On October 26, 2022, the US Securities and Exchange Commission (SEC) announced the adoption of its new rules directing national securities exchanges, including the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq), to establish listing standards for compensation recovery (clawback) policies. In accordance with the SEC’s clawback rule, both the NYSE and Nasdaq submitted their clawback proposals to the SEC on February 22, 2023. This blog post offers guidance on compliance and implementation deadlines pursuant to these proposals, as well as what public companies need to do in the coming months to ensure timely adoption.
For an overview of the SEC’s final clawback rule (Rule 10-D1 of the Securities Exchange Act of 1934, as amended), refer to the Morgan Lewis LawFlash titled “SEC Adopts Compensation Clawback Requirements.”
Conformity with the SEC Rules
The NYSE and Nasdaq–proposed clawback listing standards closely conform with the SEC’s clawback rule. When the listing standards become effective, public companies will need to implement clawback policies that require recoupment of erroneously awarded incentive-based compensation to current or former executive officers in connection with certain required accounting restatements, consistent with the SEC’s clawback rule.
In addition, both exchanges mirror the SEC’s clawback rule disclosure requirements and accordingly, public companies will be required to file the clawback policy as an exhibit to an annual report and make disclosures relating to any recovery triggered thereunder.
Timeline for Compliance and Implementation
Below is a timeline for implementation of the new clawback rules, outlining the developments thus far and the upcoming steps in the process. As explained below, public companies may have until as late as January 27, 2024 to adopt their clawback policies, but the deadline for implementation may be sooner if the NYSE and Nasdaq listing standards become effective before November 28, 2023.
- Step 1: October 26, 2022
- The SEC announced its final clawback rule.
- Step 2: November 28, 2022
- The SEC published its final clawback rule in the Federal Register, which directed the exchanges to implement listing standards within 90 days following publication (i.e., prior to February 27, 2023).
- Step 3: February 22, 2023
- The NYSE and Nasdaq publicly submitted to the SEC proposed listing rules related to the implementation and disclosure of clawback policies.
- Step 4: March 13, 2023
- The NYSE and Nasdaq proposed clawback listing standards were published in the Federal Register.
- The public has until April 3, 2023 to submit comments for the SEC to consider in approving both listing standards.
- Once the comment period has concluded, the SEC must approve both proposals within the timeframe below.
- Step 5: Date to be determined, but must be on or before November 28, 2023
- Per the SEC’s final rule, the deadline for the national exchanges to finalize their listing standards for clawback policies is November 28, 2023; however, either the NYSE or Nasdaq may adopt listing standards at an earlier date, which would accelerate the compliance date.
- Step 6: General compliance date to be determined, but will be within 60 days of the date in Step 5
- Within 60 days following the date on which the applicable listing standards become effective, public companies must adopt compliant clawback policies.
- If the NYSE and Nasdaq listing standards become effective on November 28, 2023, then the 60-day deadline for companies to adopt compliant clawback policies is January 27, 2024.
- However, if the NYSE and Nasdaq listing standards become effective before November 28, 2023, then the compliance deadline may be earlier than January 27, 2024.
- Public companies must provide required disclosures in their applicable SEC filings after the effective date of the listing standards (including filing a written clawback policy as an exhibit to an annual report and preparing other disclosures in the event a clawback analysis is triggered under the clawback policy).
- The required clawback policies will apply to incentive-based compensation “received” on or after the effective date of the applicable listing standards. For purposes of the clawback rules, the term “received” means granted, earned, or vested in the fiscal period during which the applicable financial reporting measure or goal is attained, even if actual payment is made at a later date after the end of that period.
What Public Companies Should Do Now
With the submission of the NYSE and Nasdaq proposed clawback policies, public companies face definitive compliance, and SEC filing deadlines and should begin the process of preparing compliant policies. Companies should review existing clawback policies and incentive compensation programs to determine what changes will have to be made to comply with the new clawback rule. Specific considerations include the following:
- Whether to maintain one clawback policy or multiple policies.
- Many issuers have adopted fault-based clawback policies that may be tied to a restatement or may apply more broadly to any serious misconduct. These clawback policies often apply to a broader population than required by the SEC’s clawback rule (which applies to current and former Section 16 officers).
- Most existing clawback policies are discretionary, whereas the SEC’s clawback rule requires that clawback be mandatory.
- Issuers will have to consider whether the implementation of the new no-fault clawback policy for current and former Section 16 officers will be in addition to, or in replacement of, any current policy.
- Ensure that any new clawback policy covers all required compensation.
- Under the SEC’s clawback rule, compliant policies must be applicable to all incentive-based compensation, which is broadly defined as any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any “financial reporting measure”.
- In addition to the broad language of the final clawback rule, the SEC has issued several Compliance and Disclosure Interpretations (C&DIs) regarding its clawback rule, including an interpretation that states that the rule is intended to apply broadly to incentive-based compensation, including plans that take incentive-based compensation into account, such as supplemental retirement plans (SERPs), life insurance plans and long-term disability plans.
- Ensure that the board of directors and board committees are kept up to date on the clawback rule.
- Companies will want to prepare communications for the board of directors, as well as its compensation and audit committees, about the new clawback rule and how the company’s existing clawback policy will be impacted by the new rule.
- Consider appropriate financial metrics for future incentive compensation.
- Identify financial measures that may cause incentive compensation to become subject to clawback and consider how the recovery process would work. There may be particular difficulties in determining the amount to be clawed back in connection with stock price and total shareholder return (TSR) metrics.
- Keep the clawback rule in mind when entering into new agreements or implementing new compensation programs.
- Consider imposing mandatory deferrals or holding requirements on earned incentive awards to facilitate implementation of the clawback policy.
- Ensure that new compensation arrangements provide a contractual link to the enforcement of any clawback policy.
- Consider applicable state law and how the compensation arrangement can be drafted to maximize the company’s ability to clawback compensation.
Morgan Lewis will continue to monitor the SEC regulatory process with respect to clawback policies. Stay tuned for further ML BeneBits posts, LawFlashes, and webinars on the latest developments, and, to receive timely updates regarding compliance and implementation deadlines, subscribe to our mailing list.