SEC finalizes rule for erroneously awarded compensation

The SEC adopted a new rule and rule amendments requiring companies listed on exchanges to develop, implement and disclose a policy providing for the recovery of excess incentive-based compensation received by executive officers (as defined) that is determined to have been awarded based on incorrect financial statements. Specifically, listed issuers will assess the need for recovery in the event of an accounting restatement, including certain ‘little r’ restatements (as defined).

This rule was finalized in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). The Act requires the SEC to direct the national securities exchanges and associations that list securities to establish listing standards requiring each issuer to develop and implement a clawback policy to recoup incentive-based compensation erroneously awarded to executive officers. 

The rule includes the following key aspects: 

• Trigger for recovery: Requires that the recovery policy be triggered in the event the issuer prepares an accounting restatement that corrects an error in previously issued financial statements: 
  • that is material to the previously issued financial statements; or 
  • that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
• Look-back period: Requires recovery of erroneously awarded compensation during the three completed fiscal years immediately preceding the date on which the issuer is required to prepare an accounting restatement.
• Executive officer: Defines the term ‘executive officer’, which would include at a minimum executive officers identified pursuant to 17 CFR 229.401(b), as well as defined officers with an important role in financial reporting or policy-making.
• Recovery amount: Defines the amount of incentive-based compensation subject to recovery as the amount in excess of what would have been paid to the executive officer after giving effect to the accounting restatement. It also defines incentive-based compensation to be any compensation that is granted, earned or vested based wholly or in part upon attainment of any financial reporting measure.
• Impracticability exception: Outlines limited exceptions to recovery of erroneously awarded compensation when recovery would be impracticable if certain conditions are met.
  
• Disclosure: Requires disclosure of recovery policies as an exhibit to annual reports, as well as specified information upon a recovery event. Annual filings will include check boxes on page one indicating when a restatement has been made to previously issued financial statements and when such a restatement required a recovery analysis of executive incentive compensation.
  
• XBRL: Certain information is required to be tagged using Inline XBRL.