The Securities and Exchange Commission has adopted rules requiring securities exchanges to adopt listing standards that require issuers to develop and implement policies that provide for recovery of erroneously awarded incentive compensation received by current or former executives. The final rules require a listed issuer to file the policy as an appendix to its annual report and to include disclosures related to the recovery policy and recovery analysis when recovery is triggered. The Commission proposed the compensation rules in 2015 and reopened the comment period on the proposal in October 2021 and again in June 2022.
“I believe these rules will strengthen the transparency and quality of corporate financial reporting, investor confidence in those reports, and the accountability of corporate executives to investors,” said SEC Chairman Gary Gensler. “Thanks to today’s action and cooperation with the exchanges, we are able to implement the Dodd-Frank mandate and the intent of Congress to prevent executives from retaining compensation based on financial misstatements.”
The new rules implement Section 10D of the Securities Exchange Act of 1934, a provision added by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Rule 10D-1 of the new Exchange Act directs national exchanges and securities associations to establish listing standards that require a listed issuer to: (1) adopt and enforce a written policy on the recovery of erroneously awarded incentive compensation received by its current or a former executive officer in the event that an accounting statement is required to be prepared due to material non-compliance with financial reporting requirements under securities laws, during the three completed fiscal years immediately preceding the date on which the issuer is required to prepare an accounting statement; and (2) disclose the reimbursement policy in accordance with the Commission’s rules, including providing the information in a tagged data format.
In addition, the final regulations require specific disclosures about a listed issuer’s incentive-based recovery policy and information about actions taken pursuant to such recovery policy. The amendments also require all listed issuers to: (i) file their written recovery policies as appendices to their annual reports; (ii) indicate by checkmarks in its annual reports whether the financial statements included in the filings reflect a correction of an error in previously published financial statements and whether any of those corrections are restatements requiring restating analysis; and (iii) disclose any action they have taken pursuant to such recovery policy.
The final regulations will take effect 60 days after publication of the adoption notice in the Federal Register. Exchanges will be required to submit proposed listing standards no later than 90 days after publication of the notice in the Federal Register, and the listing standards will be effective no later than one year after such publication. Issuers subject to such listing standards will be required to adopt a reinstatement policy no later than 60 days after the effective date of the applicable listing standards.
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