Tuesday, November 01. 2022
First proposed by the SEC in 2015, the new rules implement Section 10D, which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act, of the Securities Exchange Act of 1934. Specifically, this new Exchange Act Rule 10D-1 mandates national securities exchanges and associations to establish listing standards that:
- require a listed issuer to adopt and comply with a written policy for recovery of erroneously awarded incentive-based compensation received by its current or former executive officers. This would occur if the issuer must prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws during the three completed fiscal years immediately before the date of the accounting restatement
- require a listed issuer to disclose any compensation recovery policies in accordance with SEC rules, including providing the information in tagged data format (clawback disclosure)
The final rules also specify disclosure requirements concerning the listed issuer’s policy on the recovery of incentive-based compensation and information about actions taken according to this policy. The listing standards will also require an issuer to recover erroneously awarded compensation, subject to limited impracticability exceptions available in circumstances where:
- recovery violates country laws that existed at the time of adoption of the rule (the issuer must provide an opinion of counsel to that effect)
- expenses paid to third parties to assist in enforcing the policy would exceed the amount to be recovered
- recovery would cause a tax-qualified retirement plan to no longer meet relevant requirements of the Internal Revenue Code
Amendments to Item 402 of Regulation S-K, Form 40-F, and Form 20-F (and for listed funds, Form N-CSR) have also been adopted by the SEC. These changes will create new disclosure requirements related to the required policies. Under the new rules, a listed issuer must file its policy as an exhibit to its annual report. It must also indicate how it has applied the policy, indicating, among other things:
- The date the issuer was required to prepare an accounting restatement and the aggregate dollaramount of erroneously awarded compensation
- The aggregate amount that remains outstanding and any outstanding amounts due from any current or former named executive officer
- Any details regarding reliance on the impracticability exceptions mentioned above
Compensation recovery disclosures must be tagged in Inline XBRL.
The rules and amendments will become effective 60 days following publication of the release in the Federal Register. In addition, exchanges must file proposed listing standards no later than 90 days following the publication of the rules in the Federal Register. The listing standards filed must become effective no later than one year following their publication. Subsequently, issuers subject to these listing standards must adopt a recovery policy no later than 60 days following the date on which the applicable listing standards become effective. Issuers are also required to comply with these disclosure requirements in proxy statements, information statements, and annual reports filed on or after the date on which the issuer adopts its recovery policy.