Has The SEC Conflated Indemnification And Insurance?

Today's post continues the discussion of the SEC's recent adoption of rules requiring the securities exchanges to adopt listing standards requiring listed companies to develop and implement policies providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers. 

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 erroneously awarded compensation.

The rule nowhere states that an issuer is prohibited from purchasing insurance.  Indeed, the rule nowhere mentions insurance.  One might therefore be forgiven if one was to conclude that the rule does not prohibit an issuer from purchasing insurance covering such recoveries.   

State corporate law distinguishes between 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 power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in that capacity or arising out of the agent’s status as such whether or not 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.

The SEC, however, reads insurance into the rule.  In the adopting release, the SEC states "we are adopting as proposed rules to prohibit issuers from insuring or indemnifying any executive officer or former executive officer against the loss of erroneously awarded compensation" (footnote omitted, emphasis added).  The adopting release goes on to state that "the indemnification provision prohibits an issuer from paying or reimbursing the executive officer for premiums for such an insurance policy".  The SEC says these things notwithstanding the fact that the rule itself says no such things.  

Place yourself in the position of a lawyer who simply reads the rule.  Will you be perspicacious enough to see what the rule does not plainly state?  This highlights a longstanding problem with many of the SEC's rules - there is what the rule says and there is what the adopting release says the rules says.