President Obama, on July 21, 2010, signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Although the Act focuses primarily on banking, the Act does contain a section that requires the Securities and Exchange Commission to publish rules that direct the national securities exchanges and associations to prohibit the listing of any security of an issuer that does not develop and implement an appropriate clawback policy.

The Act requires that the SEC rules require the clawback policy to provide that in the event that the issuer is required to restate its financial statements because of a material violation of any financial reporting requirements under the securities’ laws, the issuer will recover from any current or former executive officer who received incentive-based compensation (including stock options) during the 3-year period preceding the date on which the restatement is required, the amount in excess of what would have been paid to the executive officer under the issuer’s restated financial statements. In other words, public companies must recover the difference between the actual pay-out under the original financial statements and the amount payable under the restated financial statements. The Act also requires that companies disclose this clawback policy to shareholders.

The effective date of the Act is July 22, 2010; however, the clawback policy requirement is not fully effective until the SEC publishes its regulations. The SEC currently is suggesting it will publish these rules to be effective for the 2011 proxy season. As such, all public companies should review their clawback policies now, or if they have not yet developed one, they should begin to develop a clawback policy. Although many companies have adopted clawback policies already, it appears that once the SEC publishes its regulations, all clawback policies may need to be revised.