October 27, 2022

SEC Adopts Rule Requiring Listed Companies to Have Clawback Policies

The SEC adopted a rule requiring exchanges to establish listing standards that require issuers to develop and implement a policy on clawing back compensation that was awarded erroneously based on incorrect financial statements.

The new rule implements SEA Section 10D ("Recovery of erroneously awarded compensation policy") which was added to the Exchange Act by Dodd-Frank. Under the new rule, issuers will also be required to publicly disclose executive compensation policies as an exhibit in their annual reports, along with additional disclosure pertaining to have they have applied the policies and any recovered amounts, as applicable. Issuers that fail to comply will be subject to delisting.

The rule will become effective 60 days after publication in the Federal Register. Thereafter, each national securities exchange is required to file its proposed listing standards within 90 days of the date of publication (with such standards effective no later than one year following such date) and each issuer subject to these standards must adopt a recovery polcy no later than 60 days following the standard's effective date.

Commissioner Statements

SEC Chair Gary Gensler supported the rule, which he said promotes accountability for issuers and provides investors with the most accurate financial information. SEC Commissioner Jaime Lizárraga also supported the rule, saying that it will "ensure that executives are incentivized to produce high quality, accurate financial statements, which investors rely on to make informed investment decisions." SEC Commissioner Caroline A. Crenshaw added that the rule will hold both executives and issuers accountable.

SEC Commissioners Hester M. Peirce and Mark T. Uyeda both expressed concern that the new rule's scope is overbroad and goes beyond the agency's mandate. Ms. Peirce and Mr. Uyeda also said that the rule will place an unfair compliance burden on issuers - many of which already have clawback policies - given that most will need to overhaul their policies to comply with the SEC's new standards. Ms. Peirce said that the rule is similar to the Pay-Versus-Performance rule in terms of needless complexity and high costs relative to minimal benefits. Mr. Uyeda criticized the SEC for not conducting proper economic analysis prior to adopting the final rule as required.

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