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SEC Adopts Rules on Clawback of Executive Compensation

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On October 26, 2022, the Securities and Exchange Commission (the “SEC”) adopted final recovery rules, commonly referred to as clawback rules (available here), directing national securities exchanges and national securities associations to establish listing standards that require issuers to develop, implement, disclose and comply with a written policy for recovery of erroneously awarded incentive-based compensation where the payment of such compensation was made as a result of financial measures where a subsequent accounting restatement was required. Although the final rules largely follow the proposed rules, changes were made that generally broadened their scope.

The table below summarizes the substance of the final recovery rules.




Which securities exchanges or securities associations must establish recovery listing standards for their issuers?

NYSE and NASDAQ are among the most prominent securities exchanges implicated, in addition to all other:

  • national securities exchanges registered under section 6 of the Securities Exchange Act of 1934 (the “Exchange Act”) that list securities, and

  • national securities associations registered under section 15A of the Exchange Act that list securities.

Securities exchanges that trade securities pursuant to unlisted trading privileges but do not list securities are not subject to this requirement.

By when must an issuer adopt a written recovery policy?

The SEC indicates that it expects issuers to have at least one year to adopt a recovery policy.


Securities exchanges must adopt recovery rule listing standards that become effective within one year after the publication of the final recovery rules in the Federal Register, and issuers’ recovery policies must be adopted no later than 60 days thereafter.

Which issuers will be subject to the recovery listing standards?

All listed issuers (including emerging growth companies, smaller reporting companies, foreign private issuers and controlled companies), with a few limited exceptions, including:

  • securities futures products and standard options cleared by a registered clearing agency,

  • securities issued by a registered management investment company that has not awarded incentive-based compensation to any executive officer in any of the last three fiscal years (or since initial listing, if listed less than three years), and
  • securities issued by a registered unit investment trust.

Who must be subject to an issuer’s recovery policy?

Any person who served as an executive officer:

  • at any time during the performance period for the incentive-based compensation subject to recovery,

  • while the issuer had a class of securities listed, and

  • during the three-year look back period before the date the issuer is required to prepare an accounting restatement.

Executive officers include the issuer’s:

  • president,

  • principal financial officer,

  • principal accounting officer (or, if there is no such accounting officer, the controller),

  • any vice president in charge of a principal business unit, division or function (such as sales, administration or finance),

  • any other officer who performs a policy-making function, and

  • any other person who performs a similar policy-making function for the issuer.

Executive officers must include, at a minimum, the issuer’s Section 16 officers.

What triggers the requirement that an issuer apply the recovery policy?

Both “big R” accounting restatements that trigger Item 4.02 of Form 8-K and “little r” accounting restatements trigger application of the recovery policy.


The trigger occurs when an issuer is required to prepare an accounting restatement to correct:

  • an error in previous financial statements that is material to the previous financial statements, or

  • an error in previous financial statements that is not material to the previous financial statements, but that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.

The SEC did not provide additional guidance regarding when an error would be considered material because materiality is a determination that must be analyzed in the context of particular facts and circumstances.


Changes to an issuer’s financial statements that do not represent error corrections under accounting standards would likely not trigger application of the recovery policy, including:

  • retrospective application of a change in accounting principle,

  • retrospective revision to reportable segment information due to a change in the structure of the issuer’s internal organization,

  • retrospective reclassification due to a discontinued operation,

  • retrospective application of a change in reporting entity, such as from a reorganization of entities under common control,

  • retrospective adjustment to provisional amounts in connection with a prior business combination (for IFRS filers only), and
  • retrospective revisions for stock splits, reverse stock splits, stock dividends or other changes in capital structure.

What is the period during which incentive-compensation is recoverable?

The three-year look-back period, which is the three completed fiscal years before the date the issuer is required to prepare an accounting restatement.


For example, if a calendar year issuer concludes in November 2024 that a restatement of previously issued financial statements is required, the recovery policy would apply to compensation received in 2021, 2022 and 2023.

When is an issuer considered to be required to prepare an accounting restatement (for purposes of starting the three-year look-back period)?

The earliest to occur of:

  • the date the issuer’s board, committee or authorized officer concludes, or reasonably should have concluded, that the issuer is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement, or

  • the date a court, regulator or other legally authorized body directs the issuer to prepare an accounting restatement (once final and non-appealable).

What compensation is subject to recovery?

Any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any financial reporting measure (including non-GAAP financial measures, other non-GAAP measures, stock price and TSR) is subject to recovery.


Examples of compensation that are not subject to recovery include:

  • base salary,

  • discretionary bonuses not paid from a bonus pool that is determined by satisfying a financial reporting measure,

  • bonuses subject to subjective criteria or service requirements,

  • bonuses subject to strategic measures or operational measures (completion of a project), and

  • equity awards that are subject to service-based requirements only and/or attainment of one or more non-financial reporting measure.

Compensation received while an individual was serving in a non-executive officer capacity before becoming an executive officer is not recoverable.

When is incentive-based compensation considered to have been received (for purposes of determining which compensation was received during the three-year look-back period)?

Incentive-based compensation will be considered received in the fiscal period when the financial reporting measure is attained (even if the payment or grant occurs after the end of that period and even if the award remains subject to other conditions, such as continued service-based conditions).

Do the listing standards apply to pre-existing contracts or arrangements with executive officers?

Yes, issuer compliance is required whether such incentive-based compensation is received pursuant to a pre-existing contract or arrangement, or one that is entered into after the effective date of the listing standard.

Is compensation that was received prior to the effectiveness of the recovery listing standards subject to recovery?

Not under the new SEC final recovery rules, although any other applicable clawback or recovery policy of the issuer may apply.

How is the amount of erroneously awarded compensation to be recovered determined?

The amount recoverable is the amount of incentive-based compensation received that exceeds the amount that otherwise would have been received had it been determined based on the accounting restatement, computed without regard to taxes paid.


Where the amount is not subject to mathematical recalculation directly from the information in the accounting restatement (such as compensation based on TSR or stock price), the amount must be based on a reasonable estimate of the effect of the accounting restatement on the applicable measure (which determination must be documented and provided to the exchange).


When making these calculations, consideration can be given to any negative discretion that had been applied to reduce the amount originally received.

Are there circumstances where the board may apply discretion to forego the recovery of erroneously awarded compensation?

There are three limited circumstances that permit the compensation committee of the board to forego recovery of erroneously awarded compensation, namely:

  • where the direct cost of recovery would exceed the amount of recovery, so long as the issuer first makes a reasonable attempt to recover such compensation and documents its recovery attempts and provides such documentation to the exchange,

  • where recovery would violate a law in an issuer’s home country that was adopted prior to the date of publication in the Federal Register and where the issuer obtains an opinion of counsel in its home country, acceptable to the exchange on which the issuer is listed, that recovery would result in a violation of such law and provides such opinion to the SEC, or

  • where recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to the issuer’s employees, to fail to meet the applicable statutory requirements for exemption.

How must an issuer seek recovery of erroneously awarded compensation?

Issuers may exercise discretion in how to accomplish recovery. However, issuers must recover erroneously awarded compensation “reasonably promptly.”

What are the consequences to an issuer that does not comply with the recovery rules?

Where an issuer does not adopt, disclose or comply with a recovery policy, the issuer will be:

  • delisted from the securities exchange on which it lists its securities, if an existing issuer, or

  • prohibited from listing on a securities exchange, if a new issuer looking to list its securities for the first time.

What must an issuer disclose?

Issuers must file their written recovery policy as an exhibit to their Annual Report on Form 10-K or 20-F, and must add check boxes that indicate:

  • whether the financial statements of the issuer included in the filing reflect the correction of an error to previously issued financial statements, and

  • whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the issuer’s executive officers during the relevant recovery period under the new rule.

Issuers must also provide disclosure about their recovery policy and its application, including:

  • modifying amounts reported in the Summary Compensation Table to reflect recovered compensation,

  • disclosing the date the issuer was required to prepare the accounting restatement and the aggregate dollar amount of erroneously awarded compensation attributable to such restatement, including an analysis of how the recoverable amount was calculated,

  • disclosing the aggregate dollar amount of erroneously awarded compensation not yet recovered at the end of the issuer’s last completed fiscal year or that is owed and outstanding for 180 days or longer since the date the amount of recoverable compensation was determined,

  • disclosing, for financial reporting measures that relate to stock price or TSR, the estimates used in determining the erroneously awarded compensation and an explanation of the methodology used, and

  • disclosing, where recovery is impracticable, for each current and former named executive officer, and for all other current and former executive officers as a group, the amount of recovery foregone and a description of the reason recovery was foregone.

Issuers must use Inline XBRL to tag their recovery disclosure.

Can an issuer indemnify its executive officers for the recovery of erroneously awarded compensation?

No. Indemnification arrangements may not indemnify any executive officer or prior executive officer of the issuer for the loss of erroneously awarded compensation.


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