Last Wednesday, the Securities and Exchange Commission (SEC) proposed new Rule 10D-1 to require public companies to adopt and enforce clawback policies to recoup incentive-based compensation paid to current and former executive officers during the three years preceding the date the issuer is required to restate its financials due to a material noncompliance with financial reporting requirements. Rule 10D-1 was adopted pursuant to Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The NYSE and NASDAQ will oversee compliance, with any company violating the rule subject to delisting.  Rule 10D-1, along with corresponding amendments to other SEC regulations, is currently subject to a 60-day comment period. Once finalized, the NYSE and NASDAQ must propose corresponding listing rules within 90 days, with such rules becoming effective within one year of publication.  Once the exchange rules are in place, issuers will have 60 days to comply.

Proposed Rule Highlights

A summary of key facts about the newly proposed rule is found below:

  • Issuers Covered. All public companies are covered, with very limited exceptions. Smaller reporting companies, emerging growth companies, foreign private issuers and controlled companies would all be required to adopt a clawback policy under the proposed rule.
  • Individuals Covered. All of an issuer’s current and former executive officers are covered. As proposed, “executive officer” (modeled after the definition of officer in Rule 16a-1(f)) would include an issuer’s president, principal financial officer, principal accounting officer (or if none, the controller), any vice-president in charge of a principal business unit or function, any other officer performing a policy-making function or any other person who performs similar policy-making functions for the issuer.
  • Accounting Restatement. Any accounting restatement due to the issuer’s material noncompliance with any financial reporting requirement under the securities laws will trigger a clawback under the proposed rule. Materiality would be determined using a facts and circumstances approach. Retrospective applications of changes in accounting principles, retrospective revisions to reportable segment information due to a change in the issuer’s internal organization or a retrospective reclassification due to a discontinued operation would not trigger application of a clawback.  The rule, as proposed, would apply to any restatements for fiscal periods ending on or after the effective date of the rule for awards that are granted, earned or vested after the rule’s effective date. 
  • Compensation Covered. The compensation covered includes incentive-based compensation (including stock options awarded as compensation) that was paid to an executive in excess of what he or she would have received but for the error. The SEC indicated the list of covered compensation would include (but not be limited to): (i) non-equity incentive plan awards earned based on satisfying a financial reporting measure performance goal; (ii) bonuses paid from a “bonus pool,” the size of which is determined based on satisfying a financial reporting measure performance goal; (iii) restricted stock, restricted stock units, performance share units, stock options and stock appreciation rights that are granted or vest based on satisfying a financial reporting measure performance goal; and (iv) proceeds received upon the sale of shares acquired through an incentive plan that were granted or vested based on satisfying a financial reporting measure performance goal.  As currently drafted, the SEC has indicated pre-tax consideration should be recouped.
  • Timing Considerations. The clawback will apply to any compensation received during the three fiscal years immediately preceding the date the issuer is required to prepare an accounting restatement. Compensation will be deemed received in the fiscal year in which the performance measure is met notwithstanding when the compensation is granted or paid. Compensation will be deemed received by an executive officer if all performance conditions necessary to receive the compensation are met even if not all criteria for payment have been met, such as additional time-based service requirements.
  • Discretion. A Board of Directors would not generally have discretion to determine whether to apply the recoupment policy. A company must seek clawback unless it would be impracticable to do so (i.e., cost to collect outweighs cost to be collected and the company has made reasonable attempts to collect or would violate a home-country law for a foreign private issuer).
  • Recovery Method. As currently proposed, issuers will have discretion in how they recoup compensation, so long as such recoupment is done “reasonably promptly.”
Related Disclosures

In addition to proposing new Rule 10D-1, the SEC has proposed several other corresponding amendments. Among these is a new disclosure item under Regulation S-K Item 402. Item 402(w) would require disclosure in an issuer’s annual report or proxy statement if an issuer had a restatement that required clawback or had clawback amounts outstanding from a restatement in a previous year. As proposed, this disclosure is designed to capture an issuer’s attempts to recover clawback amounts. Rule 10D-1, as proposed, would also require that clawback policies be filed as an exhibit to a company’s annual report, along with related disclosure therein if the company has taken any actions pursuant to such policy.

Additional SEC Clawback Requirements

In addition to the newly proposed rules, Section 304 of the Sarbanes-Oxley Act currently requires a company’s CEO and CFO to reimburse the company for bonuses and other incentive compensation and stock sale profits if the company is required to restate its financial statements as a result of misconduct, due to material noncompliance with the financial reporting requirements of federal securities laws. These clawback rules may be enforced by the SEC within the 12 months following the first public issuance or filing of the misstated financial statements. Recent enforcement actions have shown that the requisite misconduct for these actions need not have been done by the CEO/CFO.

Item 402(b) of Regulation S-K also requires that a company address in its proxy statement Compensation Discussion and Analysis any material policies or decisions regarding the adjustment or recovery of awards or payments made to named executive officers if the relevant performance measures upon which such awards are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment.


Public companies should review their clawback policies, if any, in light of these proposed rules. While a majority of public companies have a clawback policy in place, such policies may not align with the SEC proposed, and ultimately final, rules. For instance, these rules will require recoupment of CEO compensation regardless of fault/wrongdoing.  Many companies that have adopted clawback policies to date require an element of wrongdoing or fault by the CEO before compensation may be recouped.  Many companies have also given their Boards of Directors discretion in varying degrees in applying the recoupment policy – another element that generally would not be permitted under the new rules as proposed.  Further, smaller reporting companies and emerging growth companies, which are less likely to have adopted clawback policies, have not been exempted from compliance or given a grace period in which to comply under the proposed rules. Therefore, all public companies, as well as those considering going public, should stay abreast of rule developments and adoption of the final rules in order to prepare for and adopt the type of clawback policy that will ultimately be required by the SEC.

Contact Information

If you have any questions about the proposed clawback rules discussed in this alert or other securities compliance matters, please contact Janet D. Lowder, the principal drafter of this client alert. Learn more about Corporate and Securities attorneys here.

Womble Carlyle client alerts are intended to provide general information about significant legal developments and should not be construed as legal advice regarding any specific facts and circumstances, nor should they be construed as advertisements for legal services.

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