SOX 304

Full Text of SOX 304:

Sec. 304. Forfeiture of Certain Bonuses and Profits
(a) Additional Compensation Prior to Noncompliance With Commission Financial Reporting Requirements. If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for --
       (1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and
       (2) any profits realized from the sale of securities of the issuer during that 12-month period.
(b) Commission Exemption Authority. The Commission may exempt any person from the application of subsection (a), as it deems necessary and appropriate.

Source: Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 15 U.S.C. §7243 (2002), 15 U.S.C. Section 7243.

New Developments:
2017.03.27  Executive Guide to Defeating SOX 304 Clawbacks.  See the Paul Hastings Alert found here: https://www.paulhastings.com/docs/default-source/default-document-library/sox-304-(part-1)-final-pdf.pdf.

2016.08.31  9th Circuit Affirms No-fault Clawback.  See SEC v. Jensen. Holding that"The disgorgement remedy authorized under SOX 304 applies regardless of whether a restatement was caused by the personal misconduct of an issuer’s CEO and CFO or by other issuer misconduct."

2011.Sept.13  "Clawbacks without Claws" (NY Times).  With respect to the clawback provision set forth in Section 304 of the Sarbanes Oxley Act, this New York Times article observes that "The record suggests a bark decidedly worse than its bite." Some of the supporting statistics include the SEC's recovery of just over $12 million from nine executives over the past few years, with half of the targetted companies being "small and relatively obscure" and with those executives who have returned funds not admitting or denying the allegations against them. 
Case Law:

2015.Feb.10  SEC No-Fault Clawback Succeeds in Settlement (vs. Saba Executives).  This SEC announcement of clawbacks totaling about $500,000 from two executives, who were not charged with wrongdoing, warns that --  

  • “During any period when a company materially misrepresents its financial results, even executives who were not complicit in the fraud have an obligation to return their bonuses and stock sale profits to the company for the benefit of the shareholders who were misled,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.

2012.Nov.13  SEC No-Fault Clawback Claim Avoids Dismissal (vs. Arthrocare Executives).  A W.D. Texas decision rejects a motion to dismiss in which executives argued that "SOX § 304 either cannot be construed as broadly as the SEC claims; i.e., to impose liability on CEOs and CFOs without any element of scienter, or, alternatively, because § 304 is unconstitutional." SEC v. Baker and Gluk. 

2012.Apr.10  SEC AGAIN PURSUES NO-FAULT CLAWBACK UNDER SOX 304. The SEC has announced the filing of a complaint against the CEO and CFO of ArthroCare Corp. who "are not charged with personal misconduct, but they are still required under Section 304 of the Sarbanes-Oxley Act to reimburse ArthroCare for bonuses and stock profits that they received after the company filed fraudulent financial statements." 

2011.Nov.16  No Fault Clawback Enforced for $2.7M+ against Former CEO of CKX Automotive: see AZ District Court Order. 

2011.Aug.30  No Fault Clawback Enforced against Beazer's CFO.  See SEC Release ("According to the SEC’s complaint filed in federal court in Atlanta, James O’Leary is not personally charged with misconduct, but is still required under Section 304 of the Sarbanes-Oxley Act to reimburse Beazer more than $1.4 million that he got after Beazer filed fraudulent financial statements during fiscal year 2006."). 

2011 Mar 3  No Fault Clawback Enforced against Beazer's CEO for $6.48M cash and restricted stock clawed-back under SOX 304(b): see SEC Release.

2010 Sept 30  No Corporate Indemnifications for Income Clawed-back under SOX 304(b): see Cohen v. Viray (2nd Cir.).

2010 June   No Fault of CEO or CFO required for clawback under SOX 304 -- see SEC v. Jenkins (D. AZ 2010).

2008 Dec. 11  No Private Right of Action under SOX 304 -- see In re Digimarc (9th Cir) ("the text and the structure of the Sarbanes-Oxley Act do not demonstrate an intent to create a private right of action under section 304").