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Has The SEC Conflated Indemnification And Insurance? | Allen Matkins

Today’s post continues the discussion of the SEC’s recent adoption of rules requiring the securities exchanges to adopt listing standards that require listed companies to develop and implement policies that provide for the recovery of erroneously awarded incentive-based compensation provided by current or former executives officers were received.

New Rule 10D-1(b)(1)(v) is short and to the point:

The issuer is prohibited from indemnifying any executive officer or former executive officer against the loss of wrongfully awarded compensation.

Nowhere does the rule state that an issuer is prohibited from purchasing insurance. Indeed, the rule does not mention insurance anywhere. One could therefore be forgiven for concluding that the rule does not prohibit an issuer from purchasing insurance covering such recoveries.

State corporate law distinguishes between the power of a corporation to indemnify its agents and the power of a corporation to purchase insurance on their behalf. For example, section 317(i) of the California Corporations Code provides in relevant part: “A corporation shall have the power to purchase and maintain insurance on behalf of any agent of the corporation against any liability against or incurred by the agent in that capacity or arising from the agent’s status as such wregardless of whether the corporation would have the power to indemnify the agent against that liability under this section” (emphasis added). See also Section 145(g) of the Delaware General Corporation Law.

However, the SEC reads assurance into the rule. In the adoption statement, the SEC says “we are adopting as proposed rules to prohibit issuers from ensure or indemnify any executive officer or former executive officer against the loss of wrongfully awarded compensation” (footnote omitted, emphasis added). The adoption statement goes on to state that “the indemnification provision prohibits an issuer from paying or reimbursing the executive officer for premiums for such insurance policy.” The SEC says these things despite the fact that the rule itself does not say such things.

Put yourself in the position of a lawyer who is simply reading the rule. Will you be transparent enough to see what the rule does not clearly state? This highlights a long-standing problem with many of the SEC’s rules — there’s what the rule says and there’s what the acceptance waiver says the rules say.

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