Final SEC Rules on Executive Compensation Clawbacks

Siddharth Bahl


On October 26, 2022, the Securities and Exchange Commission (the “SEC”) approved new rules requiring clawback provisions under Section 954 of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010. The new rules add Rule 10D-1 to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which will require national securities exchanges to establish listing standards requiring listed companies to adopt written clawback policies. Those new listing standards would apply to all listed issuers, including smaller reporting companies, emerging growth companies and foreign private issuers.

Under these rules, 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 (with limited exceptions) recover from any current or former executive officers incentive-based compensation (including cash and equity) that was erroneously awarded during the three years preceding the date such a restatement was required (the “Recovery Period”). This is required regardless of whether the cause for the restatement was due to fraud, errors, or any other factors. The amount required to be recovered is the excess of the amount of incentive-based compensation received over the amount that otherwise would have been received had it been determined based on the restated financial measure. Listed companies that do not adopt and comply with the new requirements will be subject to delisting.

Covered Officers

Current and former executive officers will be subject to the new clawback policies. “Executive officers” are defined by the new rules as a company’s president, principal financial officer, principal accounting officer, any vice president in charge of a principal business unit, division, or function, and any other person who performs policymaking functions for the company or otherwise conforms to the full scope of the Exchange Act Section 16 definition. Non-employee directors are not subject to the new rules.

Covered Compensation

The new rules will apply to incentive-based compensation received by the covered individual after his/her service as an executive officer begins and only if the individual served as an executive officer during the Recovery Period. “Incentive-based compensation” is defined by the new rules as any compensation (including cash and equity) granted, earned, or vested based, in whole or in part, on the attainment of a financial reporting measure. A “financial reporting measure” is a measure that is determined and presented in accordance with the accounting principles used in preparing the company’s financial statements, and any measure derived, in whole or in part, from such measures, as well as stock price and total shareholder return.

Incentive-based compensation does not include base salary (however, salary increases based on the attainment of a financial reporting measure may be subject), compensation awarded at the board’s discretion, or other compensation based on subjective (ex. demonstrating leadership), strategic (ex. effecting a merger), or operational objectives (ex. increasing market share).

The new rules provide that incentive-based compensation is “received,” and thus subject to the clawback, in the fiscal period during which the applicable financial reporting measure is attained, even if the payment or grant occurs after the end of that period.

“Big R” and “little r” Restatements will Trigger Incentive-Based Compensation Recovery

The new rules require recovery of erroneously awarded incentive-based compensation for both “little r” and “Big R” restatements. “Little r” restatements are used to correct non-material errors to previously issued financial statements that would otherwise result in a material misstatement if the error were recognized or left uncorrected in the current period. This is in contrast to “Big R” restatements, which are used to correct errors that are material to previously issued financial statements.

The new rules would not apply to an “out of period adjustment” – an adjustment made to correct an immaterial error to previously issued financial statements that is also immaterial to the current period. Likewise, they would not apply to changes to prior period financial statements that do not represent error corrections such as a retrospective application of a change in accounting principle; a retrospective revision to reportable segment information due to a change in the structure of a company’s internal organization; a retrospective reclassification due to a discontinued operation; a retrospective application of a change in reporting entity, such as from a reorganization of entities under common control; and a retrospective revision for stock splits, reverse stock splits, stock dividends, or other changes in capital structure.

Calculating Clawback

The amount of the “clawback” required to be recovered under the new rules is the erroneously awarded incentive-based compensation, which is the amount of incentive-based compensation erroneously awarded to the executive officer in excess of what would have been received if the incentive-based compensation was determined based on the restated financial statements. If the compensation was based on stock price or total shareholder return, then the clawback should be based on a reasonable estimate of the effect of the accounting restatement on the applicable measure. Where the incentive-based compensation was based on two or more measure or was subject to discretion, the company must determine the portion of the incentive-based compensation attributable to restated financial reporting measure.

For equity awards, if the shares or options are still held at the time of recovery, the erroneously awarded compensation is the difference between the number of shares or options received or vested and the number of shares or options that would have been received or vested after applying the restated financial reporting measure. If options have been exercised but the shares received upon exercise have not been sold, the erroneously awarded compensation is the difference between the number of shares received from the exercise and the number of shares that would have been received from the exercise after applying the restated financial reporting measure.

Recovery and Enforcement

The new rules require the recovery of erroneously awarded incentive-based compensation in subject to limited exceptions. If the company’s board determines that the expenses associated with recovery paid to third-parties would exceed the recovery or that recovery would cause an otherwise tax-qualified retirement plan to fail to meet Internal Revenue Code requirements, then recovery is not required.

The clawback must be effectuated regardless of whether the executive officer bears any responsibility for the restatement. The executive officer may not be indemnified for the clawback and companies are expressly restricted under the new rules from paying premiums on an insurance policy that purports to cover an executive officer’s potential clawback obligation.

The new rules require companies to recover excess incentive-based compensation “reasonably promptly.” The rules do not define how or when the recovery efforts must occur any more specifically, leaving it up to companies to decide what is reasonable based on the specific facts and circumstances.

Required Disclosure of Company Clawback Policy

The SEC also adopted amendments to Item 402 of Regulation S-K to include new disclosure requirements that will require a publicly listed company to file its clawback policy as an exhibit to its annual report on Form 10-K and to disclose how the company has applied the policy, including when relevant:

(i) the date the company was required to prepare an accounting restatement and the aggregate amount of erroneously awarded compensation attributable to such accounting restatement (including the estimates used in calculating the recoverable amount in the case of awards based on stock price or total shareholder return);

(ii) the aggregate amount that remains outstanding and any outstanding amounts due from any current or former named executive officer for 180 days or more; and

(iii) details regarding any reliance on the impracticability exceptions.

There is also a new check box being added to the cover page of Form 10-K that companies must check when the financial statements included in the filing reflect a correction of an error to previously issued financial statements and whether any such corrections are restatements triggered a recovery analysis.


The new rules were published in the Federal Register on November 28, 2022 (the “Publication Date”). National securities exchanges, including New York Stock Exchange and Nasdaq Stock Market LLC, have until February 26, 2023, to adopt listing standards implementing the new rules. The updated listing standards must become effective no later than November 28, 2023. Companies will have 60 days from the effective date of the updated listing standards to adopt a compliant clawback policy (if the effective date is November 28, 2023, then the comply-by date would be January 27, 2024).

Next Steps for Listed Companies

While it is not recommended to wait until the exchanges adopt their final policies before preparing or amending a company clawback policy, companies should consider waiting until the exchanges issue their proposed listing standards so they can draft their policies with appropriate context. In the meantime, a listed company can prepare by reviewing its current clawback policy (if any), reviewing its incentive-based compensation agreements in order to determine if any incorporate an applicable element that would be subject to the new clawback policy, and taking relevant measures with respect to their incentive compensation plan documents so future awards are subject to the new clawback policy.

Because the restatement clawback policy will be attached to the company’s annual report on Form 10-K, companies should consider whether the clawback policy for restatements should be separate from any clawback policy that the company has for misconduct. In addition, the restatement clawbacks will be required, whereas misconduct clawbacks may allow for some discretion.

Additional Materials

The SEC’s press release announcing the adoption of the new clawback rules is available here, the fact sheet on the new rules is available here, and the final rule is available here.

If you have any questions about the SEC’s new clawback rules, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets or Employee Benefits and Executive Compensation groups for the latest insights and industry response to these developments.

Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2023 Harter Secrest & Emery LLP