New SEC rule requires executives to return bonuses when accountants screw up

New York
CNN business

The Securities and Exchange Commission voted Wednesday to approve a new rule that requires public companies to recover executive compensation when their financial statements are flawed.

These “clawback” requirements are intended to make corporate executives financially accountable for reporting any errors, whether they result from fraud or simple accounting errors.

The rule was mandated by Congress as part of the 2010 Dodd-Frank Act in response to the recent financial crisis, but met with resistance from business leaders and Republican lawmakers, delaying implementation. Last year, SEC Chairman Gary Gensler revived the initiative as part of a crackdown on corporate misconduct.

SEC commissioners voted 3-2 to approve the rule Wednesday, with all Democrats supporting the plan and Republicans dissenting.

“I believe these rules, if adopted, would strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors,” Gensler wrote before the vote.

Leaders of large companies often receive the majority of their pay from performance-based bonuses. If companies report high revenues and profits, they pay more. Thus, errors in the preparation of financial statements can have a significant impact on executive compensation.

“Whether such inaccuracies result from fraud, error or any other factor, the current rules would establish procedures requiring issuers to recover wrongly awarded compensation, a process known as ‘clawback,'” Gensler wrote.

The SEC’s two Republican commissioners, Hester Peirce and Mark Uyeda, voted against the rule, calling it “too broad.”