The purpose of this paper is to explore the requirements of Section 954 of the Dodd‐Frank Act, “Recovery of erroneously awarded compensation”, and what companies should currently be doing in anticipation of these requirements.
The paper explains what clawbacks are, what purposes they serve, the key requirements under Section 954, challenges with Section 954, including key terms that require greater definition and unresolved enforceability issues, and recommends what companies can do now to prepare for the likely enactment of the rules implementing Section 954 in 2012.
The Dodd‐Frank Act's clawback requirements under Section 954 relate to the recovery of “windfall” compensation without regard to misconduct if there is a financial misstatement or other change in financial results, and as a result more compensation was paid than otherwise would have been paid had the correct financial results originally been reported.
Given the number of key open issues with Section 954 and the potential sensitivities around a policy that could require companies to recover previously earned and paid compensation without fault of the executive, companies will want to closely monitor the rulemaking process in 2012.
The paper provides practical guidance from experienced financial services lawyers.
