SEC Clawbacks of CEO and CFO Compensation

Last week, the U.S. Court of Appeals for the Ninth Circuit affirmed the SEC’s interpretation of Section 304 of the Sarbanes-Oxley Act, which authorizes the SEC to seek to claw back performance-based compensation paid to CEOs and CFOs of public companies in certain circumstances. SEC v. Jensen (Aug. 31, 2016). The SEC’s power to seek clawbacks arises when an issuer has been required to restate previously issued financial statements “as a result of misconduct.” A key issue in the interpretation of this provision has been the question whether the “misconduct” must be committed by the person whose compensation the SEC is seeking to recover. The SEC has argued that personal misconduct is not required, but that any misconduct within the corporation—committed by any employee—is a sufficient predicate to claw back compensation from the CEO and CFO.