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US Securities and Exchange Commission

New York Stock Exchange and Nasdaq Issue Executive Compensation ‘Clawback’ Proposals

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

The New York Stock Exchange and the Nasdaq Stock Market have issued stock listing rule proposals four months after the SEC published Dodd-Frank clawback rules directing national stock exchanges to require listed public companies to implement policies intended to recoup bonuses paid to executives if the company is found to have misstated its financial results.

The proposals by the two exchanges are very similar but not identical. Perhaps the biggest difference is the explanation about the type of compensation that should be recovered.

Both say that the clawback rule applies to all incentive-based compensation received by executive officers that results by meeting a financial reporting measure based on or derived from financial information. However, Nasdaq is more explicit about the covered compensation by spelling out a couple of potential carveouts.

“Equity awards that vest exclusively upon completion of a specified employment period, without any performance condition, and bonus awards that are discretionary or based on subjective goals or goals unrelated to financial reporting measures, do not constitute incentive-based compensation,” Nasdaq stated.

This in part comes as more large companies tie a small portion of executive compensations to environmental, social and governance matters.

“Incentive-based compensation received by an executive officer before the issuer had a class of securities listed on a national securities exchange or a national securities association would not be subject to the compensation recovery policy,” Nasdaq notes.

Both exchanges published the proposals on their respective website on Feb. 22, 2023.

However, the SEC as of March 1 afternoon has yet to post them on its rulemaking webpage to solicit comment. When it is published, the public will get 21 days to comment. These national stock exchanges are self-regulatory organizations, but they still need to file proposed rules with the SEC. After the commission receives comments and analyzes them, it will either approve, reject or ask the exchanges to modify.

The pending proposals from the New York Stock Exchange and Nasdaq were drafted in response to SEC’s final Release No. 33-11126, Listing Standards for Recovery of Erroneously Awarded Compensation, published in October 2022. (See SEC Adopts Dodd-Frank Executive Compensation Clawback Rules in the Oct. 27, 2022, edition of Accounting & Compliance Alert.)

The SEC rules, mandated by Section 954 of Dodd -Frank, are intended to discourage executives from taking questionable actions that temporarily boost share prices but ultimately result in a correction of financial statements.Sec. 954 of PL111-203

The Dodd-Frank requirement is more extensive than what is currently required today under Section 304 of the Sarbanes-Oxley Act of 2002, which applies only to the chief executive officer and chief financial officer and requires misconduct for clawbacks to be triggered.

The commission has decided to interpret Dodd-Frank expansively to include both “Big R” and “little r” restatements as triggers for a compensation recovery analysis.

The SEC rules became effective on Jan. 27. Exchanges were given a maximum of 90 days to file proposed listing standards following the publication of the SEC release in the Federal Register, which was Nov. 27, 2022. The final listing standards must be effective no later than one year following the release’s publication in the Federal Register, which occurred on Nov. 28. Companies then will have to adopt a recovery policy no later than 60 days following the effective date of new listing standards in proxy and information statements and the company’s annual report. This means that compliance will likely begin by late January 2024.

In particular, the SEC’s new rules direct national exchanges and associations to establish listing standards that require a company to implement a policy to recover erroneously awarded incentive-based compensation received by its current or former executive officers in the event of a restatement because of material non-compliance with any financial reporting requirements. These policies must be disclosed.

All listed companies must file their written recovery policies as exhibits to their annual reports. And they must indicate by check boxes on their annual reports whether the financial statements included in the filings reflect correction of an error to previously issued financial statements and whether any of those error corrections are restatements that required a recovery analysis. Companies then must disclose any actions they have taken under such recovery policies.


This article originally appeared in the March 2, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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