With SEC Rule 10D-1 (17 C.F.R. § 240.10D-1) now fully in effect, 2025 marks the first year public company boards may be required to actively enforce clawback policies in response to financial restatements. Most issuers completed policy adoption and related disclosures in 2023–2024. The rule now enters its enforcement phase, making 2025 a pivotal year for governance readiness and for compensation committees, legal teams, finance, and human resources departments preparing to operationalize clawback policies.
This Blog summarizes the Rule's requirements and offers practical considerations for boards and committees navigating enforcement.
Overview of SEC Rule 10D-1
Rule 10D-1 requires listed issuers to adopt and comply with a written clawback policy providing for the reasonably prompt recovery of erroneously awarded incentive-based compensation in the event of an accounting restatement. The rule applies when a restatement is required due to material non-compliance with financial reporting requirements, including both:
- Errors material to prior financial statements, and
- Errors that, if left uncorrected, would result in a material misstatement in the current period.
The "trigger date" for recovery is the earlier of (i) when the board (or an authorized officer or committee) concludes, or reasonably should have concluded, that a restatement is required, or (ii) when a court or regulator directs a restatement.
Key features include:
- Covered Officers: Applies to all current and former executive officers who served during the performance period in question.
- Lookback Period: Three completed fiscal years immediately preceding the restatement determination date (including certain transition periods).
- Covered Compensation: Incentive-based compensation "received" after the individual began serving as an executive officer, while the issuer's securities were listed.
- Recovery Amount: Excess of compensation actually received over what should have been received based on restated results. For stock price or TSR-based awards, issuers must use a reasonable estimate and retain documentation.
Exceptions to enforcement are narrow and available only if:
- Recovery costs would exceed the recoverable amount, with documented attempts;
- Recovery would violate pre-November 28, 2022 foreign law, supported by a legal opinion; or
- Recovery would cause a tax-qualified retirement plan to lose favorable status.
Issuers may not indemnify officers for recovered amounts. Annual reports and certain SEC filings must include disclosure of the policy and any recovery actions.
Enforcement and Governance Considerations
As restatements arise, boards and compensation committees must move from policy adoption to enforcement. Practical issues include:
- Contractual Alignment – Employment agreements, bonus plans, and equity awards should be reviewed for consistency with clawback obligations. Amendments or acknowledgments may be advisable to strengthen enforceability.
- Process and Documentation – Establish clear internal protocols for identifying impacted compensation, calculating recoveries, and documenting determinations. Coordination among legal, finance, and HR is critical.
- Tax and Reporting – Recovery may require adjustments to Forms W-2 or 1099 and income tax corrections. Companies should plan for administrative complexity.
- Broader Clawbacks – Many issuers maintain broader misconduct-based clawbacks. Ensuring alignment between Rule 10D-1 policies and these broader provisions remains a best practice.
Recommendations for 2025
Compensation committees and general counsel should consider the following as part of their governance cycle:
- Confirm the Rule 10D-1 policy is filed, current, and reviewed at least annually.
- Reassess award agreements and employment agreements for enforcement consistency.
- Establish a standing board agenda item addressing potential recovery events.
- Provide onboarding education for new directors on the Rule 10D-1 framework.
Nelson Mullins' Securities & Corporate Governance Industry Group works regularly with its clients to navigate the changing legislative and regulatory landscape affecting both private and public companies and their boards.
These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.
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.
