On July 1, 2015, the Securities and Exchange Commission proposed long-awaited rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandating any company whose securities are listed on a national securities exchange to adopt and enforce a policy requiring the clawback of incentive-based compensation from current and former executive officers in the event of an accounting restatement (the Clawback Rules).

As proposed, the Clawback Rules would require national securities exchanges to promulgate listing standards requiring the recovery of incentive-based compensation during the three fiscal years preceding the date on which the listed company is required to prepare an accounting restatement to correct a material error. Recovery would apply on a “no fault” basis to any “executive officer”—meaning that executive officers would be required to return their incentive-based compensation regardless of whether or not any misconduct occurred relating to the restatement or whether the executive officer was responsible for the erroneous financial statements. Although the SEC notes that the Clawback Rules are intended to require listed companies to pursue recovery in most instances, the Clawback Rules do provide the board of directors of a listed company with discretion to not pursue recovery if it would be impracticable because it would impose undue costs on the issuer or its shareholders (i.e., the cost of enforcing recovery would exceed the recoverable amount) or would otherwise violate home country law.

The SEC has proposed a broad definition for “executive officers” subject to clawback that is modeled after the definition used in the regulations implementing the short-swing profit rules set forth in Section 16 of the Securities Exchange Act of 1934, as amended. “Executive officers” subject to the Clawback Rules would include a listed company’s president, principal financial officer, principal accounting officer, any vice president in charge of a principal business unit, division or function, and any other person who performs a policymaking function for the company, and would apply to both current and former executive officers during the three years preceding the date of the required restatement.

The amount of incentive-based compensation subject to recovery would be the amount of incentive-based compensation previously received that exceeds the amount of incentive-based compensation that otherwise would have been received had it been determined based on the accounting restatement, and computed without regard to any taxes paid. For purposes of the Clawback Rules, “incentive-based compensation” would be defined as any compensation that is granted, earned or vested based wholly or in part upon the attainment of a financial reporting measure, which includes measures presented in an issuer’s financial statements, as well as stock price and total shareholder return.

Listed companies would be required to file their clawback policies as an exhibit to their Annual Reports on Form 10-K. In addition, if, during its most recent fiscal year, a listed company prepared a restatement requiring recovery of excess incentive-based compensation or there was an outstanding balance of excess incentive-based compensation relating to a prior restatement, the company would be required to disclose its recovery efforts in its proxy statement, including the aggregate dollar amount of excess incentive-based compensation attributable to the restatement and the aggregate dollar amount of incentive-based compensation that remained outstanding at the end of the last completed fiscal year.

As proposed, indemnification by the company against the loss of erroneously awarded compensation or the use of insurance that is funded (whether directly or through reimbursement) by the company would be prohibited.

Comments will be accepted on the Clawback Rules for a period of 60 days. Once finalized and adopted by the relevant national exchange, adoption of a recovery policy by a listed issuer would be required within 60 days following the date the listing exchange rules become effective.

Manatt, Phelps & Phillips, LLP, will be monitoring the Clawback Rules through final adoption.

The full text of the Clawback Rules can be found here.