In a recent tweet, Gary Gensler clearly expressed the SEC’s current stance on erroneous financial reporting by any company. The SEC Chairman announced that they are bringing the controversial Dodd-Frank Act into effect, reintroducing the clawback concept for company executives. The proposed move aims to furnish the general investor with the right information bolstering a greater sense of responsibility and accountability for the company executives.
The Dodd-Frank Act
In several businesses, CEOs and other management executives receive their remuneration in proportion to the company’s performance. The remuneration received is based on incentives and the parameters may include sales revenues, profits, or other business performance indicators. As such, it is easy to understand the need for accountability for erroneous numbers and financial figures. Incorrect reporting is bad- both for the company and the general investors.
The Dodd-Frank Act was passed in 2010 to address the issues brought forward by the Great Recession of 2008. The Act encapsulated multiple objectives including key areas like consumer protection and systematic risk regulation. Named after Sen. Chris Dodd and Rep. Barney Frank, the law sought to upgrade financial stability, accountability, and transparency throughout the existing US finance system. For the protection of US consumers, the law also marked the beginning of the CFPB, FSOC, and the Office of Financial Research. It also empowered the SEC with greater authority and regulation abilities, particularly for derivatives and credit-rating agencies.
Clawback Provision: Tool for the SEC
The mandatory clawback requirements for public-listed companies were increased using the Dodd-Frank Act. In the case of misconduct and subsequent restatement, all executive officers(not only the CEOs and CFOs) would fall under the clawback requirement. When a company reverts back and revises its financial reports- the previous executive may have accepted remuneration for a milestone that has not been actually reached.
As per the act, company executives were required to return their received incentive-based payment in case the company needs a revised financial statement. Failing to make an accurate report with the proper numbers, the executives didn’t actually earn the incentive, and thus they fall under the clawback provision. Be it fraud or simple errors, the slated Clawback rule will force executives to do better verification of corporate financial numbers- which is good for both the investors and the company. Congress tasked the SEC with the implementation of the Clawback’s Rule.
Latest SEC Developments
As per the tweet posted on 15th October 2021, Gensler acknowledges that the SEC has issued a proposal for marching forward with the Clawback. US citizens can visit sec.org and post their opinion regarding the implementation. According to him, the move will fortify transparency and improve the quality of the corporate financial reports. It will also increase the accountability of corporate executives to the investing public.
The latest tweet comes in line with SEC prioritizing investor protection and awareness. However, the Dodd-Frank Act is not without its controversies. Several industry experts believe that the law can cripple small-sector economies. One of its biggest criticisms is its failure to address the very topic it stood against- the large-scale mortgage industry. Research indicates that the act has been detrimental to the viability of small banks and small-scale business lending. It is also responsible for a slowdown in the pace of economic growth.