The SEC’s October 2022 “Listing Standards for Recovery of Erroneously Awarded Compensation” Final Rulewill require companies whose securities are listed on national securities exchanges to develop and adopt  policies for the recovery or “clawback” of incentive compensation that has been “erroneously awarded” when a company restates its financial statements. Because the SEC generally cannot directly regulate corporate governance matters, the new requirements are being implemented through listing standards that national securities exchanges will soon be required to adopt.

Based on the Final Rule, clawback policies will be required to:

• • Apply to all current and former executive officers,
  • Require clawback of incentive compensation that was based on a financial measure that is changed when a company restates its financial statements, and
  • Apply to the three years before the date on which the company restates its financial statements.

Gary Brown, Partner at Nelson Mullins Riley & Scarborough LLP, and SEC Institute workshop leader and PLI author, has drafted an “Incentive Compensation Recoupment Policy” template to help companies get a head start in this process.  You can find the policy template here.

If you would like to learn more about the provisions of and timing for the new requirements, some highlights are provided below.  You can also learn more in this Fact Sheet and the Final Rule.

The Final Rule became effective on January 27, 2023.  Based on this effective date, the timing requirements of the Final Rule are:

• • February 26, 2023 – last day by which national securities exchanges are to file proposed clawback listing standards;
  • November 28, 2023 – last day by which clawback listing standards must become effective; and
  • January 27, 2024 – last day by which listed companies must adopt and comply with an appropriate clawback policy.

Of course, if the exchanges enact listing standards earlier than the deadlines outlined above, companies will have to adopt policies before January 27, 2024.

Three important notes:

• • These new rules apply to all listed companies – including SRCs, emerging growth companies and foreign private issuers,
  • The clawback provisions will apply to both “Big R” and “little r” restatements, and
  • The requirement to pursue clawback recoveries will be subject to very limited “impracticability” exceptions.

In our next post we will review the related new disclosure requirements and form changes.

As always, your thoughts and comments are welcome!