The U.S. Securities and Exchange Commission (SEC) has announced that it will begin initiating "clawbacks" of executive pay to punish companies that fail to comply with financial regulations. The clawbacks could cost executives millions of dollars in bonuses and stock sales profits and are set to become a key enforcement tool for the SEC.
"Clawbacks can be an important factor in accountability," John Coffee, a professor at Columbia University Law School, told Reuters. "If properly implemented, they can be much more effective than they currently are."
The clawback rule is actually a revived version of a proposal made during the 2008 financial crisis. The rule will require companies who have to correct financial statements due to compliance failures to recoup executive compensation.
The SEC has already begun using a narrower version of the clawback power from 2002 to force companies to take back CEO and CFO bonuses and incentive pay to make up shortfalls in the case of financial misconduct.
The SEC's power to seize executive pay has been challenged in the past by critics who say punishments shouldn't extend to executives who haven't personally been accused of wrongdoing. However, a federal court found in 2016 that the SEC did have the authority to clawback executive pay because the execs don't have the right to profit from foul play.
Despite the courts' support of the SEC, it has rarely utilized its clawback powers since they were introduced in 2002. The rule has been called upon only 15 times against execs who were not directly accused of wrongdoing despite there being hundreds of instances in which this could have been done.
Experts say it's unclear why the SEC has been so sparing with the use of this executive enforcement tool.
However, the commission has reportedly signaled its intention to start using the rule more often in recent weeks. The SEC's new Democratic leadership says the agency has been too lenient on big business for too long.
Efforts by investors to establish a practice of recouping executive pay after misconduct have been largely unsuccessful, making the regulatory use of this power all the more important.
"It's based on the common-sense notion that you shouldn't get to keep incentive-based comp that wasn't actually earned," Allison Lee, a Democratic Commissioner and former senior enforcement attorney for the SEC, told Reuters. "I'm glad we're finally moving toward implementing that mandate."