Saturday, May 19, 2012

US Senator Reminds JP Morgan Chase of Dodd-Frank Clawback Provisions

Noting his support of the Dodd-Frank Act, Senator Scott Brown (R-MA) reminded JP Morgan Chase & Co. that if the recent $2 billion trading loss leads to a restatement of the company’s first quarter results, Dodd-Frank requires that any incentive compensation that would not have been awarded under the earnings restatement be subject to a mandatory clawback under a strict liability standard. In a letter to the firm’s CEO, Senator Brown noted that the company’s 2012 proxy statement says that, with regard to employee incentive compensation, the firm retains the right to reduce current year incentives to redress any prior imbalances that the firm subsequently determines to have existed, and a clawback review or other recovery mechanism may be initiated as a result of a material misstatement of earnings.

It is the hope of Senator Brown that the company will use this proxy provision to its full potential to address the situation. He emphasized that exercising this provision would send a strong signal to investors and the financial markets that company employees that take outsized risks in search of short-term profits at the expense of the firm’s long-term success will face financial penalties. Dodd-Frank is, in part, designed to help curb unnecessary risk taking in the financial sector. While it is important to adopt regulations implementing Dodd-Frank, reasoned Senator Brown, it is also very important that, when unprecedented mistakes occur, companies use their internal policies to promote employee accountability.