The SEC adopted a new rule and rule amendments requiring companies listed on exchanges to develop, implement and disclose a policy providing for the recovery of excess incentive-based compensation received by executive officers (as defined) that is determined to have been awarded based on incorrect financial statements. Specifically, listed issuers will assess the need for recovery in the event of an accounting restatement, including certain ‘little r’ restatements (as defined).
This rule was finalized in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). The Act requires the SEC to direct the national securities exchanges and associations that list securities to establish listing standards requiring each issuer to develop and implement a clawback policy to recoup incentive-based compensation erroneously awarded to executive officers.
The rule includes the following key aspects:
In January 2023, the SEC staff issued four new Compliance and Disclosure Interpretations (C&DIs), Questions 121H.01 to 121H.04, to clarify requirements pursuant to Rule 10D-1 that registrants are not expected to comply with the rule’s disclosure requirements before adopting a recovery policy under the applicable exchange’s listing standards.
The C&DIs also clarify how to apply the rule to compensation that is in plans other than tax-qualified retirement plans and disclosure requirements pursuant to Forms 20-F and 40-F.
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