In proposing executive compensation recoupment rules, the Securities and Exchange Commission either overlooked or failed to recognize an important legal distinction.  The proposed rules would require national securities exchanges and national securities associations to establish listing standards requiring each issuer to develop and implement a policy providing for the recovery, under certain circumstances, of incentive-based compensation based on financial information required to be reported under the securities laws that is received by current or former executive officers, and require the disclosure of the policy.

The proposing release fails to acknowledge that status as an executive officer is not necessarily coextensive with status as an employee.  Although an officer may often be an employee, not every officer is an employee and not every employee is an officer.  This is analytically significant point because two different bodies of law are implicated.  Corporate law generally determines what officers are required, how they are appointed, their duties and how they are removed.  See, e.g., Cal. Corp. Code § 312 and NRS 78.130.  In contrast, employment status is the subject of an entirely different body of law – statutory employment laws and the common law of agency.  The separation of corporate and labor law is evident in Section 312(b) of the California Corporations Code:

Except as otherwise provided by the articles or bylaws, officers shall be chosen by the board and serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment.

As a result of the SEC’s failure to discern the difference between employee and officer, the proposing release fails to recognize that the proposed rules will be impacted by state employment law.  Thus, the proposing release is devoid of any discussion or analysis of state labor laws governing such matters as protection of wages and mandatory indemnification.  See, e.g., Cal. Labor Code §§ 221 & 2802.

Officer and a Gentleman

The phrase “an officer and a gentleman” isn’t just the title of a movie, it is statutory.  The Uniform Code of Military Justice provides:

Any commissioned officer, cadet, or midshipman who is convicted of conduct unbecoming an officer and a gentleman shall be punished as a court-martial may direct.

10 U.S.C. § 933.