On October 14, 2021, the U.S. Securities and Exchange Commission (SEC) reopened the period to solicit input from the public on the compensation clawback rules it proposed in 2015 to implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The proposed rules would direct the national securities exchanges to establish listing standards that would require a company to adopt, disclose and comply with a compensation clawback policy as a condition to listing securities on a national securities exchange. The proposed clawback rules were summarized in the Sidley Update available here.
In the reopening release, the SEC requests comments and supporting data on the proposed clawback rules in light of regulatory and market developments since the rules were proposed in 2015. The SEC also identifies 10 new topics on which it is specifically requesting public comment, including the following:
- The SEC asks whether it should expand the types of accounting restatements that would trigger application of a clawback policy. Under Section 954 of the Dodd-Frank Act, a clawback would be triggered “in the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws.” Based on its initial interpretation of the Section 954 mandate, the clawback trigger under the SEC’s 2015 proposed rules was limited to material restatements of previously issued financial statements (so-called “Big R restatements”). In the reopening release, the SEC asks the public whether it should expand its interpretation and revise the rule proposal to include all required restatements made to correct an error in previously issued financial statements, including restatements required to correct errors that were not material to previously issued financial statements but would result in a material misstatement if (1) the errors were left uncorrected in the current report or (2) the error correction was recognized in the current period (so-called “Little R restatements”). This new request resulted from concerns raised that companies may not be making appropriate materiality determinations for errors to avoid triggering application of a clawback policy.
- The proposed rules contemplate that clawback policies would require the recoupment of excess incentive-based compensation received during the three-year period preceding “the date on which the issuer is required to prepare an accounting restatement,” meaning the earlier to occur of (1) the date the company’s board of directors, a board committee or authorized officer (if board action is not required) concludes, or reasonably should have concluded, that the company’s previously issued financial statements contain a material error or (2) the date a court or regulator directs the company to restate its previously issued financial statements to correct a material error. In the reopening release, the SEC asks whether it should remove the “reasonably should have concluded” standard in light of concerns that it adds uncertainty to the determination.
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