Defining Issues | June 2022



SEC again reopens proposal on compensation clawback policies

Comment period on 2015 proposal to implement Section 954 of Dodd-Frank Act reopened with new questions and analysis.

In July 2015, the SEC proposed rules to implement listing standards for the recovery of compensation later determined to be awarded based on incorrect financial statements. The SEC is now revisiting the proposal and reopening the comment period for a second time as part of its rulemaking activities.

Relevant dates

  • July 1, 2015 – Proposal issued
  • October 14, 2021 – Comment period initially reopened (closed on November 22, 2021)
  • June 8, 2022 – Comment period reopened
  • July 14, 2022 – Comment period ends 

Key impacts:

Highlights from the proposal and incremental feedback being sought

In 2015, the SEC proposed a rule to implement certain provisions of the Dodd-Frank Act. This rule has yet to be finalized.

  • Requirement that national securities exchanges establish standards requiring listed companies to have a written recovery policy to recoup incentive-based compensation erroneously awarded to executive officers.
  • Definition of circumstances triggering recovery and compensation subject to recovery.
  • Requirement to provide disclosures over recovered incentive-based compensation in the event of a material accounting restatement.
  • Requirement to file the recovery policy as an exhibit to the annual report.

The comments received on the original proposal in 2015 made a number of observations, including concerns with the broad applicability of the proposed rule to:

  • all issuers of listed securities, even those not subject to other SEC executive compensation disclosure requirements;
  • compensation based on measures like share price performance and total shareholder return, given the subjectivity and potential complexity in calculating the impact on those measures of an accounting restatement. 

On October 14, 2021, the SEC issued a release, supported by a statement from SEC Chair Gensler,  that reopened the comment period. It also seeks to gather incremental feedback on the 2015 proposed rule.

  • What should be considered to represent an ‘accounting restatement due to material noncompliance’ and how should certain other terms be defined or interpreted for the purposes of the rule?
  • Whether corrections of immaterial errors to previously issued financial information (sometimes referred to as ‘little r’ restatements) should be within the scope of the definition above.
  • Whether the calculation of excess incentive-based compensation attributable to the restatement should be disclosed when the incentive-based compensation is linked to stock price or total shareholder return.
  • Whether the proposed guidance for triggering the lookback period should be revised to reduce uncertainty in application.

On June 8, 2022, the SEC reopened the comment period for this proposal once again. In connection with the latest reopening, and to assist in the evaluation of the proposal and the questions raised for consideration, the SEC staff released a memo that:

  • Discusses the increase in voluntary adoption of compensation recovery policies.
  • Provides estimates of the number of additional restatements that would trigger a compensation recovery analysis.
  • Briefly discusses some potential implications for costs and benefits of proposed rule.

The SEC has posted a fact sheet outlining the background and next steps related to this proposal.

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