The Securities and Exchange Commission approved a rule that requires public companies whose financial statements contain errors to recoup their executives' bonuses and other incentive pay, according to an Oct. 26 report from The Wall Street Journal.
The new rule was required by the 2010 Dodd-Frank Act to discourage fraud, but its implementation has been delayed due to commercial and political resistance, according to the report. Under the rule, public companies will include checkboxes on the front page of their annual reports to highlight if an error correction or clawback analysis has been conducted.
SEC Chairman Gary Gensler said that the rule would strengthen investor confidence in corporate reporting and accountability of managers.
"Corporate executives often are paid based on the performance of the companies they lead, with factors that may include revenue and business profits," Mr. Gensler said. "If the company makes a material error in preparing the financial statements required under the securities laws, however, then an executive may receive compensation for reaching a milestone that in reality was never hit," Mr. Gensler said.
Public companies will also be required to adopt policies to recover wrongfully awarded incentive pay from both current and former executives going back three years. The rule will take effect in about one year, according to the Journal.