When Congress passed the Sarbanes-Oxley Act of 2002 (SOX), it included a clawback tool. Flowing out of the accounting scandals that led to SOX’s creation, Section 304 provides that if a public company has to restate its financials as a result of misconduct, the company’s CEO and CFO must reimburse the company for any incentive-based compensation or trading profits they made during the 12-month period in question.
Many public companies have incorporated similar clawback provisions into their bylaws–which may be one reason Section 304 gets little use. Still, in an October 2010 speech, SEC Commissioner Luis Aguilar called the SEC’s historical failure to invoke the provision a “clear example where the Commission ignored a Congressional mandate set forth in Sarbanes-Oxley.” Aguilar went on to outline the importance of Section 304 as an incentive for CEOs and CFOs “to be diligent in establishing an honest culture of reporting and in choosing the right people to work for them.”
