Updating Clawback Policies

The public comment period for the new NYSE and Nasdaq listing standards requiring public companies to have expanded clawback policies ended on April 3, 2023. The new standards will require listed companies to have clawback policies that provide for the recovery of excess incentive-based compensation of current and former executive officers upon the restatement of the company’s financial statements for any reason (currently recovery of compensation is only required for a restatement resulting from company misconduct and then only from the CEO and CFO).

The new listing standards, which closely track the SEC’s Rule 10D-1 under the Securities Exchange Act of 1934 that was adopted last October requiring exchanges to adopt clawback listing standards, can be found at this link (for the NYSE) and this link (for Nasdaq). Once the new listing standards are approved by the SEC, which could be at any time (though the statutory deadline is not until November), companies will have 60 days to put a compliant clawback policy in place to avoid being delisted.

The good news is that many public companies already have a clawback policy in place, based in part on Section 304 of the Sarbanes-Oxley Act.  However, Rule 10D-1 and the new listing standards will require companies to revisit their existing clawback policies and expand them to apply to any restatement that results in the executives having received excess compensation during the prior three fiscal years without regard to misconduct.

For many companies, their existing policy covers more employees than necessary or covers compensation during a shorter period.  Going forward, companies could be required to recover compensation from executives under both Section 304 of Sarbanes-Oxley and Rule 10D-1, although without double counting.

Takeaways

• Public companies are likely to need new or amended policies for recouping excess incentive compensation paid to current and former executive officers as a result of a restatement.
• The new listing standards have public disclosure requirements and expand the types of financial restatements that can trigger a clawback, so companies may want to add disclosure controls and procedures designed to fit their new or revised clawback policies.
• With more potential clawback triggers (for example, including almost all restatements instead of only restatements related to misconduct), companies may want to revisit how incentive compensation is paid to its executive officers. Where appropriate, deferred payments could help the company recover the full (pre-tax) amount of incentive compensation required upon a restatement without extra hardship to executives.
• Companies may want to educate their executive officers on erroneously paid incentive-based executive compensation so that executives understand their potential exposure in the case of a restatement.

If you have any questions about the new listing standards, please contact your regular Locke Lord contact or any of the authors.

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