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Ann Graham, JD, MBA Professor of Law Director, Business Law Institute

Executive Compensation Clawbacks. Ann Graham, JD, MBA Professor of Law Director, Business Law Institute Hamline University School of Law Banking Law Prof Blog: http://lawprofessors.typepad.com/banking/. Executive Compensation Clawbacks. Public Outrage:

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Ann Graham, JD, MBA Professor of Law Director, Business Law Institute

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  1. Executive Compensation Clawbacks Ann Graham, JD, MBA Professor of Law Director, Business Law Institute Hamline University School of Law Banking Law Prof Blog: http://lawprofessors.typepad.com/banking/

  2. Executive Compensation Clawbacks Public Outrage: Make the Bad Guys Give the Money Back!!!

  3. 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

  4. 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

  5. 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) - http://www.gao.gov/products/GAO-12-301 Other Bank Bailout statutes & regs have different standards: TARP Press Release – Guidance (2/4/09) Capital Purchase Program (CPP) – Guidance American Recovery & Reinvestment Act of 2009 (2/17/09)

  6. 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

  7. 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

  8. Executive Compensation Clawbacks • Dodd-Frank Act – July 21, 2010 - § 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

  9. 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?

  10. 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

  11. 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?

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