On July 1, 2015, the Securities and Exchange Commission (SEC) issued the long-awaited proposed rules to implement section 10D of the Securities Exchange Act of 1934, as added by section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules expand existing clawback provisions and direct national security exchanges and associations to establish listing standards requiring issuers to adopt and implement policies to recover incentive-based compensation paid to executive officers in cases of material non-compliance with accounting reporting requirements, and disclose the recovery policies in accordance with SEC rules.

The listing requirements would apply to all listed issuers, including emerging growth companies, smaller reporting companies, foreign private issuers and controlled companies. If an issuer is required to prepare an accounting restatement to correct a material error, the issuer is required to claw back all incentive-based compensation paid to its current and former executive officers over the three preceding fiscal years completed before the date on which the issuer was required to prepare a financial restatement. The amount of incentive based compensation to be recovered is the excess over the amount the officer would have received had the incentive-based compensation been determined based on the restated financial statements. The clawback applies to all Section 16 officers and is required regardless of any officer’s misconduct or responsibility for the error.

The proposed definition of “incentive-based compensation” includes any compensation that is granted, earned or vested, based wholly or in part upon attaining any financial reporting measure. Accordingly, amounts such as salary, time based awards, discretionary awards and awards based on subjective or strategic metrics are not generally considered to be incentive based compensation. Financial reporting measures are measures that are determined and presented in accordance with the accounting principles used in preparing the financial statements, and any measures that are derived from such measures, in addition to stock price and total shareholder return (TSR). Issuers must reasonably estimate the effect of restatements on the applicable measures to determine the amount of incentive-based compensation that must be recovered.

Issuers would be required to pursue recovery of all excess incentive-based compensation unless the compensation committee (consisting of independent directors) determines that it would be impracticable to seek the recovery because the expense would exceed the recoverable amounts, or if recovery would violate the issuer’s home country law.

The proposed rules include a requirement that issuers file their written recovery policy as an exhibit to their annual report. If action has been taken pursuant to a policy, the issuer is required to disclose details of the action in its annual report, including the date on which the accounting restatement took place, the aggregate dollar amount of excess incentive-based compensation, the aggregate dollar amount that remains outstanding at the end of its last completed fiscal year, and – in the case of stock price or TSR metrics – the estimates used to determine the excess incentive-based compensation. The issuer must also disclose the name of each executive officer from whom the issuer has determined not to pursue recovery, and the amount due from each executive officer subject to the clawback that has been outstanding for 180 days or longer. The proposed rules prohibit issuers from reimbursing or indemnifying any executive officer for any amount clawed back.

An issuer would be subject to delisting under the proposed rules if it does not adopt a compensation recovery policy, disclose the policy, or comply with the policy’s recovery provisions.

The proposed regulations will now be subject to a 60-day comment period. When final rules are released, the listing exchanges will have 90 days to publish their adopted versions of the rules, with an effective date no later than one year following the publication date. When the listing standards are effective, issuers will have 60 days to adopt the required recovery policy and must provide the required disclosures in SEC filings made after the effective date.