Section 304 of the Sarbanes-Oxley Act of 2002: The case for a personal culpability requirement

Section 304 of the Sarbanes-Oxley Act imposes on chief executive officers and chief financial officers of public companies an obligation to disgorge certain compensation (i.e. trading profits, bonuses and equity-based compensation) that is earned in the twelve-month period following the first public issuance or filing of a financial document that the public company is subsequently required to restate due to its material noncompliance, as a result of misconduct, with any financial reporting requirement under the securities laws. On its face, section 304 provides no guidance on the question whether chief executive officers and chief financial officers are required to disgorge even if they have no personal culpability for the "misconduct" that gives rise to the need to restate. This Article considers that question. After estimating the frequency with which this question might arise in the post Sarbanes-Oxley era and reviewing the limited legislative history of section 304, the Article considers the normative question of how section 304 should be interpreted. Relying on statutory, constitutional and policy arguments, the author concludes that section 304 should be interpreted to require chief executive officers and chief financial officers to disgorge only when they have personal culpability for the misconduct that gives rise to the need to restate.