Navigating the New Disclosure and Policy Requirements in Response to the SEC’s Clawback Rule

The SEC issued a final rule on October 26, 2022, Listing Standards for Recovery of Erroneously Awarded Compensation (commonly referred to as the “Clawback Rule”), to prevent executive officers from retaining excess compensation following an accounting restatement. The SEC approved the listing standards presented by NASDAQ and the New York Stock Exchange (NYSE) on June 9, 2023 to take effect on October 2, 2023. Listed companies will have until December 1, 2023, which is 60 days after the effective date, to adopt a clawback policy in compliance with the individual exchange’s listing standards.

Pursuant to the Clawback Rule, in the event an issuer is required to prepare an accounting restatement due to the material noncompliance with any financial reporting requirement under the securities laws, the issuer will recover (clawback) any excess incentive-based compensation that was erroneously awarded to its current or former executive officers based on any misstated financial reporting measure.

Scope of the Clawback Rule

The Clawback Rule specifies the excess compensation awarded to executive officers that is subject to clawback, as detailed in the table below: 

Incentive-based compensationFor purposes of the Clawback Rule, incentive-based compensation includes any compensation (including cash bonuses and equity instruments awarded as compensation) that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure.
Three-year look-back periodIncentive-based compensation awarded to current or former executive officers during the three-year period preceding the date the issuer is required to prepare an accounting restatement is subject to clawback. 
Executive officersExecutive officers include current (or former) officers or employees who perform(ed) a policy-making function for the issuer, which typically consists of the issuer’s president (e.g., CEO), principal financial officer (e.g., CFO), principal accounting officer (e.g., CAO or controller), and any vice-president(s) in charge of a principal business unit, division or function (such as sales, administration or finance).
Scope exceptionsLimited impracticality exceptions apply only in circumstances where: (i) third-party expenses to enforce recovery would exceed the amount to be recovered and the issuer has made a reasonable attempt to recover the excess compensation; (ii) recovery would violate home country law; or (iii) recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the specified tax-qualification requirements. 

When do the requirements under the Clawback Rule become effective?

The Clawback Rule shall take effect following its publication in the Federal Register on November 28, 2022, as stipulated below:

  • Each exchange was required to file its proposed listing standards by February 26, 2023 (90 days following the publication date in the Federal Register). 
  • The listing standards on each exchange must be effective on or before November 28, 2023 (one year following the publication date in the Federal Register). For NASDAQ and the NYSE, the effective date is October 2, 2023.
  • Each issuer must adopt and implement a written recovery policy that is compliant with the SEC’s Clawback Rule no later than sixty (60) days from the effective date of the applicable listing standards. For NASDAQ and the NYSE, the compliance date is December 1, 2023.

Issuers will be subject to delisting due to failure to timely adopt a compliant recovery policy and provide the mandated disclosures.

What are the new policy and disclosure requirements?

Each issuer’s written recovery policy must mandate recovery of each executive officer’s excess compensation during the three-year look-back period, regardless of whether the executive officer is at fault or responsible for the misstatement. 

Immediately on or after the date the issuer adopts its recovery policy, the issuer must comply with additional disclosure requirements, including its compensation recovery policies as exhibits to its Form 10-K as well as specified information upon a recovery event. 

Questions to consider

  • How soon does my company need to establish and implement a written recovery policy based on my company’s exchange?
  • Has my company had any recent restatements that will result in the recovery of incentive-based compensation based on the three-year look-back period?
  • What new processes and controls should my company implement in order to deal with the new policy and disclosure requirements?
  • How will my company quantify the potential recovery amount in the event of an accounting restatement?
  • How will my company (and auditors) obtain comfort that our incentive-based compensation data for current and former employees is complete and accurate?
  • How must my company’s quarter-end and year-end financial close processes be updated to accommodate the Clawback Rule?

How can I prepare?

We understand that navigating existing and emerging financial reporting requirements can be a complex and time-intensive process. Companies should continue to monitor developments related to the listing standards on their exchanges and follow the SEC’s current guidance on recovery policy disclosures. CFGI is prepared to help you conform to these new requirements. Our team of experienced professionals will support your capacity to assemble disclosures and draft filings that comply with the new rules. Reach out to us today to learn more.