SEC Adopts Final Rule 10D-1 Regarding Clawbacks Of Executive Compensation

• Jurisdiction: United States,Federal
• Law Firm: Cahill Gordon & Reindel LLP
• Subject Matter: Accounting and Audit, Corporate/Commercial Law, Accounting Standards, Corporate and Company Law, Securities, Executive Remuneration
• Author: Mr Bradley J. Bondi and Michael D. Wheatley
• Published date: 24 January 2023

On October 26, 2022, the Securities and Exchange Commission ("SEC") adopted Rule 10D-1 entitled "Listing Standards for Recovery of Erroneously Awarded Compensation."¹ The rule has two main requirements. First, it directs national securities exchanges to require listed issuers to develop and implement written policies to claw back incentive-based executive compensation if the issuer is later required to issue an accounting restatement. The policies must comply with the elements set out in the final rule. Second, the rule directs exchanges to require that issuers publicly disclose their written policies.²

The final rule creates important new requirements for public companies, with significant consequences for noncompliance. An issuer that fails to adopt, comply with, and disclose a clawback policy will be subject to delisting from the exchange.³ The final rule also follows recent enforcement efforts to deter corporate misconduct by clawing back executive compensation.⁴ Rule 10D-1 extends those efforts by increasing (1) the likelihood that a company will have to claw back incentive-based compensation and (2) the universe of individuals who may be subject to a clawback. The rule becomes effective on January 27, 2023.

Background

Since 2002, executives have been at risk of being required to reimburse their companies for certain incentive-based compensation when there is an accounting restatement. Under Section 304 of the Sarbanes-Oxley Act of 2002 ("SOX 304"), if a public company issues an accounting restatement as a result of misconduct, the SEC may seek to require the CEO and CFO to reimburse the company for incentive-based compensation they received during the 12-month period following the misstated financial statement, regardless of whether they were involved in the misconduct.⁵ The SEC has brought several enforcement actions pursuant to SOX 304.⁶ The adoption of Rule 10D-1 does not affect the requirements of SOX 304, and CEOs and CFOs remain subject to that statute.

Eight years after the Sarbanes-Oxley Act, the Dodd-Frank Act of 2010 was passed, requiring the SEC to adopt rules requiring public companies to recover incentive-based compensation from executive officers when a public company files an accounting restatement.⁷ Twelve years after Dodd-Frank, the SEC adopted Rule 10D-1 pursuant to this statutory mandate. As described below, when compared to SOX 304, Rule 10D-1 expands the scope of potential clawbacks against executives in significant ways.⁸

Key Parts of Rule 10D-1

Rule 10D-1 has four key parts.

First, Rule 10D-1's clawback requirement is triggered by an accounting restatement. In the final version of the rule, the SEC broadened the restatement trigger to include both "Big R" restatements and "little r" restatements.⁹ A "Big R" restatement is a restatement that corrects errors that are material to previously issued financial statements and, if as a result of misconduct, triggers...