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SEC Long-awaited Clawback Rule

December 27, 2022

On October 26, 2022, the SEC adopted long-awaited “clawback” rules relating to the recovery of erroneously awarded incentive-based executive compensation of SEC registrants.

‒ By Reid A. Godbolt, Esq.

On October 26, 2022, the Securities and Exchange Commission (SEC) adopted final rules relating to the recovery of erroneously awarded incentive-based executive compensation of SEC registrants. These long-awaited rules have been referred to as the “clawback” rules which the SEC was required to implement pursuant to Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The rules direct the national securities exchanges to establish listing standards that require listed companies to adopt, disclose and comply with a written compensation clawback policy as a condition to listing securities on the exchange. The policy applies in the event the listed company is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws. The policy must mandate the recovery of any incentive-based compensation awarded to a current or former executive officer in excess of compensation that would have otherwise been received during the three-year period preceding the date the listed company is required to prepare an accounting restatement. The rules also require listed registrants to file their clawback policies as an exhibit to their annual reports and to disclose certain information if recovery is triggered under the policy.

In a significant deviation from the term “named executive officers” that commonly accompanies compensation disclosures, the clawback rules define “executive officers” in the same way as the term is used in determining the officers subject to the short-swing profit rules of Section 16 of the Securities Exchange Act of 1934. The SEC indicated that officers covered by the clawback rules “expressly include officers with an important role in financial reporting.” Specifically, under the Clawback Rules, “executive officers” include:

  • CEO/President;
  • Principal financial officer;
  • Principal accounting officer (or, if none, the controller);
  • Vice president(s) in charge of a principal business unit, division, or function (e.g., sales, administration, or finance);
  • Officer(s) who perform a policy-making function; and/or
  • Employees who perform similar policy-making functions.

Additionally, executive officers of the registrant’s parent(s) or subsidiaries are considered “executive officers” of the registrant under the Clawback Rules if they perform similar policy-making functions for the registrant.

One item of note is that the clawback rules require a registrant to recoup its executives’ erroneously awarded incentive-based compensation in the event of both “Big R” or “little r” accounting restatement. According to the SEC, “Big R” restatements correct errors that are material to previously issued financial statements; while “little r” restatements correct errors that are not material to previously issued financial statements, but would result in a material misstatement if: (a) the errors were left uncorrected in the current report, or (b) the error correction was recognized in the current period (commonly referred to as ‘little r’ restatements).  Thus, ensuring proper GAAP accounting treatment and controls remains paramount and executive management of stock exchange listed companies will need to strongly consider the risks when adopting or using questionable accounting treatments or when making subjective accounting estimates.

Regarding the 2023 annual NYSE American compliance letter that was recently released, the SEC rule requires the NYSE to adopt listing standards to address these requirements within 90 days following publication of the SEC rules in the Federal Register, which occurred on November 28, 2022. As of the date of this memorandum, the NYSE has not yet adopted its new listing standard and rule (although it must do so by the end of February.)  Companies must adopt compliant clawback policies no later than 60 days following the date that the applicable listing standards become effective, and compliance with the new public disclosure requirements will be required in the first annual report, proxy statement, or information statement required to be filed following the effective date of the final listing standards.

This article is provided for information purposes only and is not intended to constitute legal advice or legal opinion as to any situation. You should not take, or refrain from taking, any action based on information in this article, without seeking legal counsel from an attorney on your particular facts and circumstances. Jones & Keller would be happy to provide you with specific advice about specific situations, if desired. Do not hesitate to contact a member of the Corporate Securities Practice Group.

About Reid Godbolt

Reid A. Godbolt is a shareholder and member of the Corporate Securities Practice Group at the Denver, Colorado, law firm of Jones & Keller, P.C. Much of Reid’s experience over his 40+ years with Jones & Keller has been in securities regulation, capital formation, mergers and acquisitions and representation of issuers and underwriters in public and private offerings of securities in several industries including energy, insurance, technology and pooled investment vehicles such as hedge funds, private equity funds and mutual funds. He also represents executives and boards of directors in connection with sales of control and investigations. Reach out to Reid at