Securities and Exchange Commission Adopts New Clawback Rule

If securities laws require a listed company to publish a restatement correcting a material financial reporting error, including such an error resulting in erroneously awarded executive compensation, then the clawback rule will require the company to claw back the portion of executive compensation, pre-tax, which would not have been paid absent such reporting error. The clawback rule will apply to compensation awarded during the three-year period preceding the date on which a restatement was deemed required under securities laws, and will apply to current and former executives, regardless of whether any misconduct occurred.  

The clawback rule applies to all listed issuers, including smaller reporting companies, foreign private issuers, and controlled companies. There are some exceptions, such as registered investment companies which do not award incentive-based compensation to their employees. 

The clawback rule was initially proposed in 2015; however, that proposal only required clawbacks if the previously issued financial statement contained an error that was material at the time the statement was made. The current rule expands on this, requiring a clawback even if the previously issued financial statement contained an error that would only become material if recorded or left uncorrected in the current period.

Securities exchanges must file their proposed listing standards with the SEC for approval no later than 90 days following the rule’s publication in the Federal Register and the standards must become effective no later than one year following such publication. The rule is therefore not expected to take effect until mid-2023 at the earliest.