the issuer’s executive officers if an accounting restatement is required as a result of material failure to comply with applicable financial reporting requirements, and to require issuers to disclose such incentive compensation recovery policies.  Specifically, the clawback rules under Section 954 apply to incentive-based compensation (including compensatory stock options) received by any current or former executive officer of the issuer during the three-year period preceding the date on which such an accounting restatement is required, to the extent such compensation was based on the erroneous data and was in excess of what would have been received using the corrected data under the accounting restatement.

How the SEC proposes to resolve various ambiguities, uncertainties and open questions under the language of the Dodd Frank Act rules (as well as the initial proxy season in which compliance with those rules will be required) remains to be seen, but in any event certainly will impact how public companies structure their incentive compensation recoupment policies and practices.  Although many companies – especially those in the Fortune 500 – have adopted some form of an incentive compensation clawback policy, a significant number of companies have deferred the adoption, review and/or update of their incentive compensation clawback provisions and policies pending SEC guidance on the Dodd Frank Act’s clawback requirements since the adoption of the Dodd Frank Act.  In any case, all public companies – even those companies that have such policies in place – will need to become familiar with the proposed (and ultimately the final) rules.