Better Markets filed a comment letter with the Securities and Exchange Commission on its proposal to implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Under that provision, the SEC must adopt a rule directing the securities exchanges to establish standards providing for the recovery of incentive-based compensation paid to current or former executive officers in excess of what those executives should have received.

This important reform not only serves to limit systemic risk by curbing the impulse among executives to pursue short-sighted business strategies or manipulative accounting approaches for personal gain. It also vindicates the basic principle that it is wrong for corporate leaders to retain compensation—especially performance-based compensation—that they do not deserve.

Why it matters: Too often in the lead up to the financial crisis of 2008, executives were engaged in high-risk business strategies and accounting chicanery to beef up revenues and cash in on huge compensation packages. But when those bets failed, shareholders and ultimately U.S. taxpayers were left holding the bag while executives got to keep their huge and undeserved incentive-based compensation.

What we said: The SEC’s original proposal was strong and we are pleased to see that they are considering improving it.  We argue that the final rule should close a dangerous loophole in the original proposal by broadening the class of accounting restatements that would trigger clawbacks. We also urge the SEC to minimize board discretion in determining whether an accounting restatement is necessary. Finally, we caution the SEC, as we have so often, against attempting to conduct a quantitative cost-benefit analysis of the rule—a methodology that favors industry and undervalues the enormous public benefits that come with greater corporate accountability.

Bottom Line: We are gratified that the SEC is considering strengthening the rule in several important respects. The SEC should follow through with the enhancements and continue its work to fulfill  Congress’ policy choice to address undeserved executive compensation.

Read more in our press release.