SEC CLAWBACK RULES TAKE EFFECT: WHAT COMPANIES SHOULD DO NOW

On June 9, 2023, the Securities and Exchange Commission (SEC) approved the New York Stock Exchange’s (NYSE) and Nasdaq Stock Market’s (Nasdaq) proposed clawback listing standards, including the amendments that delayed the effective date of the rules to October 2, 2023. Listed companies now have until December 1, 2023 to adopt Dodd-Frank-compliant clawback policies.

Background

The SEC adopted final rules to implement Section 954 of the Dodd-Frank Act (“Section 954”) in October 2022, which direct the national stock exchanges to establish listing standards requiring listed companies to adopt, disclose and enforce a clawback policy compliant with Section 954. On February 22, 2023, the NYSE and Nasdaq released their respective versions of proposed listing standards, the final versions of which require listed companies to adopt, no later than December 1, 2023, clawback policies providing for the recovery of erroneously awarded incentive-based compensation “received” by current and former executive officers in connection with a financial restatement, regardless of fault or misconduct, on or after October 2, 2023. For this purpose, listed companies include foreign private issuers, smaller reporting companies, emerging growth companies, controlled companies and issuers of debt and other nonequity securities, but exclude certain registered investment companies. Failure to comply with the listing requirements could subject listed companies on both exchanges to suspension of trading and delisting.

What Listed Companies Should Do Now

With the October 2, 2023 effective date fast approaching, we recommend that public companies take the following steps:

• Adopt a compliant clawback policy by Friday, December 1, 2023.
• Review committee charters and other relevant board policies to ensure that the responsibility for determining the recovery process is appropriately addressed.
• For NYSE-listed companies, confirm no later than December 31, 2023, via Listing Manager, either (1) timely adoption of a compensation recovery policy or (2) reliance on an applicable exemption to such adoption. Issuers submitting initial applications for securities to be listed on the NYSE on or after October 2, 2023 will be required to confirm the adoption of a compensation recovery policy as part of their listing application.
• Consider which aspects of existing employment agreements, equity plans, deferred compensation plans and bonus/incentive arrangements, if any, should be revised or supplemented in light of the new clawback rules.
• Review executive officer determinations in light of the new significance of this designation. This group will be consistent with a company’s Section 16 officers. Foreign private issuers, which are not subject to Section 16 of the Exchange Act, will need to determine the covered group of officers, in many cases for the first time.
• Develop a database or process for tracking incentive compensation received by current and former executive officers in the event recovery needs to be assessed.
• Prepare to file the clawback policy as an exhibit to their annual report on Form 10-K, Form 20-F or Form 40-F.
• Be aware that Forms 10-K, 20-F and 40-F will also include new checkboxes indicating (1) whether the financial statements included in the filing reflect correction of any error to previously issued financial statements and (2) whether any of those error corrections are restatements that required a recovery analysis under the issuer’s clawback policy.
• Review the new clawback-related disclosure rules—Item 402(w) of Regulation S-K requires companies to disclose in their proxy statements any actions taken to recover erroneously awarded executive compensation during or following the end of the most recently completed fiscal year.
• Ensure robust internal controls over financial reporting and GAAP or IFRS requirements are in place.