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Can The SEC Ignore Congress’ Plain Language?

In proposing executive incentive compensation clawback rules, the Securities and Exchange Commission departs materially from the plain words of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Section 954 (codified at Section 10D of the Securities Exchange Act of 1934) states that an issuer will recover incentive-based compensation received during the “3-year period preceding the date on which the issuer is required to prepare an accounting restatement”.  The statute doesn’t say the “three completed fiscal years immediately preceding the date the issuer is required to prepare an accounting restatement”.  Yet, that is what the SEC is proposing.

In the proposing release, the SEC justifies its departure from the plain meaning of the statute as follows:

We believe that basing the look-back period on fiscal years, rather than a preceding 36-month period, is consistent with issuers’ general practice of making compensation decisions and awards on a fiscal year basis.

That may be, but that isn’t what Congress said.  Moreover, interpreting the statute in accordance with its plain meaning would not frustrate Congressional intent.  The fact that the SEC may think there is a better way does not empower it to overrule Congress.  Regardless of the rationality of the SEC’s proposal, it is subject to being set aside as arbitrary and capricious.  5 U. S. C. § 706(2).

Nonetheless, when an agency attempts to give meaning to a statute that is plain on its face, we need not defer to the agency but instead must give effect to the intent of Congress.

The Fertilizer Institute v. E.P.A., 935 F.2d 1303, 1309 (1991) citing Chevron USA, Inc. v. NRDC, Inc., 467 U.S. 837, 842-43 (1984) and Amalgamated Transit Union v. Skinner, 894 F.2d 1362, 1368 (D.C.Cir.1990).

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