The Securities and Exchange Commission began the month by issuing proposed rules that would direct national securities exchanges and associations to establish listing standards requiring companies to adopt policies that require executive officers to pay back incentive-based compensation that was awarded erroneously.  Five years ago, Congress ordered the SEC to adopt these rules in Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rule proposal weighs in at 198 pages and is already engendering animadverters.  See, e.g., Controversy Surrounds SEC’s New Proposed Dodd-Frank Executive Compensation Clawback Rules.

The enormous lacuna in the SEC's release is any mention of preemption of state law.  Some state labor laws may prohibit recovery of wages after they have been paid.  For example, Section 221 of the Labor Code provides:

It shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee.

The SEC did acknowledge that foreign laws may bar recovery ("proposed Rule 10D-1 would provide that an issuer must recover erroneously awarded compensation in compliance with its recovery policy except to the extent that pursuit of recovery would be impracticable because it . . . would violate home country law and certain conditions are met").  However, there is ne'er a word about violation of state law.

The SEC's failure to address the question of state law is particularly egregious because it received comment letters raising this very issue.  In this letter, for example, Clark Consulting specifically alerted the SEC to the "impact that state creditor and wage protection laws may have in preventing corporate enforcement of post-payout recovery mechanisms".  Towers Watson also cited preemption as an issue in this letter to the SEC ("Unlike federal pension law, the Dodd-Frank statute does not preempt state contract law.").