This post was written by James A. Rolfes.

Last week, the Washington Post reported the SEC had rejected a proposed settlement of SEC’s landmark case seeking enforcement of the so-called “clawback” of executive compensation under Sarbanes Oxley Section 304. See Hilzenrath, D., Washington Post July 20, 2011, SEC Rejects Proposal. In SEC v. Jenkins, No. 09-cv-01510 (D. Ariz. filed Jul. 22, 2009), the SEC for the first time sought over $4 million in incentive-based compensation from an admittedly non-culpable CEO of a company that had misstated its financial statements due to employee fraud. The SEC further had obtained an early victory in that case, persuading the federal court that SOX 304 did not require a showing that the defendant CEO aided or even knew about the fraud leading to financial statement restatement. SEC v. Jenkins, 718 F. Supp. 2d 1070 (D. Ariz. 2010). Now the Commissioners have rejected the settlement recommendation of the SEC enforcement staff and accepted the risk that trial of the matter could undo this victory — signaling perhaps the Commission’s intention to aggressively pursue clawbacks.

Behind the scenes, however, the rejection of the settlement provides a less clear message. According to unnamed sources, some Commissioners balked at a settlement that obtained less than half the sought-after compensation, but others rejected the staff’s recommendation claiming the SEC should never have brought the case in the first place. That tension reflects a wider debate now on going as to whether SOX 304 enforcement against “innocent” CEOs and CFOs represents an intended tough Congressional mandate to punish executives who oversee the filing of later-restated financial statements, or a poor policy choice by the SEC. See e.g., Harvard law School Forum on Corporate Governance and Financial Regulation.

That divergence of Commissioner opinion may also play out as the SEC undertakes to establish rules required under Dodd-Frank 954. That legislation mandated expanded restatement-based clawback requirements, and directed the SEC to craft rules requiring public companies to recover incentive-based compensation calculated using erroneous financial data. See Dodd-Frank Leaves Clawback Uncertainty, Compliance Reporter (August 30, 2010) Rolfes, J.  Right now, the SEC has placed that rulemaking responsibility on hold at least until the Fall 2011.