SEC Adopts Executive Compensation Clawback Rules

Siddharth Bahl


On October 26, 2022, the Securities and Exchange Commission (“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, which will require national securities exchanges to establish listing standards requiring listed companies to adopt written clawback policies.

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 impracticability exceptions) recover from any current or former executive officers incentive-based compensation (including stock options) that was erroneously awarded during the three years preceding the date such a restatement was required. 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.

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 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.

The final rules and amendments will be effective 60 days from the publication of the SEC’s release in the Federal Register. National securities exchanges will be required to file proposed listing standards no later than 90 days from publication, with the new required listing standards going into effect no later than one year from publication. Put simply, publicly listed companies will need to adopt a clawback policy that complies with NYSE or Nasdaq rules in the next 12 to 15 months to ensure they comply with these new rules.

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

We will provide a full analysis and description of the new rules in our quarterly newsletter. In the meantime, if you have any questions, please reach out to a member of HSE’s Securities and Capital Markets team or the Employee Benefits and Executive Compensation team for the latest insights and industry response to these developments.

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