United States: SEC Proposed Rules To Implement Clawback Provisions Of The Dodd-Frank Act

The SEC has proposed new rules to implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which relates to clawbacks of incentive compensation.

The proposed rules direct the exchanges to establish listing standards that require listed issuers to adopt and comply with written policies for the recovery of incentive-based compensation in connection with the restatement of financial information required to be reported under applicable securities laws and to disclose the issuer's recovery policies in accordance with the Commission's rules. The proposed rules would require listed issuers to file their written recovery policies as an exhibit to their annual reports and to also disclose any actions taken under such policies.


We expect that the rules will likely become effective in the latter half of 2016. The proposed rules would require each exchange to file its proposed listing rules no more than 90 days following the publication of the final rule, and such rules must be effective no later than one year following such publication date. Each listed issuer must adopt its recovery policy no later than 60 days following the date on which the applicable exchange's rules become effective.


The proposed rule would apply the requirements to nearly all listed issuers, including emerging growth companies, smaller reporting companies, foreign private issuers, and controlled companies. Limited exceptions would apply to the listing of security futures products, standardized options, and the securities of certain registered investment companies.


The rules apply to any current or former executive officer of the issuer who received incentive-based compensation during the three completed fiscal years prior to the date the issuer is required to prepare an accounting restatement. Executive officers would include the issuer's president, principal financial officer, principal accounting officer (or controller), vice-presidents in charge of principal business units, divisions, or functions, and any other officer who performs a policy-making function or any other person who performs similar policy-making functions for the issuer, including officers of parents or subsidiaries of the issuer if they perform such policy making functions for the issuer.


Incentive-based compensation would include any compensation that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure. This broad definition includes measures that are (i) determined and presented in accordance with accounting principles used in preparing the financial statements, (ii) derived from such financial information, or (iii) determined based on stock price and total shareholder return. This would encompass nearly all performance-based bonus programs or equity grants which have some objective, company-wide performance criteria (e.g., RSUs or stock options which vest upon the achievement of objective, company-wide performance criteria).

The recovery policies would require recovery only of the incentive-based compensation in excess of what would have been paid to the executive officer under the accounting restatement. Following an accounting restatement, an issuer must determine what the executive officer would have received had the accounts properly been stated and recover any amounts received by the executive officer in excess of the proper amounts. In circumstances where such a mathematical recalculation is impossible, the recoverable amount may be determined based upon a reasonable estimate of the effect of the restatement.


An accounting restatement includes any revision to previously issued financial statements to correct one or more errors that are, in the aggregate, material to those financial statements. Restatements do not include retroactive application of a change in accounting principles, retrospective revisions to reflect a change in the internal organization, retrospective reclassification due to a discontinued operation, retrospective application of a change in reporting entity, retrospective adjustment to provisional amounts in connection with a prior business combination, or retrospective revision for stock splits.

The issuer is required to prepare an accounting restatement on the earlier of (i) the date the board, a committee of the board, or officers authorized to take such action, conclude(s), or reasonably should have concluded, that the issuer's prior financial statements contain a material error and (ii) the date a court, regulator, or other legally authorized body directs the issuer to restate its previous financial statements to correct a material error.


The proposed rules provide that the issuer must recover any excess compensation in compliance with its recovery policies, except to the extent that (i) recovery would be impracticable because the direct costs of recovery exceed the amount to be recovered or (ii) recovery would violate home country laws. Inconsistencies between compensation contracts and the proposed rules is not sufficient reason to find that recovery would be impracticable, as the proposed rules contemplate that contracts may be amended to accommodate recovery. The proposed rules do not directly address the precise means of recovery but allow discretion in determining the best way to affect a recovery.


Issuers will be required to file their recovery policy as an exhibit to their Forms 10-K and will be required to disclose how they have applied their recovery policy. Any amounts recovered must also be reflected in the summary compensation table.


Issuers are prohibited from indemnifying any executive officer or former executive officer against the loss of any excess incentive-based compensation. Executive officers may purchase insurance from a third-party protecting against such loss, but issuers are prohibited from paying the premiums on such an insurance policy.


Under the proposed rules, failure to adopt and comply with a compensation recovery policy would result in delisting. The exchanges have discretion to determine if an issuer is complying with its recovery policy and must take into account whether an issuer is making a good-faith effort to promptly pursue recovery.


Because inconsistency of the recovery policies with any existing compensation contract is not sufficient reason to withhold application of the recovery policy, issuers should review their clawback policies in connection with any future incentive compensation grants and should include a clause reserving the right to claw back compensation as may be required by the Dodd-Frank Act or by any applicable listing standard. This will prevent any contract claim from executives upon application of any recovery policy. Further, as the rules become final and exchanges issue their listing rules, issuers should work with their advisors in developing a written recovery policy and implementing such policy upon any financial restatement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions