By Ben Woessner 

The last few decades have seen significant debate surrounding the generous compensation of the top executives of publicly-held corporations.  While some view the current system of pay as functional and driven by market forces like scarce executive talent,[1] many watch the upward trajectory of an increasingly disproportionate gap between executive pay and the average American’s salary with equally growing dismay.[2]

Some commentators point to the fact that executive compensation packages have increasingly utilized stock-based compensation to account for the trending upward spiral of executive pay, which may pose a threat to a company by potentially misaligning the interests of its directors with those of its shareholders.[3]  For example, while stock-based compensation attempts to award executives based on stock performance, thereby motivating higher returns to shareholders, it can also incentivize hedging transactions that permit directors to shield themselves from stock declines while still benefiting from compensation.[4]

In response to concerns regarding corporate transparency in the wake of the Financial Crisis of 2008, Congress instituted disclosure reforms through the Dodd-Frank Act of 2010, which, among other measures, included provisions for “clawback” recovery of incentive-based pay awarded on the basis of erroneous accounting reports.[5]  The implementation of a provision of the Act requiring a clawback of executive pay based on inaccurate reports regardless of whether the errors are “due to fraud, error, or any other factor” was delayed until recently.[6]

On Wednesday, October 26, the Securities and Exchange Commission (“SEC”) voted 3-2 in favor of a provision of the Dodd-Frank Act requiring publicly held companies to implement clawback policies to recover erroneously awarded incentive-based compensation paid to directors, even where the director had no responsibility over the inaccurate accounting statement.[7]  The new rule will require exchanges to “prohibit the listing of issuers that do not develop and implement policies to recover erroneously awarded incentive-based compensation.”[8]  These policies will be triggered whenever companies are forced to issue financial restatements for later-discovered accounting errors and will apply to compensation awarded up to three years from the policy’s implementation.[9]

The SEC intends the rule to “return erroneously awarded compensation to the issuer and its shareholders.”[10]  In so doing, the Commission hopes to realign the interests of executives and shareholders by increasing corporate accountability regarding the distorted incentives potentially created by stock-related forms of incentive-based compensation.[11]

However, the clawback rule may suffer from overbroad definitions that potentially undercut its goals to align executive and shareholder interest.  The first of these definitions concerns what qualifies as an accounting restatement that would trigger a recovery of incentive-based compensation.  Under the original proposal of the rule, only “Big R” restatements, or those that are “material to previously issued financial statements,” would trigger a clawback.[12]  However, the newly adopted rule also requires recovery of pay after so-called “little r” restatements—those that correct nonmaterial errors that could constitute material errors if left unreported.[13]

While the SEC hopes that including both material and immaterial restatements will incentivize executives to assert more control over accounting, thereby reducing instances of accounting error and allowing shareholders to put greater trust in the financial reporting of a company,[14] the rule contains another expansive definition that potentially undermines this goal.  The rule’s definition of “executive officer” not only includes the President, CFO, and principal accounting officer, but also “any other officer who performs a policymaking function.”[15]  As a result, even individuals who may have no actual control over the company’s compliance with accounting rules, and therefore no practical way to ensure greater accountability, are at risk of a compensation clawback.[16]

Furthermore, the clawback rule includes an expansive definition of what qualifies as incentive-based compensation that is subject to recovery if a company issues a financial restatement, including “any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any financial reporting measure.”[17]  Therefore, at-risk compensation could include not only bonuses and equity-based compensation, but also nonqualified deferred compensation and long-term incentive compensation, so long as it is granted at least in part on the attainment of a financial reporting measure.[18]

Accordingly, critics of the rule argue that companies are likely to significantly decrease the amount of at-risk incentive compensation offered to executives, who will instead elect for a compensation restructuring to retain executive talent with higher salaries or increased discretionary bonuses unrelated to performance goals.[19]  Such restructuring would tend to go against the very heart of the clawback rule’s purpose—while clawbacks hope to align executive and shareholder interests through increased accountability, a shift away from performance-based compensation altogether may untie executive incentives from stock performance to the shareholder’s detriment.

When the rule goes into effect in about one year, the increasing trend toward shareholder activism may serve to keep potentially detrimental compensation restructuring in check.[20]  In fact, at least one study has shown that clawback policies required by the new rule are popular with shareholders as demonstrated by positive stock returns for companies following the initial 2015 announcement of the newly adopted clawback rule.[21] Nevertheless, in addition to being “burdensome to administer,” the rule may increase the divide between executive and shareholder interests as a result of its sweeping definitions, raising doubts as to whether its proposed benefit will outweigh its costs.[22]

[1] See generally Randall S. Thomas, Explaining the International CEO Pay Gap: Board Capture or Market Driven?, 57 Vand. L. Rev. 1171 (2004).

[2] Josh Bivens & Jori Kandra, Economic Policy Institute, CEO Pay Has Skyrocketed 1,460% Since 1978 (2022),

[3] Luis A. Aguilar, Aligning the Interests of Company Executives and Directors with Shareholders, Harv. L. Sch. F. on Corp. Governance (Feb. 16, 2015),

[4] Id.

[5] Gary Gensler, Statement by Chair Gensler on Final Rules Regarding Clawbacks of Erroneously Awarded Compensation, Harv. L. Sch. F. on Corp. Governance (Oct. 30, 2022),

[6] Id.

[7] Paul Kiernan, Accounting Errors to Cost Executives Their Bonuses Under SEC Rule, Wall St. J. (Oct. 26, 2022),

[8] Sec. & Exch. Comm’n, Listing Standards for Recovery of Erroneously Awarded Compensation 125 (2022),

[9] Id. at 86.

[10] Id. at 80.

[11] Id.

[12] Id. at 28.

[13] Meredith O’Leary et al., What SEC Bonus Clawback Rule Means For Public Cos., Law360 (Nov. 1, 2022, 4:52 PM),

[14] Id.

[15] Id.

[16] O’Leary et al., supra note 13.

[17] Sec. & Exch. Comm’n, supra note 8, at 57.

[18] O’Leary et al., supra note 13.

[19] Kiernan, supra note 7.

[20] Id.

[21] Id.

[22] O’Leary et al., supra note 13.

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Molly Mitchell

More than one year after the Supreme Court’s 9-0 decision in National Collegiate Athletic Association v. Alston that the NCAA is not exempt from the Sherman Act with respect to certain compensation rules, the floodgates have opened for student-athletes to profit from their name, image, and likeness (“NIL”).[1] However, the Court’s majority opinion in Alston did not cover the NCAA’s rules governing NIL deals in college athletics—it only covered compensation rules regarding education-related benefits provided directly to student-athletes by member schools.[2] Allowing NIL deals was instead a direct result of changing public opinion about compensation in college sports and changes in state law, and an indirect result of Alston.[3] The 9-0 opinion was perhaps a signal that the only thing America agrees on is that the NCAA does not fairly compensate athletes.

            Despite the narrowness of Alston’s holding, NIL deals had their moment in Justice Kavanaugh’s concurrence, which was an absolute censure of the NCAA’s compensation rules, including endorsement deals (i.e., NIL deals).[4] Just as “[l]aw firms cannot conspire to cabin lawyers’ salaries in the name of providing legal services out of a ‘love of the law,’” the NCAA cannot price-fix labor by defining the product of college sports as amateurism.[5] If the NCAA had any remaining thought that some of its other compensation rules would be easily exempt from the purview of the Sherman Act if later challenged, Kavanaugh’s concurrence was a resounding “no.”

            On June 30, 2021, only eight days after the decision in Alston, the NCAA announced that all three divisions had adopted interim rules suspending its previous NIL rules.[6] The interim policy provided four new rules.[7] First, college athletes are allowed to “engage in NIL activities that are consistent with the law of the state where [their] school is located.”[8] Second, if an athlete’s school is located in a state with no NIL law, then he or she can engage in NIL activities “without violating NCAA rules related to name, image and likeness.”[9] Third, athletes “can use a professional services provider, [like an agent,] for NIL activities.”[10] Fourth, athletes must report NIL activities to their schools.[11]

            Following this announcement, states quickly moved to pass laws allowing college athletes to receive compensation.[12] For example, Roy Cooper, Governor of The Center of the College Basketball Universe[13] and the state that is home to the greatest college basketball program in history (i.e., the University of North Carolina at Chapel Hill), issued an executive order allowing NIL deals two days after the NCAA announced its interim policy.[14]

            Contrary to the NCAA’s arguments against paying college athletes, the product of college sports has remained essentially the same since the adoption of the interim policy—16.3 million people watched UNC beat Duke to end Coach K’s career in the Final Four without a care in the world that the game likely featured some of the most highly compensated athletes in college sports.[15]

However, the NCAA’s original concern—that NIL deals are used to indirectly induce athletes to attend certain schools—remains, and several other concerns have emerged since the NCAA adopted interim rules.[16] New concerns include college athletes’ potential liability under tax law[17] and federal securities laws and regulations[18] due to a general lack of knowledge about how these laws impact them.    

Federal Income Tax Liability

            Over the last year, college athletes have learned that “in this world nothing can be said to be certain, except death and taxes.”[19] College athletes’ federal income taxes are complicated by a number of issues. First, they file a Form 1040 income tax return as independent contractors after receiving a Form 1099-NEC (i.e., non-employee compensation)[20] or some other variation of a Form 1099[21] from companies with whom they have entered into NIL deals.[22] This requires them to aggregate all 1099s they have received throughout the year when filing their tax return.[23] In comparison, “traditional workers” in the United States file their Form 1040 after receiving a Form W-2 that includes their salary and wages for the year.[24]

Second, college athletes could unintentionally underreport gross income due to the intricacies of the Internal Revenue Code (“IRC”) and related Treasury Regulations. Section 61(a)(1) of the IRC provides that gross income specifically includes “compensation for services, including fees, commissions, fringe benefits, and similar items.”[25] Compensation includes both cash and non-cash compensation, such as cars provided by dealerships or products from companies.[26] If college athletes receive non-cash compensation, then they must include in their income as compensation the fair market value of the property taken in payment.[27] Thus, if they receive something like a car in exchange for use of their NIL, they have gross income in the amount of the fair market value of the car (or fair market rental value, if the car is leased). Further, college athletes’ receipt of payment in the form of cryptocurrency further complicates computation of gross income for federal income taxes.

Liability Under Federal Securities Laws

            NIL deals for endorsing a cryptocurrency may expose college athletes to federal securities laws if the cryptocurrency is a “security” under the Securities Act of 1933. A security is broadly defined under the Securities Act to encompass many different types of instruments, including investment contracts.[28] Whether an instrument is an investment contract for purposes of the Securities Act depends on a fact-specific analysis under the Howey test.[29] In Howey, the Court held that investment contract means “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”[30]

If a college athlete promotes a cryptocurrency that is a security under the Howey test, then he or she is subject to federal securities laws, including anti-touting provisions.[31] Under Section 17(b) of the Securities Act, it is unlawful for any person to “publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received, directly or indirectly from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.”[32]

Thus, a college athlete promoting a cryptocurrency that is a security “must disclose the nature, scope, and amount of compensation received in exchange for the promotion.”[33] Further concerns for potential liability under federal securities laws arise from “violations of the anti-fraud provisions of the federal securities laws, [as well as] from participating in an unregistered offer and sale of securities.”[34]

Possible Future NIL Regulations

Since the NCAA adopted its interim policy allowing compensation from NIL deals, it has not issued many regulations or clarifications on possible sources of income or potential issues for athletes. However, we will likely see more regulations come to fruition in the future. The past year has shown that it is necessary for schools to educate athletes on liability issues and encourage them to seek guidance from agents or other professionals with knowledge of the significant implications that arise from endorsement deals.   

[1]  See e.g., Max Escarpio, College Football’s Most Unique NIL Deals in 2022, Bleacher Report, (last visited Oct. 17, 2022); College Basketball NIL Rankings, On3NIL, (last visited Oct. 17, 2022); Sarah Eberspacher et al., National Collegiate Athletic Association v. Alston,  JD Supra (June 22, 2021),

[2] Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2166 (2021) (Kavanaugh, J., concurring).

[3] Alex Silverman, From Name, Image and Likeness to Pay for Play, Americans Increasingly Support Compensation for College Athletes,  Morning Consult (June 29, 2021 4:07 PM),

[4] Alston, 141 S. Ct. at 2166–2167.    

[5] Id. at 2167.

[6] Michelle Brutlag Hosick, NCAA adopts interim name, image and likeness policy, Nat’l Collegiate Athletic Ass’n (June 30, 2021, 4:20 PM),

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12]NIL Legislation Tracker, Saul Ewing Arnstein & Lehr,

[13] Governor of the State of North Carolina, Proclamation that North Carolina is The Center of the College Basketball Universe (March 30, 2022),

[14] N.C. Exec. Order No. 223 (July 2, 2021).

[15] Duke vs. North Carolina is most-watched NCAA DI men’s national semifinal game since 2017, National Collegiate Athletic Association (April 3, 2022),,of%2Dhome%20viewership%20is%20included.

[16]  Pat Forde (@ByPatForde), Twitter, (Aug. 18, 2022, 3:02 PM),

[17] Ron L. Brown, Tax Implications When NCAA Student Athletes Make Money, Kiplinger (July 21, 2022),,employed%20Internal%20Revenue%20Service%20guidelines.

[18] See e.g., Kristi Dosh, FSU Softball Lands NIL Deal With Cryptocurrency Exchange FTX, Forbes (Dec. 21, 2021, 1:21 PM),; Ross Dellenger, Florida State Football Team Scores NIL Cash Deal From Crypto Company, Sports Illustrated (Aug. 17, 2021),

[19] Letter from Benjamin Franklin to Jean-Baptiste Le Roy (November 13, 1789).

[20] Tim Shaw, The Long Read: Tax Implications of College Collectives, NIL Deals, Thomson Reuters (October 6, 2022),,such%20as%20Venmo%20or%20PayPal.

[21] See supra note 17.

[22] Id.

[23] Id.

[24]About Form W-2, Wage and Tax Statement, Internal Revenue Service (Oct. 3, 2022),

[25] 26 I.R.C. § 61(a)(1).

[26] 26 C.F.R. § 1.61–2(d)(1).

[27] Id.

[28] 15 U.S.C. § 77b(a)(1).

[29] SEC v. W.J. Howey Co., 328 U.S. 293, 298–99 (1946).

[30] Id.

[31] SEC Division of Enforcement & SEC Office of Compliance Inspections and Examinations, SEC Statement Urging Caution Around Celebrity Backed ICOs (Nov. 1, 2017),

[32] 15 U.S.C § 77(b).

[33] See supra note 31.

[34] Id.

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