Ann Graham, JD, MBA Professor of Law Director, Business Law Institute Hamline University School of Law Banking Law Prof Blog: 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” cases SEC 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) Other Bank Bailout statutes & regs have different standards: 1. TARP Press Release – Guidance (2/4/09) 2. Capital Purchase Program (CPP) – Guidance 3. American Recovery & Reinvestment Act of 2009 (2/17/09)

TARP/ARRA Clawbacks Institutions receiving TARP funds 5 SEOS and next 20 most highly-compensated Based on statements of earnings, revenues, gains, or other criteria that are materially inaccurate Note: Misconduct not required Accounting Restatement not required Duration: 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 Fraud Authority: § 203(b) of Dodd-Frank FDIC: “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, § 954 SEC National 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 2012 Consequence for company: Possible delisting When does triggering period commence? Decision to file restatement or when it occurs Definition 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 Issues Tax 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 Statute Company Purpose: SH, EE, Public Perception Draft Narrowly Covered Employees Define Compensation Trigger Reachback Discretion? Who Administers? Is It Enforceable? Get consent of affected executives in writing up front Best Practice for Private Company?