Payback: Disgorging bonuses, equity and incentive-based compensation under Sarbanes–Oxley's Section 304

Abstract

Section 304 is among the most feared, but least understood, provisions of the Sarbanes–Oxley Act of 2002. The principles underlying this section, as set forth in the legislative record, are clear and unequivocal: if the officers of a publicly held company are compensated based on misrepresented financial performance, the officers must return such compensation to the company. In practice, however, the limited but declarative language enacted by Congress gives little practical guidance, and reasonable interpretations can lead to draconian results This paper, after noting the potentially expansive scope of Section 304, develops a framework for interpreting, limiting and implementing its provisions. Although many of the key requirements have yet to be defined through private litigation or enforcement action by the Securities and Exchange Commission, the limits of executive officer liability may lie in cases such as Traficanti v. United States, which required that financial and other penalties for statutory violations be rationally related to a legitimate governmental objective. Thus, the amount of compensation that executive officers are required to return may be limited to the portion directly attributable to the misstated financial results.