Junaid A. Zubairi, a Shareholder and Chair of Vedder Price’s Government Enforcement & Special Investigations practice, was recently interviewed by CFO magazine and quoted in an article titled “More Clawbacks Likely in Store.”

This CFO article focused on the SEC broadening its definition of “misconduct” in order to claw back incentive compensation to CEOs and CFOs. Mr. Zubairi weighed in on the broadened definition offering, “What the SEC wants to do is push the envelope of Section 304 further, and the next horizon appears to be negligence-based cases without regard to fraud. As the SEC staff has made clear in litigation filings and during the investigative phases of these matters, there are ongoing discussions about whether mere negligence is enough to trigger a clawback, and the staff is taking the position that it is.”

As a way to combat the broadened definition, Mr. Zubairi maintained that a defendant’s strongest argument is a policy-based one. He suggests that executives need to be able to show that the company had good internal controls against fraud, hired good outside auditors and had good internal auditors.

Mr. Zubairi closes by saying that exposing executives to clawbacks for simple negligence “would not only defy the apparent legislative intent behind Section 304, it would also increase the likelihood of a successful Constitutional challenge.” Whether investors are persuaded by this argument is yet to be determined.