Today, the SEC (by a 3-2 vote among commissioners) proposed rules, as required under the Dodd-Frank Act, that would direct the stock exchanges to adopt clawback listing standards. Under the proposed new Rule 10D-1, listed companies would be required to develop and enforce recovery policies that in the event of an accounting restatement, “claw back” from current and former executive officers incentive-based compensation they would not have received based on the restatement. Recovery would be required without regard to fault. The proposed rules would also require disclosure of listed companies’ recovery policies, and their actions under those policies.
Under the proposed rules, the listing standards would apply to incentive-based compensation that is tied to accounting-related metrics, stock price or total shareholder return. Recovery would apply to excess incentive-based compensation received by executive officers in the three fiscal years preceding the date a listed company is required to prepare an accounting restatement. Companies would have discretion not to recover the excess incentive-based compensation received by executive officers if the direct expense of enforcing recovery would exceed the amount to be recovered or, for foreign private issuers, in specified circumstances where recovery would violate home country law.
Each listed company would be required to file its recovery policy as an exhibit to its annual report under the Securities Exchange Act of 1934. In addition, a listed company would be required to disclose its actions to recover in its annual reports and any proxy statement that requires executive compensation disclosure if, during its last fiscal year, a restatement requiring recovery of excess incentive-based compensation was completed, or there was an outstanding balance of excess incentive-based compensation from a prior restatement. Under the proposed rules, a company would be subject to delisting if it does not adopt a compensation recovery policy that complies with the applicable listing standard, disclose the policy in accordance with SEC rules or comply with the policy’s recovery provisions.
Comments on the proposal are due 60 days from publication in the Federal Register (presumably that means early September). Once adopted, the stock exchanges would then have 90 days to propose their listing rules under Rule 10D-1, which would be effective sometime in the ensuing year. Once the listing rules are effective, companies would have 60 days to adopt a clawback policy. Recoveries would be required after the effective date of the new rule for excess incentive-based compensation received by current and former executive officers that results from attaining a financial reporting measure based on financial information for any fiscal period ending on or after the effective date of Rule 10D-1. Listed companies would be required to comply with the new disclosures in proxy or information statements and Exchange Act annual reports filed on or after the effective date of the listing exchange’s rule.