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SEC Adopts Final Rule on “Clawback” Policies (November 14, 2022)

Heads Up | Volume 29, Issue 14
November 14, 2022
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SEC Adopts Final Rule on “Clawback” Policies

On October 26, 2022, the SEC issued a final rule1 aimed at ensuring that executive officers do not receive “excess compensation” if the financial results on which previous awards of compensation were based are subsequently restated because of material noncompliance with financial reporting requirements. Such restatements would include those correcting an error that either (1) “is material to the previously issued financial statements” (a “Big R” restatement) or (2) “would result in a material misstatement if the error were corrected in or left uncorrected in the current period” (a “little r” restatement). The final rule implements the mandate in Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”)2 under which the SEC is required “to adopt rules directing the national securities exchanges . . . and the national securities associations . . . to prohibit the listing of any security of an issuer” that has not adopted and implemented a written policy providing for the recovery of incentive-based compensation (IBC) under certain circumstances.


SEC Final Rule Release No. 33-11126, Listing Standards for Recovery of Erroneously Awarded Compensation.
The SEC also recently finalized other compensation-related rules required by the Dodd-Frank Act. For more information about the pay-versus-performance disclosure requirements, see Deloitte’s September 2, 2022, Heads Up.
The final rule does, however, provide an exemption for listings of (1) security futures products, (2) standardized options, (3) securities issued by unit investment trusts, and (4) securities issued by an investment management company that is registered under Section 8 of the Investment Company Act of 1940, if such an investment management company has not awarded IBC to any executive officer of the company in any of the last three fiscal years, or in the case of a company that has been listed for less than three fiscal years, since the listing of the company.
The original proposed rule focused only on restatements resulting from errors that are material to the previously issued financial statements.
Issuers should consider SAB Topics 1.M (SAB 99) and 1.N (SAB 108) when determining whether an accounting restatement due to material noncompliance is required.
For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”
In addition, base salaries, retention bonuses, and cash incentives based on the attainment of nonfinancial strategic or operational measures would not be considered IBC.
The relevant home country law must have been adopted in that country before the date on which the final rule is published in the Federal Register.
The disclosure requirements would also apply to FPIs. These issuers would file their recovery policies as an exhibit to the annual reports they file with the SEC on Form 20-F.
While this discussion focuses on share-based payment awards that are classified as equity, some of the same considerations could apply to awards classified as liabilities.
See ASC 718-10-20 for the definition of a grant date.
See ASC 718-10-35-6 and the related implementation guidance in ASC 718-10-55-108.
See ASC 718-20-35-2A.
ASC 718 states that a clawback feature is an example of a “contingent feature of an award that might cause the grantee to return to the entity either equity instruments earned or realized gains from the sale of equity instruments earned.” The final rule requires companies to have a recovery policy that could extend beyond equity instruments earned under ASC 718. Thus, a company may adopt a recovery policy under the final rule that could extend beyond what is described as a clawback under ASC 718.
See ASC 718-10-30-24 and ASC 718-10-55-8.
If the award is not vested, see Recovery of Unearned Awards.
See ASC 718-20-55-85.
See ASC 718-10-25-20 and ASC 718-10-30-12.