*Timing Update*

The New York Stock Exchange ("NYSE") and Nasdaq filed amendments to their proposed rules requiring that all listed companies adopt adequate clawback policies on executive compensation.1 Under the amended proposals, these listing standards would become effective on October 2, 2023 and companies would be required to adopt compliant clawback policies on or before December 1, 2023 (60 days after the effective date).2

What is the clawback requirement?

As required by Section 10D of the Exchange Act, the proposed listing standards require recoupment if incentive compensation paid to an executive officer was calculated based on financial statements that were required to be restated due to material noncompliance with financial reporting requirements and that noncompliance resulted in overpayment of the incentive compensation within the three fiscal years preceding the date the restatement was required.

Restatements that trigger clawbacks include accounting restatements that correct an error in previously issued financial statements, or "Big R" restatements, as well as accounting restatements that correct an error not material to the previously issued financial statements that result in a material misstatement if the error was left uncorrected in the current period or the error correction was recognized in the current period, or "Little r" restatements.

What issuers are covered?

All listed issuers are subject to the clawback requirement with limited exceptions. This includes foreign private issuers, smaller reporting companies, emerging growth companies and controlled companies.

Who is subject to the clawback policy?

All current and former executive officers must be covered by the clawback policy.3 The definition of executive officer is identical to the definition of a Section 16 officer under the Exchange Act. 4 This will include, at a minimum, the executive officers named by the issuer in its Form 10-K or proxy statement.

What is "incentive-based compensation"?

Incentive-based compensation refers to compensation (cash or equity) that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure.

Incentive-based compensation excludes compensation that is not based on achievement of a financial reporting measure, such as base salary, discretionary bonuses, or time-based awards, as well as awards based on subjective standards, strategic or operational measures.

When is incentive-based compensation deemed "received"?

Incentive-based compensation is deemed "received" in the issuer's fiscal period during which the financial reporting measure specified in the incentive-based compensation award is attained, even if the payment or grant of the incentive-based compensation occurs after the end of that period.

How is the amount of clawed back compensation measured?

The recoupment amount is equal to the incentive-based compensation received that exceeds the amount of incentive-based compensation that otherwise would have been received had it been determined based on the restated amounts and must be computed without regard to any taxes paid.

How is recovery determined for incentive-based compensation tied to stock price or TSR (total shareholder return)?

If the incentive-based compensation is tied to stock price or TSR the recoupment amount must be derived from reasonable estimates of the effect of the accounting restatement on TSR and the issuer must maintain documentation of this estimation and provide this documentation to the exchange.

What time period must be covered by the clawback policy?

The policy must apply to any incentive-based compensation received (as defined above) during the three completed fiscal years immediately preceding the date on which the issuer is required to prepare an accounting restatement.

When is an issuer "required" to prepare an accounting restatement?

The company is required to prepare a financial statement upon the earlier of the following:

  • the board of directors, a committee thereof, or authorized officers concluded or reasonably should have concluded that the issuer is required to prepare an accounting restatement due to material noncompliance of the company with any financial reporting requirement; 5 or
  • a court, regulator, or other legally authorized body directs the company to prepare an accounting restatement.

Is the issuer required to seek recovery of erroneously received incentive-based compensation?

Yes, issuers must take steps towards recovery reasonably promptly with very limited exceptions.6 There is no exception for de minimis amounts.

Do companies have discretion regarding the means of recovery?

Yes, as long as the erroneously received incentive-based compensation is recovered reasonably promptly, the issuer has discretion regarding the appropriate means of recovery. For example, equity awards could be forfeited, shares received could be returned or proceeds from the sale of erroneously received shares could be repaid.

Can an issuer indemnify its current or former executive officers against the loss of any erroneously awarded incentive-based compensation?


What are the consequences of failure to adopt and comply with these listing requirements?

Listed issuers will be subject to delisting from Nasdaq or NYSE, as applicable, if they fail to adopt a compliant clawback policy within 60 days of the effective date or fail to enforce their clawback policies.

When are the new listing standards effective?

If approved by the SEC, the NYSE and Nasdaq listing standards will become effective on October 2, 2023 and issuers will be required to adopt compliant clawback policies on or before December 1, 2023 (60 days after the effective date).

What are the disclosure obligations?

Issuers will be required to file their clawback policy as an exhibit to their annual report on Form 10-K. Additional disclosure will be required if an executive officer is subject to recoupment under the policy, including the aggregate dollar amount of the erroneously awarded incentive-based compensation, how it was calculated, and information regarding amounts not yet recovered.

What steps should issuers consider?

Issuers should consider taking the following actions:

  • update the board of directors, audit and compensation committees regarding the new clawback requirements and the expected effective date;
  • confirm the process to adopt a compliant policy or amend any exiting clawback policies to comply with the new requirements;
  • review existing incentive compensation programs to identify metrics that will constitute incentive-based compensation subject to recoupment under the policy; and
  • consider implementing documentation of any discretionary awards made by the compensation committee that would not be subject to the clawback policy.

Summer associate Paul Tetenbaum co-authored this blog post.


1 NYSE 303A.14; Nasdaq 5608

2 Section 10D to the Securities Exchange Act of 1934, which was effective on January 27, 2023, directed national securities exchanges and associations that list securities to establish a written clawback policy that requires each listed issuer to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers.

3 Incentive-based compensation received by a current executive officer while they served in a non-executive capacity is not susceptible to being clawed back under these new rules. Former executive officers are individuals who have left the company but received incentive-based compensation within the three fiscal years preceding the accounting restatement.

4 This means that individuals who are Section 16 officers but not deemed executive officers by the issuer, such as a non-executive controller, will be subject to potential recoupment under the clawback policy.

5 If the issuer is required to file a Form 8-K to report non-reliance on previously issued financial statements under Item 4.02(a) the date should coincide with the occurrence of the event described in that item.

6 The three permissible exceptions are (i) the issuer reasonably determines that the expense paid to a third party to recover the incentive compensation would exceed the amount of the incentive compensation to be recovered, making recovery impracticable (ii) the recovery of the incentive compensation would violate a law of the issuer's home country that was passed before the final rule is published in the Federal Register and (iii) the recovery of the incentive compensation would cause an otherwise tax-qualified retirement plans to fail to meet qualification requirements.

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