Last fall, the US Securities and Exchange Commission (SEC) announced that it had adopted new rules directing national securities exchanges, including the New York Stock Exchange (NYSE) and Nasdaq, to establish listing standards requiring companies to implement “clawback” policies to recover incentive-based compensation in the event of a required accounting restatement.
NYSE and Nasdaq then proposed in March 2023 clawback listing standards that were published in the Federal Register and were intended to be approved by the SEC within 45 days (or up to 90 days).
The SEC announced on April 24, 2023 that it would use the longer 90-day period for taking action on the proposed listing standards. Assuming the SEC takes the full 90-day period, the last day would be June 11, at which point the 60-day window would kick in and the day for having a compliant clawback policy would be August 10, 2023.
We note that June 11 is a Sunday, so, assuming the action is on the last business day prior to that (June 9), the 60th day would be Tuesday, August 8. These dates could be further extended, but the published rule requires that the national exchanges finalize their listing standards by November 28, 2023.
With this fluid timeline in mind, public companies should waste no time planning for its implementation. While it is not required to adopt the clawback policies until 60 days following effectiveness of the exchange rules, that deadline may be rapidly approaching this summer.
Here, we outline 10 practical considerations for public companies to help prepare and meet full compliance.
- Ensure that employment agreements, equity plans, deferred compensation plans, and bonus/incentive arrangements contain appropriate provisions to enable implementation of the Dodd-Frank recovery policies.
- Create a contractual link between the incentive compensation and the recovery policy in any new agreements and consider the appropriateness of amending earlier agreements or entering into short-form agreements acknowledging the application of the clawback.
- Specify the remedy for the clawback.
- Review the company’s existing clawback policies to determine what modifications will be needed to comply with the new rules. Potential revisions may include which officers are covered (including former officers); the types of compensation covered; the kinds of restatements that trigger compensation recovery; the lookback period; the mandatory nature of clawbacks under the new rules (no discretion, no fault); and the limited exceptions to compensation recovery.
- Consider whether to limit the company’s policy to the Dodd-Frank policy or add other discretionary clawbacks on events such as misconduct/breach of restrictive covenants, or clawbacks for a broader group of responsible employees if the Dodd-Frank clawback is triggered for an executive officer.
- If discretionary fault–based clawbacks are preferable, evaluate whether to have one multipronged clawback policy or separate policies. Within a multipronged structure, one prong of the policy would be designed to be a no-fault Dodd-Frank–compliant policy and one prong would be for discretionary fault–based use and applicable to a broader population of employees. This has the added benefit of being responsive to institutional investor advisory firm guidance.
- Review committee charters and other relevant board documents to ensure that the responsibility for determining the Dodd-Frank recovery process is appropriately addressed.
- Begin familiarizing the board and compensation committee with the requirements at upcoming meetings.
- Prepare to devote sufficient time and resources to developing a policy that is both compliant with the final rules and appropriate for the company’s compensation policies and governance programs.
- Identify financial measures that may cause incentive compensation to become subject to recovery and consider how the recovery process would work. This is especially important for companies using stock price and total shareholder return measures.
- Consider a shift toward types of compensation that would not be covered by the clawback rules, including equity compensation that vests based on service, incentive compensation using nonfinancial/non–stock price measures, and discretionary awards.Companies will want to continue being responsive to guidance and input from institutional investor advisory firms and outside compensation consultants.
- Consider imposing mandatory deferrals or holding requirements on earned incentive awards to facilitate implementation of the recovery policy. Deferral plans require plan design and navigation of complex legal requirements (including timing requirements for elections of deferral), so, if it is preferable to follow this approach, planning early will benefit the process.
If you are interested in A Practical Guide to Implementing Compliant Clawback Policies, as part of our Morgan Lewis Global Public Company Academy, we invite you to subscribe to Morgan Lewis publications to receive updates on trends, legal developments, and other relevant areas.