Dodd-Frank Clawback Developments - NYSE & NASDAQ Issue Proposed Listing Standards and SEC Issues Compliance and Disclosure Interpretations

On October 26, 2022, the SEC adopted a final rule (the “Clawback Rule”) with respect to the new clawback requirements mandated by section 954 of the Dodd-Frank Act.  Generally speaking, the Clawback Rule is triggered in the case of a restatement (both “little r” and “Big R” restatements) of a company’s financial statements and, in such a case, requires repayment of incentive compensation received by executive officers to the extent that a lesser amount of incentive compensation would have been received if the financial statements had been prepared correctly.  A brief summary of the final SEC rules may be found in our previous blog.  

A couple of recent developments with respect to the Clawback Rule merit brief mention. 

The Clawback Rule did not itself mandate the adoption of a new clawback policy.  Instead, the NYSE and NASDAQ were required to adopt new listing standards providing for the delisting of the securities of listed companies that fail to comply with the Clawback Rule, either by failing to adopt a compliant policy, failing to comply with that policy, or failing to make certain disclosures required by the Clawback Rule.

On February 22, 2023, both the NYSE and NASDAQ sent the SEC proposed listing standards that would implement the Clawback Rule.  These standards will become effective when approved by the SEC, which approval, pursuant to the Clawback Rule, must be no later than November 28, 2023.  A listed company will then have 60 days from the approval date to adopt a compliant clawback policy, which will apply to all incentive compensation received subsequent to the SEC approval date.

Our review of the proposed listing standards has not revealed any additional guidance with respect to the Clawback Rule.  Instead, the proposed listing standards generally parrot the language of the Clawback Rule without additional elaboration.  The only area of additional guidance relates to elaboration of how the delisting process will be implemented in cases where the requirements of the Clawback Rule are not met.

The second development of note is the SEC’s release of four Compliance and Disclosure Interpretations (“CDIs”) with respect to the Clawback Rule on January 27, 2023.  Three of the CDIs concern topics of somewhat limited applicability, i.e., the interpretation of certain new check boxes related to the Clawback Rule on Form 10-K and the definition of “named executive officers” with respect to foreign private issuers.  The fourth CDI (121H.04) is of wider applicability, however, stating that the amounts to be clawed back include not only any overpayments of incentive compensation, but any other compensation based on such incentive compensation (excluding tax-qualified retirement plans).  For example, suppose a long-term disability policy based its payout on an executive’s compensation in a particular year and that compensation included a performance-based annual bonus that turned out to be too high once a financial statement was restated.  In this case, any overpayments of disability benefits would need to be recouped.

David Gordon
Managing Director

Dave Gordon’s practice as an executive compensation consultant covers a variety of industries, including extensive experience with financial institutions and utilities. Based on his years of experience as an executive compensation lawyer, he acts as the senior resource on numerous technical issues for the Firm. He frequently acts as an expert witness.

Bindu M. Culas
Managing Director

Bindu Culas has over 15 years of experience advising clients on the US and international legal, tax and regulatory aspects of designing and structuring equity incentive programs, employment agreements, and severance and change-of control plans. Bindu has worked with both domestic and foreign publicly traded and privately held companies as well as pre-IPO companies.