SEC Clawback Policy Rules

On June 9, 2023, the SEC approved its new rules regarding “Clawback” disclosure requirements which will become effective for incentive-based compensation received on or after October 2, 2023.  These rules were mandated by Dodd-Frank and the Consumer Protection Act almost 13 years ago.  The official compliance date is December 1, 2023.

The full guidance can be found on the SEC site here: Listing Standards for Recovery of Erroneously Awarded Compensation and they also provide a Fact Sheet as well.  The final rules direct stock exchanges to establish listing standards that require listed companies to develop, implement and disclose a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers.

Key Considerations

• Listed companies will be required to adopt a clawback policy providing for the recovery of incentive-based compensation received by current or former executive officers more than what they should have received without the accounting restatement.
• The policy needs to provide for a lookback of the three completed fiscal years immediately preceding the year in which the company is required to prepare an accounting restatement due to material noncompliance with financial reporting requirements.
• Erroneous payments must be recovered even if there was no misconduct or failure of oversight on the part of an individual executive officer.
• Incentive compensation subject to clawback includes annual bonuses, performance bonuses, performance shares, performance cash and any other compensation based on attaining financial reporting measures.

• Board discretion for the clawback has been removed.  The former rules allowed board discretion to decide whether enforcing a clawback was in the best interest of the company or the shareholders.

Exceptions

The only exceptions to clawbacks are in the case of:

• If the expenses paid to third parties to assist in enforcing the policy would exceed the amount to be recovered and the issuer has made a reasonable attempt to recover.
• If recovery would violate home country law that existed at the time of adoption of the rule, and the issuer provides an opinion of counsel to that effect to the exchange; or
• If recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the Internal Revenue Code.

Next Steps

If you are a public SEC filer, there will be some additional work to do related to this new disclosure requirement.  Below is a list of things you should be thinking about.

• Review the company’s existing clawback policies to determine what modifications will be needed to comply with the new rules.
• Review committee charters and other relevant board documents to ensure that the responsibility for determining the Dodd-Frank recovery process is appropriately addressed.
• Consider a shift toward types of compensation that would not be covered by the clawback rules.
• Consider imposing mandatory deferrals or holding requirements on earned incentive awards to facilitate implementation of the recovery policy.

Blanchard Consulting Group will be helping our clients understand these new rules.  We will continue to fine-tune our processes and insights over the next few months.  If you have any questions about this client alert, please contact us at info@blanchardc.com.