The Securities and Exchange Commission (the “SEC”) today voted, 3-2, to issue proposed rules implementing the mandate in Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that the SEC require national securities exchanges and associations to adopt a listing standard that requires listed companies to adopt and enforce a clawback policy.
This summary is based on information provided at the SEC's open meeting and therefore may not reflect nuances that appear in the official text of the proposals. The proposing release is available here. The proposed rules will be subject to a 60-day comment period following publication in the Federal Register.
SEC Chair Mary Jo White and Commissioners Kara Stein and Luis Aguilar voted to propose the rules and Commissioners Daniel Gallagher and Michael Piwowar dissented. Statements made by the Commissioners today regarding the proposal are on the SEC website and available here.
Section 954 of the Dodd-Frank Act mandates that the SEC adopt rules requiring national securities exchanges and associations to establish listing standards that require listed companies to develop and implement a policy providing that, in the event of a financial restatement due to material noncompliance with financial reporting standards, the listed company will recover any incentive-based compensation that is more than what would have been paid but for the financial reporting error.
The SEC’s proposed new Rule 10D-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), directs the exchanges and associations to adopt listing standards that would require each listed company to adopt, comply with and disclose a compensation recovery policy that complies with the following parameters:
- If during the last completed fiscal year, the company was required to prepare an accounting restatement to correct a material error, the company would be required to seek recovery from current and former “executive officers” who received “excess incentive-based compensation” during the three fiscal years preceding the date of the restatement;
- “Executive officers” would include all Section 16 officers (i.e., the company’s president, principal financial officer, principal accounting officer (or if there is not one, the controller), any vice-president in charge of a principal business unit, division or function and any other person who performs a policy-making function);
- “Excess incentive-based compensation” would include compensation granted, earned or vested based wholly or in part on the attainment of any financial reporting measure or the company’s stock price or total shareholder return, which exceeds the amount that would have been received had the incentive-based compensation been based on the accounting restatement. Reasonable estimates could be used in determining the amount to be recovered for incentive-based compensation based on stock price or total shareholder return;
- Recovery would be on a “no-fault” basis, without regard to misconduct or responsibility for the material error; and
- Discretion not to recover excess incentive-based compensation would only be permissible if the company determines that the direct expense of enforcing recovery would exceed the amount to be recovered (or, for foreign private issuers, if recovery would violate home country law).
Each company would be required to file its compensation recovery policy as an exhibit to its annual report on Form 10-K. In addition, if a company completed a financial restatement during a fiscal year, the company’s proxy statement would be required to disclose certain information regarding its actions to recover excess incentive-based compensation during the last completed fiscal year, including:
- The date it was required to prepare the restatement;
- The aggregate dollar amount of excess incentive-based compensation and any estimates used in determining that amount;
- The aggregate dollar amount of excess incentive-based compensation that remains outstanding at the end of the last completed fiscal year;
- If the company decided not to pursue recovery from any individual, the name of that person, the amount involved, and a brief description of the reason why the company decided not to pursue recovery; and
- The name of each person from whom, as of the end of the fiscal year, excess incentive-based compensation had been outstanding for 180 days or longer since the company determined the amount owed.
The disclosure would be required to be included with the company’s other executive compensation-related disclosures and as an XBRL-formatted exhibit.
Companies would not be allowed to indemnify executive officers against a loss of compensation due to a clawback, or pay for premiums on insurance policies that would cover events of recoupment.
The proposed rules would generally apply to all listed companies, including smaller reporting companies and emerging growth companies. Noncompliance with the applicable listing standards, the SEC’s disclosure requirements, or its own policy’s recovery provisions would subject a company to delisting.
The proposed rules would require each national securities exchange and association to propose rules or rule amendments no later than 90 days after publication of final SEC rules in the Federal Register. The exchange and association rules would need to be approved and be effective no later than one year after publication of final SEC rules in the Federal Register.
Within 60 days following the effective date of the listing standards, each listed company would be required to adopt a compensation recovery policy applicable to all excess incentive-based compensation received by executive officers as a result of the attainment of financial reporting measures based on financial information for any fiscal period ending on or after the effective date of Rule 10D-1. The additional disclosures would be required for all applicable filings following the effective date of the listing standards.