On July 1, 2015, the U.S. Securities and Exchange Commission proposed rules which would require exchange-listed companies to adopt a policy for the recovery of incentive-based compensation in the event of an accounting restatement. These rules would implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The proposed rules are broader in scope than Section 304 of the Sarbanes-Oxley Act of 2002, which applies only to chief executive officers and chief financial officers, requires a finding of material noncompliance resulting from misconduct, and can be used only to recover compensation paid in the year following the financial misstatement.
Under the proposed rules, each listed company would be required to adopt a compliant clawback policy within 60 days after the effective date (not likely to be soon-- see below) of the applicable securities exchange’s listing standards. Even if a company has proactively implemented a clawback policy, it will likely have to adopt a new or amended policy that complies with the final rules. Specifically, the policy must provide for the recovery of all excess incentive-based compensation received by any current or former executive officer that results from attaining a misstated financial reporting measure for any fiscal period ending on or after the effective date of the final rules, regardless of whether there is any fault or responsibility on the part of such executive officer. The clawback policy would be triggered in the event that the company is required to prepare a restatement to correct an error that is material to previously issued financial statements, but not by corrections resulting from new accounting principles, changes in the company’s internal organizational structure or reclassifications due to discontinued operations.
The proposed rules define “incentive-based compensation” as any compensation that is granted, earned or vested based on the attainment of any financial reporting measure. Service-based awards (whether equity or cash), awards based on strategic or operational metrics, discretionary compensation and base salary are excluded from this definition. The amount of incentive-based compensation that is recoverable is the difference between the compensation received by the executive officer based on the materially incorrect financial statements and the amount such executive would have received had the compensation been determined based on the financial statements as restated. This “excess” compensation would be recoverable for a look-back period of three fiscal years.
Each listed company would be required to file its clawback policy as an exhibit to its Annual Report on Form 10-K. Separately, if a company either prepares a restatement that resulted in clawback enforcement or there remained an outstanding balance of excess incentive-based compensation relating to a prior restatement, the company will have additional disclosure obligations.
The rules will not take effect for some time. There is a 60-day comment period. After the proposed rules are adopted, the national securities exchanges would have 90 days to propose new listing standards, which would be subject to an additional comment period. Listed companies would be required to comply with the new disclosure requirements in proxy or information statements and periodic reports filed on or after the effective date of the new listing standards.
- Partner
Mark Reuter advocates for business clients in transactions, proceedings and conflicts regulated by federal and state securities laws and stock exchange rules. A partner in the firm’s Business Representation & Transactions ...
- Partner
As a partner in the firm’s Business Representation & Transactions Group, Allie Westfall’s insight and proven analytical skills help translate the complexities of the often-challenging securities laws. Allie’s counsel ...
Topics/Tags
Select- SEC
- Corporate Transparency Act
- Securities Law
- Cybersecurity and Privacy Law
- Securities Regulation
- Cybersecurity Regulation
- IRS
- Corporate Law
- Tax Planning
- Coronavirus
- Nasdaq
- Clawback Rules
- SEC Enforcement
- Taxation
- Dodd-Frank
- Mergers & Acquisitions
- Paycheck Protection Program
- JOBS Act
- Corporate Tax
- Economic Sanctions
- Ohio LLC Act
- FAST Act
- Corporate Governance
- Consumer Protection Act
- Proxy Access Rules
- Securities Litigation
- Crowdfunding
- Conflict Minerals
- Cryptocurrency
- Hedging
- Real Estate Law
- Emerging Growth Companies
- Investors
- Pay Ratio Disclosure
- Whistleblower
- Private Offerings
- Intellectual Property
- Technology
- LIBOR
- Opportunity Zone
- Executive Compensation
- Health Care Act
- Accredited Investors
- Sales Tax
- United States Supreme Court
- Online Trading Platforms
- Wall Street Reform
- IPO
- Registration Statement
- Annual Reports
- Family-Controlled Entities
- Gift and Estate Transfers
- Ohio Foreclosure Reform
- Director Compensation
- Board of Directors
- Director Independence
- Total Shareholder Return
- Cyber Insurance
- Data Breach
- Lenders
- Receivership Statute
- Regulation A
- Regulation D
- Compensation Committee Certification
- CDEs
- CDFI Fund
- Community Development Entities
- Community Development Financial Institutions Fund
- Government Shutdown
- New Markets Tax Credit
- NMTC
- NMTC Financing
- Regulation Fair Disclosure
- Social Media
- Benefits
- Healthcare Reform
- Litigation
- Marketing
- Public Company Transition Rules
- Employment Incentives
- HIRE Act
- Social Security Tax
- Tax Credit
Recent Posts
- Corporate Transparency Act Update: Texas Federal Court Issues Nationwide Injunction
- SEC Fines Four Companies $7M for Violating Cyber Disclosure Rules
- FinCEN Issues Additional Guidance for Reporting Companies on Dissolved Entities
- Division of Corporation Finance Director Statement: The State of Disclosure Review
- FinCEN Issues Additional Guidance for HOAs and Trusts under the Corporate Transparency Act
- SEC Wins ‘Shadow Insider Trading’ Trial
- SEC Voluntarily Stays Climate Rules
- New SEC Climate Disclosure Rules – Temporarily Stayed
- Corporate Transparency Act Ruled Unconstitutional
- SEC Climate Rule Vote Scheduled for March 6, 2024