October 27, 2022

New SEC Rule Requires Incentive-Compensation Clawback, Filing and Disclosure Obligations

Holland & Knight Executive Compensation and Benefits Info Flash
John D. Martini | Kerry L. Halpern | Michael Romeo
Executive Compensation and Benefits Info Flash


  • The U.S. Securities and Exchange Commission on Oct. 26, 2022, issued its long-awaited final rule requiring exchanges to adopt rules that require issuers to establish recovery or "clawback" policy requirements (Final Rule).
  • The Final Rule will require all issuers to recover amounts of incentive compensation from current and former executives that were based on erroneously reported financial information, regardless of whether the executive was at fault.
  • Exchanges are required to adopt listing standards no later than 90 days after the Final Rule is published in the Federal Register and requires the standards to be effective within one year. Affected issuers will be required to adopt compliant clawback policies within 60 days of the date the listing standards become effective.

Congress in 2010 passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Pursuant to Section 954 of the Dodd-Frank Act, the U.S. Securities and Exchange Commission (SEC) was tasked with adopting rules requiring national security exchanges and associations (Exchanges) to prohibit listing securities that do not comply with Section 10D of the Securities Exchange Act of 1934 (Exchange Act), which requires listed companies to adopt a clawback policy that meets certain standards. The SEC had originally proposed a clawback rule in 2015, but reopened the proposed rule for further public comment in 2021 and 2022.

On Oct. 26, 2022, the SEC issued the Final Rule setting out the clawback standards, and reporting and disclosure requirements of Section 10D. Though Exchanges have 90 days to adopt formal listing standards reflecting Section 10D, all such standards must be effective within 12 months of the date the Final Rule is published in the Federal Register. Thereafter, affected issuers must adopt a clawback policy within 60 days following the effective date of the new Exchange listing standards.

Application of Final Rule

According to the Final Rule, all listed issuers must adopt a clawback policy that requires recoupment of certain incentive compensation paid to current and former executives as a result of an accounting restatement.

  • Clawback Rule Applies to All Listed Issuers. The Final Rule applies to all listed issuers, including smaller reporting companies, foreign private issuers and emerging growth companies, but does not apply to certain securities futures products, standardized options or securities issued by listed funds where the funds have not awarded incentive compensation to any executive officers in the last three years.
  • Rule Applies Upon Accounting Restatements. Under the Final Rule, the clawback policy must apply whenever there is an accounting restatement that corrects an error in previously issued financial statements that is material to the previously issued financial statements or would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
  • Three-Year Lookback Period. The Final Rule requires the clawback policy to apply to compensation awarded during the three-year period preceding the date that the issuer concluded (or reasonably should have concluded) that an accounting restatement is required, or the date that a court or regulator directs the issuer to prepare an accounting restatement.
  • Current and Former Executives Covered. All executive officers of the issuer during the three-year lookback period, including former executives, are subject to the clawback policy, regardless of whether the executive was at fault for the accounting error.

Incentive Compensation Covered

The Final Rule applies to any compensation that is received, in whole or in part, upon attaining financial reporting measures, which includes non-GAAP financial measures, stock price and total shareholder return (TSR). For these purposes, discretionary bonuses, compensation based on subjective performance standards or strategic or operational measures, and equity awards that vest solely on the continued service or nonfinancial measures are not subject to recoupment.

Issuers will be required to recover incentive compensation paid to executives equal to the excess of the payment over the amount that would have been paid had there not been an error in the issuer's financial statements (Excess Payment).

  • The amount of the Excess Payment must be calculated without regard to taxes paid by the employer or the executive.
  • If the Excess Payment is based on a measurement that is not subject to mathematical recalculation (such as stock price or TSR), the issuer must use reasonable estimates to determine the Excess Payment and provide documentation reflecting the estimate analysis.
  • Issuers are barred from indemnifying executives for the loss stemming from incorrectly awarded incentive-based compensation.
  • The incentive compensation is considered to be "received" in the fiscal year in which the financial reporting measure is attained, even if payment occurs after the end of that period.

Reporting and Disclosure

Additionally, affected issuers will be subject to new reporting and disclosure requirements applicable to the clawback policy and the application of the policy upon any accounting restatement, including:

  • checkbox on 10-K, 20-F and 40-F to indicate whether the financial statements included in the filing reflect correction of an error to previously issued financial statements, and whether any of those error corrections required an analysis of whether Excess Payments were made to any executives of the issuer
  • disclosure in proxy statement or Form 10-K, 20-F or 40-F, as applicable, as to:
    • the date on which an accounting restatement was required
    • the aggregate amount of erroneously awarded compensation paid to executives as a result of such restatement
    • any estimates used to calculate Excess Payments that were based on a stock price or total shareholder return metrics
    • the aggregate amount of Excess Payments that are still outstanding as of the end of the last fiscal year
    • the amount of Excess Payments made to each current and former named executive officer that has been outstanding for 180 days or longer
    • if recovery would be impracticable, the amount of recovery foregone and a description of the reason the issuer decided not to pursue recovery
  • filing of the clawback policy as an exhibit to the issuer's Form 10-K, 20-F or 40-F, as applicable

Affected issuers will also be required to maintain adequate documentation reflecting all erroneously paid amounts and the attempts made to recover it.

If you would like assistance with preparing a Section 10D-compliant clawback policy, evaluating your company's incentive-compensation arrangements or mitigating the risk of future required disclosures, contact the authors, another member of Holland & Knight's Executive Compensation and Benefits Team or your primary Holland & Knight attorney.

(See more on the SEC's use of clawbacks.)

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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