In July 2015, the SEC proposed new Exchange Act Rule 10D-1 to require national securities exchanges  (NYSE, Nasdaq) to adopt listing rules that require listed companies to adopt and disclose clawback  policies. These policies must be designed to recover incentive-based executive compensation from  current and past executive officers that was based on financial statements that are subsequently  restated. The proposed rule is the final in a series of many executive compensation rules mandated  by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC believes that the  proposed rule will “result in increased accountability and greater focus on the quality of  financial reporting, which will benefit investors and the markets.”


The proposed rule requires all listed issuers to comply. Emerging growth companies, smaller  reporting companies, and foreign private issuers are subject to the rule’s requirements without  exception. Limited exceptions exist for certain security futures products, standardized options  products, and registered investment companies.

Proposed Rule 10D-1 covers incentive-based compensation awarded to an “executive officer”, which  includes a company’s president; principal financial officer; principal accounting officer; any  vice-president in charge of a business entity, division, or function; and any person who performs  policymaking functions for the listed company. The definition parallels the definition of “officer”  used in Section 16 of the Exchange Act.


Proposed Rule 10D-1 defines incentive-based compensation as money awarded, earned, or vested based  in whole or part on the achievement of a financial reporting measure. Financial reporting measures  are: measures based on accounting principles used to prepare financial statements; measures rooted  in the financial statements; and stock price or total shareholder return. The proposed rules do not  apply to incentive compensation based on non-financial metrics.

The compensation is considered to be “received” by the executive officer in the period the relevant  financial measure is attained, even if payment occurs after the end of that period. Incentive-based  compensation is subject to reporting and claw back only if the executive received the compensation  while the company has listed securities. The amount subject to claw back is the amount received  above the amount that should have been received based on restated financial statements. If stock  price or shareholder return is the measure for the incentive-based compensation, the rule permits  determination of recovery based on reasonable estimates as opposed to the accounting restatement  figures.

Companies would be prohibited from indemnifying executive officers for losses of excess  incentive-based compensation.


Each listed issuer would be required to establish and file as an exhibit with its Form 10-K its  clawback policy. The policy must explain the incentive-based compensation financial measures and  accounting restatement process. Under the proposed rule, when an accounting restatement is required  to correct a prior accounting error due to material noncompliance (regardless of any fault or  wrongdoing on the part of the executive officers covered by the clawback policies), the clawback  provisions are triggered. The proposed rule defines “materiality” as the already-established standards of materiality under the securities laws. Further, if the company  prepared a restatement that triggered a recovery of excess incentive-based compensation, the company must disclose in its 10-K or proxy statement:

  • the date the accounting restatement was required to be prepared;
  • the amount of excess incentive-based compensation that is attributed to the restatement and  recoverable under the clawback policy;
  • the recipients and amounts of erroneously awarded compensation that the issuer has decided not  to recover and the reasons why the issuer is not seeking to claw back that compensation; and
  • the recipient and amounts of any erroneously awarded compensation that remained outstanding for  more than 180 days at year end.


Proposed Rule 10D-1 permits issuers to forego recovery of the incentive-based compensation if  recovery imposes undue costs on the shareholders or the issuer itself or if it violates the  issuer’s home country law, subject to additional conditions.


Proposed Rule 10D-1 applies to excess incentive-based compensation awarded or paid to executive  officers within three fiscal years of the date the listed company is required to prepare a  restatement. This is the date when the board or management concludes that the filed financial  statements contain a material error or another authorized body requires the issuer to file a  restatement. It is not the date the restatement is filed.

Once the final rules are adopted, the exchanges will have 90 days to propose compliant listing  rules implementing the clawback policy requirements, and those rules must then become effective no  more than one year after the publication date of the proposed rules. Each company must adopt a  recovery policy no more than 60 days after its exchange’s listing rules become effective.


We do not believe that these rules will be effective until late 2016 or 2017. Nevertheless, many  companies that have not yet adopted a clawback policy may benefit with institutional investors and  others that focus on corporate governance best practices by adopting now a clawback policy that  complies with the proposed rules. In addition, companies should review their compensation programs,  including any employment agreements, in advance of the adoption of the final clawback rules to  determine whether the rules conflict with current programs and agreements and pursue any required  changes or amendments to current programs or agreements. Finally, companies should assess their  compensation committee charters and indemnification provisions (indemnification agreements and/or  bylaws) for conformity with the proposed rules.