The New York Stock Exchange LLC and the Nasdaq Stock Market LLC revised their proposed executive compensation clawback rules that would give more time for listed companies to comply with the rules than the Securities and Exchange Commission had first envisioned.
The two exchanges are proposing an effective date of Oct. 2, 2023, and listed companies must adopt their recovery policy no later than 60 days following the effective date, which would be Dec. 1.
The SEC’s June 9, 2023, notice that contains the stock exchanges’ modified proposal states that the effective date of Oct. 2 “is consistent” with the language in the clawback rules the commission adopted in October 2022, “while also ensuring prompt implementation of this proposed rule.”
The notice seeks public comment on the two exchanges’ filings. Stock exchange rules do not go into effect until the SEC, as the capital market regulator, first approves them.
“The SEC staff had previously conveyed informally that listed companies should expect the effective date of the listing standards to be June 9, 2023, which would have required companies to adopt their clawback policies no later than August 8, 2023,” according to a June 10 client update by Davis Polk & Wardwell LLP, which led the submission of a joint comment letter of about 40 law firms asking the SEC to delay the effective date to give companies sufficient time to implement the rules.
The two exchanges issued stock listing rule proposals four months after the SEC published Dodd-Frank clawback rules directing national 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. Sec. 954 of PL111-203
The proposals from the two exchanges were drafted in response to the SEC’s final Release No. 33-11126, Listing Standards for Recovery of Erroneously Awarded Compensation. (See SEC Adopts Dodd-Frank Executive Compensation Clawback Rules in the Oct. 27, 2022, edition of Accounting & Compliance Alert.)
The SEC rules became effective on Jan. 27. Exchanges were given a maximum of 90 days to file proposed listing standards. 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, 2022.
“Some companies may be far along in the process of adopting, or may have already adopted, their clawback policies. The amendments do not change the listing standards in a manner that would affect the substantive terms of a compliant clawback policy,” Davis Polk’s client memo noted. “Furthermore, even if a company adopts its policy earlier than required, unless its policy states otherwise, it will only apply to compensation ‘received’ (i.e., based on goals attained) from and after the October 2, 2023 effective date.”
In the meantime, Farient Advisors on June 14 published frequently asked questions (FAQs) that would help companies to implement the rules.
For example, one question asks what would happen if the restatement results in better financials. Would it mean a larger incentive payment?
“The SEC rule doesn’t cover this scenario. It only covers cases where the amount paid is in “excess” of what should have been paid,” the FAQs states. “Per SEC regulation, ‘Implicit in these statutory requirements is that the amount of such compensation received in the three-year look-back period would have been less if the financial statements originally had been prepared as later restated.’”
This article originally appeared in the June 20, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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