The SEC has proposed a new rule (Rule 10D-1) and rule amendments that would require national securities exchanges and national securities associations to establish listing standards requiring each issuer listed on its exchange to develop and implement a policy that provides for the recovery of incentive-based compensation that was erroneously awarded to its officers (a “clawback” policy). Issuers would also be required to file the policy to the SEC as an exhibit to its annual report and to include additional disclosures within both their annual report and their proxy statements regarding clawback actions taken by the company.
Thursday, July 30. 2015
Under the proposed rule, companies that fail to adopt a compensation recovery policy that complies with applicable listing standards, or that fail to disclose the policy to the SEC, or that fail to comply with the policy’s recovery provisions would be subject to delisting.
Proposed Rule 10D-1 would cover any incentive-based compensation that is earned wholly or in part when any financial reporting measure is met by the company. “Financial reporting measures” are measures based on the accounting principles that the company uses when preparing financial statements, or any measures that are derived wholly or in part from such financial information, as well as stock price and total shareholder return (TSR).
This proposed rule means that issuers would be providing two additional pieces of information to the SEC with their EDGAR filings: a compensation recovery policy (the clawback policy) and a new disclosure within the annual report or proxy statement that contains information about actions that were taken during the previous fiscal year that pertains to the recovery of excess incentive-based compensation.
What is required in the compensation recovery policy?
– Recovery would be required on a “no fault” basis.
– Recovery would be required from current and former executive officers (“executive officers” includes the company’s president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business division, unit, or function, and any other person who performs policy-making functions for the company) who received incentive-based compensation during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement to correct a material error.
– Companies would be required to recover the difference between the amount of incentive-based compensation that was received by an executive officer and the amount the executive officer would have received if the incentive-based compensation had been determined using the accounting restatement. If compensation is based on stock price or the total shareholder return of the company, companies would use an estimate of the effect of the accounting restatement on the stock price or TSR to determine what needs to be recovered.
– Companies would have discretion not to recover the excess incentive-based compensation received by executive officers if the direct expense of recovering it would exceed the amount to be recovered.
– Foreign private issuers would have the discretion not to recover the excess incentive-based compensation in circumstances specified by the SEC where recovery would violate their home country’s law.
What gets disclosed to the SEC?
– The company’s compensation recovery policy would be filed as an exhibit to the company’s annual report.
– If during the fiscal year the company prepared an accounting restatement that required recovery of incentive-based compensation or the company has an outstanding balance of excess incentive-based compensation relating to a prior restatement, additional information would need to be disclosed to the SEC. Such information would include:
– the date on which the company was required to prepare each accounting restatement
– the aggregate dollar amount of the excess incentive-based compensation attributable to each
– the aggregate dollar amount that remained outstanding at the end of the company’s last fiscal year
– the estimates used to determine the excess incentive-based compensation attributable to each accounting restatement, if the financial reporting measure was related to a stock price or total shareholder return metric
– the name of each person subject to recovery from whom the company decided not to pursue recovery
– the amounts due from each person from whom the company decided not to pursue recovery
– a brief description of the reason the company decided not to pursue recovery for each person
– and, if any amount of excess incentive-based compensation is outstanding for more than 180 days, the name of each person and the amount due from each person at the end of the fiscal year.
– The company’s Summary Compensation Table would also be adjusted if any restatement of a company’s financials resulted in recovery of compensation. When a recovery occurs, the Summary Compensation Table would be revised to update the reported amount and a footnote would be required to disclose the amount of compensation that was recovered.
This disclosure would be included along with the company’s other executive compensation disclosure in the company’s annual report and any proxy or information statements that require executive compensation disclosure pursuant to Item 402 of Regulation S-K. This disclosure would be provided as part of its Item 402 disclosure (as Item 402(w)).
For registered management investment companies that would be subject to proposed Rule 10D-1, this information would be included in the company’s annual reports on Form N-CSR and in proxy statements and information statements relating to the election of directors.
For listed foreign issuers, including Canadian issuers using the Canada-U.S. multijurisdictional disclosure system (MJDS), the same information would be filed only in annual reports on Form 20-F, Form 10-K, and Form 40-F, as applicable. This information would not be required in any proxy or consent solicitation materials. For Form 20-F, the disclosure would be Item 6.F.
Additionally, the Item 402(w) disclosure and the Item 6.F disclosure for foreign issuers would also be provided in interactive data format (XBRL). This information would be block-tagged using XBRL elements prescribed by the SEC and then provided as an exhibit to the EDGAR filing.
What is the transition period?
Exchanges would be required to file their proposed listing rules 90 days after the final version of Rule 10D-1 is published in the Federal Register. Listing rules would be required to become effective no later than one year following the publication date.
Listed companies would then be required to adopt their recovery policy no later than 60 days following the date that the listing exchange’s rule becomes effective.
Companies would be required to recover incentive-based compensation that was erroneously awarded after the effective date of Rule 10D-1 that results from attaining a financial reporting measure based on financial information for any fiscal period ending on or after the effective date of Rule 10D-1 and would be required to include the new disclosures about recovery in filings submitted to EDGAR on or after the effective date of the listing exchange’s listing rules.
Comments to the SEC are due September 14, 2015. Comments that have already been received by the SEC are available here: http://www.sec.gov/comments/s7-12-15/s71215.shtml.