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: Jim Hamilton's World of Securities Regulation

By Jim Hamilton

Emergency Economic Stabilization Act Bonus Forfeiture Provision Differs from Similar Sarbanes-Oxley Provision

It should be noted that the forfeiture standards under section 111(b)(2)(B) of the Emergency Economic Stabilization Act differ significantly differ from the forfeiture provisions of section 304 of the Sarbanes-Oxley Act. With regard to financial institutions participating in the Treasury?s troubled asset relief program, section 111(b)(2)(B) states that the firm must provide for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate.

Section 304 of Sarbanes-Oxley requires the forfeiture by a public company's chief executive officer and chief financial officer of any bonus, incentive-based compensation, or equity-based compensation received, and any profits from sales of the company's securities, during the twelve-month period following a materially non-compliant financial
report. Section 111(b)(2)(B) differs from section 304 because, first, the standard under section 111(b)(2)(B) applies more broadly to the three most highly compensated executive officers in addition to the CEO and CFO.

The EESA statute also applies to both public and private financial institutions, while section 304 applies only to public companies. In addition, while section 304 is exclusively triggered by an accounting restatement; section 111(b)(2)(B is not, nor does the latter limit the recovery period. Further, the EESA provision covers not only material inaccuracies relating to financial reporting, as Sarbanes-Oxley does, but also material inaccuracies relating to other performance metrics used to award bonuses and incentive compensation.

Full post as published by Jim Hamilton's World of Securities Regulation on October 31, 2008 (boomark / email).