On October 26, 2022, the Securities and Exchange Commission adopted the clawback rules required by Section 10D of the Securities Exchange Act of 1934, which was added over a dozen years ago by the Dodd-Frank Act. Stock exchanges now must promulgate listing standards that require companies to implement and disclose a clawback policy and will require most companies to adopt new compensation recovery policies. Listed companies will be subject to delisting if they do not adopt and comply with clawback policies that meet the requirements of the to-be-adopted listing standards. Fortunately, companies will have some time to develop new clawback policies because the new rules likely will not be effective for the 2023 proxy season.

Stock Exchange Listing Requirements
New Exchange Act Rule 10D-1 directs national securities exchanges to establish listing standards that require companies to: (1) adopt and comply with written policies for recovery of erroneously awarded incentive-based compensation received by their current or former executive officers in the event they are required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws, during the three completed fiscal years immediately preceding the date that the companies are required to prepare an accounting restatement; and (2) disclose those compensation recovery policies in accordance with Commission rules, including providing the information in tagged data (XBRL) format.

Clawback Trigger; Covered Period, Compensation and Executive Officers
Under the new rules, clawback policies must require recovery of incentive compensation erroneously paid during the three completed fiscal years immediately preceding the date on which the company is required to prepare an accounting restatement to correct an error that is material to previously issued financial statements. The final rules clarify that triggering restatements may include both (1) restatements that correct errors that are material to previously issued financial statements (commonly referred to as "Big R" restatements) and (2) restatements that correct errors that are not material to previously issued financial statements, but would result in a material misstatement if (a) the errors were left uncorrected in the current report or (b) the error correction was recognized in the current period (commonly referred to as "little r" restatements).

The amount of recoverable compensation will be the amount of incentive-based compensation received by the executive officer or former executive officer that exceeds the amount of incentive-based compensation that otherwise would have been received had it been determined based on the restated financial statements. The rules contemplate that the listing standards can provide for very limited impracticability exceptions.

The rules apply to Section 16 officers, including the CEO, CFO, PAO, any VP in charge of a principal business unit, and any other officer who performs a "policy-making" function.

Disclosure and Reporting
The rules require specific disclosure of company policies on recovery of incentive-based compensation and information about actions taken pursuant to such recovery policies. The rules also require all companies to: (i) file their written recovery policies as exhibits to their annual reports; (ii) indicate by check boxes on their annual reports whether the financial statements included in the filings reflect correction of an error to previously issued financial statements and whether any of those error corrections are restatements that required a recovery analysis; and (iii) disclose any actions they have taken pursuant to such recovery policies.

The rules also add a new instruction to the Summary Compensation Table requiring any amounts recovered pursuant to a company's clawback policy to reduce the amount reported in the applicable column, as well as the "total" column" for the fiscal year in which the amount recovered initially was reported, and be identified by footnote.

Effective Date
The final rules will become effective 60 days following publication of the adopting release in the Federal Register. Exchanges will be required to file proposed listing standards no later than 90 days following publication of the release in the Federal Register, and the listing standards must be effective no later than one year following publication. Companies subject to the listing standards will then be required to adopt a corresponding clawback policy no later than 60 days following the date on which the applicable listing standards become effective, and will thereafter be required to comply with related disclosure requirements.

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