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On October 26, 2022, the SEC continued what we’ve referred to as its “regulatory rampage” by adopting final rules on “compensation recovery” – or, as more commonly referred to, “clawbacks.”  (To be fair, the term “rampage” may not be applicable here; these rules were mandated in the Dodd-Frank Act in 2010 but were not proposed until 2015 and then languished until the SEC reopened the comment period in October 2021 and again in June 2022.   That said, the reproposed rules went beyond those proposed in 2015 and have now been adopted substantially as reproposed.)

It is noteworthy that, unlike many other SEC rules, the clawback rules apply to substantially all listed issuers, including emerging growth companies, smaller reporting companies, and foreign private issuers, with no special provisions or other relief.

What must be recovered?

Consistent with Dodd-Frank, the new rules mandate that the national securities exchanges and associations establish listing standards requiring issuers to adopt, comply with, and disclose a clawback policy.  The policy must provide as follows:

  • If an issuer is required to prepare an accounting restatement, it must recover incentive-based compensation (as defined) paid to current or former executive officers (not just “named executive officers”) based on any misstated financial reporting measure. 
  • The recovery requirement applies to compensation received during the three-year period preceding the date on which the issuer is required to prepare the restatement.
  • The amount to be recovered is the amount of incentive-based compensation in excess of what would have been paid if determined based upon the restated financial measure.
  • Recovery must be made regardless of the officers’ culpability or lack thereof and whether the errors in question would have been material to previously issued financial statements, if they would result in a material restatement if recognized or left uncorrected in the current period.  (These are also referred to as “little r” restatements, as opposed to “Big R” restatements; in other words, the final rules make no distinction between the two.)

Issuers will be required to recover the excess compensation, subject to limited “impracticality” exceptions; in other words, the board cannot exercise discretion to decide not to pursue recovery or to mitigate the recovery through indemnification or insurance.  The only exceptions would be where “direct” expenses payable to third parties to recover the compensation would exceed the amount to be recovered (but only if the issuer has made a “reasonable” attempt to recover it); where recovery would violate home country law, but only if the issuer can provide an opinion of counsel to that effect; or would cause an otherwise tax-qualified retirement plan to fail to meet the qualification requirements of the Internal Revenue Code.

What must be disclosed?

An issuer will be required to file its policy as an exhibit to its 10-K and to disclose in its proxy or information statement how it has applied the policy, including, to the extent relevant: (1) The date it was required to prepare an accounting restatement and the aggregate dollar amount of erroneously awarded compensation attributable to such accounting restatement (including the estimates used in calculating the recoverable amount in the case of awards based on stock price or total shareholder return); (2) the aggregate amount that remains outstanding and any outstanding amounts due from any current or former named executive officer for 180 days or more; and (3) details regarding any reliance on the impracticability exceptions. Issuers will be required to use Inline XBRL to tag their compensation recovery disclosure.

When will the new rules be effective?

This is a tad complicated, but the good news is “not for 2023.”  The rules will take effect 60 days following the publication of the adopting release in the Federal Register.  The exchanges will be required to propose the new listing standard within 90 days following such publication, and the new listing standards must be effective no later than one year after such publication.  Listed companies will be required to adopt their policies within 60 days following the effective date of the new listing standards and must comply with the disclosure requirements in proxy and information statements following the adoption of their policies.

Please direct any questions or observations to Gunster securities law and corporate governance practice leader Bob Lamm.


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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.

About Gunster

Gunster, Florida’s law firm for business, provides full-service legal counsel to leading organizations and individuals from its 12 offices statewide. Established in 1925, the firm has expanded, diversified and evolved, but always with a singular focus: Florida and its clients’ stake in it. A magnet for business-savvy attorneys who embrace collaboration for the greatest advantage of clients, Gunster’s growth has not been at the expense of personalized service but because of it. The firm serves clients from its offices in Boca Raton, Fort Lauderdale, Jacksonville, Miami, Orlando, Palm Beach, Stuart, Tallahassee, Tampa, Vero Beach, and its headquarters in West Palm Beach. With over 240 attorneys and consultants, and more than 240 committed support staff, Gunster is ranked among the National Law Journal’s list of the 500 largest law firms and has been recognized as one of the Top 100 Diverse Law Firms by Law360. More information about its practice areas, offices and insider’s view newsletters is available at www.gunster.com.

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