Securities and Exchange Commission's New Expansive Rule for Clawback of Incentive-based Compensation Is Now in Effect

• Publication year: 2023

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Jake Downing and Jessica M. Stricklin ^*

In this article, the authors review the Securities and Exchange Commission's final "clawback" rule concerning the recovery of incentive-based compensation. They note that the application of this final rule is particularly expansive, with the potential impact reaching far beyond the United States.

Several recent developments with the U.S. Securities and Exchange Commission (SEC) come into effect this year, including the new pay-versus-performance proxy disclosure as well as new Rule 10b5-1 rules and related disclosure requirements intended to enhance protections against insider trading.

There is also a key third development—the final "clawback" rule concerning the recovery of incentive-based compensation, the application of which is particularly expansive, with the potential impact reaching far beyond the United States.

The New Rule

Encouraging executive officers to reduce errors requiring restatements, the new rule targets compensation awarded to executive officers as a result of erroneously reported financial information that is received in the three-year period preceding the date when an issuer is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under securities laws. The main points of the new rule are discussed below.

Who does it apply to? All issuers listed on any national securities exchange, including foreign private issuers. ¹

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What is required? Issuers must implement a written clawback policy that provides for the recovery of incentive-based compensation erroneously awarded to current and former executive officers.

Who is affected? Current and former executive officers, ² including non-U.S. executives of foreign private issuers.

The final rule establishes new reporting and disclosure requirements. Listed companies must file their written clawback policy as an exhibit to their annual report and disclose any actions taken pursuant to the policy.

They must also indicate—via checkboxes—if financial statements disclosed in their filing reflect the correction of an error in previously issued financial statements and whether analysis under the company's clawback policy was required.

Expansive Scope

The scope of the new rule is notably expansive in respect of a few areas, discussed below.

Payment timing. Recovery of compensation is allowed regardless of when payments are made, as compensation is deemed "received" in the...