The U.S. Securities and Exchange Commission (“SEC”) voted on Wednesday to adopt a new rule requiring companies listed on a national securities exchange to claw back incentive-based executive compensation that was erroneously awarded on the basis of materially misreported financial information that requires an accounting restatement.

New Exchange Act Rule 10D-1 has its roots in the Dodd-Frank Wall Street Reform and Consumer Production Act of 2010, which aimed to enhance market stability, transparency, and accountability. Section 10D of the Dodd-Frank Act required the SEC to adopt rules directing national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the requirements of Section 10D(b). That subsection in turn required the SEC to adopt rules directing exchanges to implement listing standards requiring disclosure of incentive-based compensation policies and the claw back of such compensation tied to erroneous figures in financial statements that require restatement. A Senate Report issued in connection with the Dodd-Frank Act legislative process noted that it would be “unfair to shareholders for corporations to allow executive officers to retain compensation that they were awarded erroneously,” so “executives must return monies that should belong to the shareholders.”

On July 1, 2015, the SEC proposed a new rule in furtherance of Congress’ directive that lay dormant until the SEC reopened the rule’s comment period some six years later on October 14, 2021, and again on June 8, 2022. The SEC’s adoption of Rule 10D-1 on Wednesday thus brings the rule’s nearly 12-year implementation process full circle. 

Rule 10D-1 generally directs national securities exchanges and associations to establish listing standards that require a listed issuer to:

  1. Adopt and comply with a written policy for recovery of erroneously awarded incentive-based compensation received by its current or former executive officers in the event it is required to prepare an accounting restatement due to its material noncompliance with any financial reporting requirement under the securities laws, during the three completed fiscal years immediately preceding the date that the issuer is required to prepare an accounting restatement; and
  2. Disclose those compensation recovery policies in accordance with SEC rules.

The final rule further requires all listed issuers to: (1) file their written recovery policies as exhibits to their annual reports; (2) indicate by check boxes on their annual reports whether the financial statements included in the filings reflect correction of an error to previously issued financial statements and whether any of those error corrections are restatements that required a recovery analysis; and (3) disclose any actions they have taken pursuant to such recovery policies.

Rule 10D-1 will become effective 60 days following publication of the rule’s adopting release in the Federal Register. Exchanges will be required to file proposed listing standards within 90 days of such publication that become effective within a year of publication. Issuers subject to such listing standards will be required to adopt a recovery policy no later than 60 days following the date on which the applicable listing standards become effective.