The SEC recently released proposed rules to adopt the incentive-based compensation clawback provisions under Section 954 of The Dodd-Frank Wall Street Reform and Consumer Protection Act, nearly five years after the Dodd-Frank Act became law.
Under the proposed rules, securities exchanges would have to adopt rules that require public companies to develop and implement clawback policies in order to be listed on such exchange. Such listing requirements would apply to all issuers with publicly traded securities, including foreign private issuers and issuers of listed debt or preferred stock, whose common stock is not otherwise listed (subject to very limited and narrow exceptions). The clawback policies must, at a minimum, require the recovery from any current or former executive officer of the issuer who received “incentive-based compensation” during the three-year period preceding the date on which the company is required to prepare a restatement of its accounting statements as a result of material noncompliance with applicable financial reporting requirements, based on erroneous data, to the extent such compensation is in excess of what would have been paid under the accounting restatement. “Incentive-based compensation” is compensation that is granted, earned or vested based wholly or in part on the attainment of a financial reporting measure. The SEC solicited comments on the proposed rules through September 14, 2015, so final rules may be adopted by the SEC at any time. Exchanges would be required to file proposed listing rules no later than 90 days following the publication of the final adopted rules, with such listing rules becoming effective no later than 12 months of the final rules being published. Issuers would be required to adopt a compliant policy within 60 days following the date on which the exchanges’ rules become effective.
We will be posting a series of posts on the Dodd-Frank clawback rules over the upcoming months, including a deeper dive into the proposed clawback rules, exploration of the questions and uncertainties raised by the proposed rules, as well as guidance on the substance and implications of any final or interim rulemaking from the SEC and exchanges.