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Clawback Policies are Coming: Exchanges Propose Listing Standards

Siddharth Bahl

  585.231.1484

  sbahl@hselaw.com

Following the directive from the Securities and Exchange Commission (the “SEC”) to propose listing standards to require publicly listed companies to adopt compensation clawback policies in the event of financial restatements, both the New York Stock Exchange (the “NYSE”) and the Nasdaq Stock Market (“Nasdaq”) published proposed listing standards in late February 2023.

These proposed standards are not yet effective. After the SEC publishes the rules, they will be subject to a 21-day public comment period. Under the clawback rule adopted by the SEC in October 2022, Exchange Act Rule 10D-1, the listing standards must be effective by November 28, 2023.

The proposed listing standards from the NYSE and Nasdaq closely follow Exchange Act Rule 10D-1. Both proposed standards require publicly listed companies to adopt a clawback policy designed to recover erroneously awarded executive compensation within 60 days of when the listing standards are adopted. The proposed standards require publicly listed companies to comply with their clawback policies for any compensation received after the effective date of the listing standards. This means that if a publicly listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period, the company must recover incentive-based compensation that was erroneously awarded during a three-year lookback period, if that compensation was received by an executive officer after the effective date of the listing standards. Finally, both proposed listing standards require a public company to provide the disclosure required by Exchange Act Rule 10D-1 after the effective date of the listing standards.

If a company with securities listed on the NYSE does not comply with the NYSE listing standard after its effective date by not reasonably promptly recovering the erroneously awarded compensation, the NYSE may immediately suspend trading in the security and commence the NYSE delisting procedures. Any listed company in violation of the standard would be subject to delisting.

If a company with securities listed on Nasdaq does not comply with the listing standard, Nasdaq will send the company a deficiency notice that requires the company to submit a plan of compliance. Similar to Nasdaq’s deficiency proceedings for other corporate governance requirements, after reviewing the plan of compliance, Nasdaq may allow the company up to 180 days to cure the deficiency. If not cured, Nasdaq will commence its delisting procedures.

Now that proposed listing standards have been submitted to the SEC, companies should consider preparing clawback policies that follow the proposed listing standards in anticipation of adopting a compliant policy within 60 days of when the listing standards become effective. If you have any questions about preparing a clawback policy to follow the listing standards, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets or Employee Benefits and Executive Compensation groups.

NYSE’s proposed listing standards can be found here. Nasdaq’s proposed listing standards can be found here. Additional information on the new clawback rules can be found in our LEGALcurrents, Final SEC Rules on Executive Compensation Clawbacks.

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