SEC Adopts Requirements for Clawback of Erroneously Awarded Compensation

SEC Adopts Requirements for Clawback of Erroneously Awarded Compensation

Client Alert


The long-anticipated rules regarding recovery of erroneously awarded incentive-based compensation, commonly referred to as a “clawback,” were adopted by the Securities and Exchange Commission by a 3-2 vote on October 26, 2022. Continuing with recent rulemaking trends, the Commission has taken a prescriptive approach to new Rule 10D-1 and the related other amendments, expanding significantly beyond the scope of the initial clawback proposal from 2015 in a few important respects.  (See our prior client alert.) These rules have important implications for public companies and their audit committees, compensation committees and “executive officers,” with no exemptions available for emerging growth companies, smaller reporting companies or foreign private issuers.


The new rules require national securities exchanges to establish listing standards requiring listed companies to develop, implement and disclose clawback policies. These clawback policies will, with extremely limited exceptions, require a listed company to recover from its executive officers incentive-based compensation received as a result of erroneous financial results during a three year look-back period when the listed company is required to prepare an “accounting restatement.” Failure to comply with these new requirements will subject listed companies to delisting.

Key Provisions

Executive Officers

The “executive officers” subject to potential clawbacks tracks the same officers covered by Rule 16a-1(f) and includes the issuer’s current and former president, principal financial officer, principal accounting officer (or if there is no such accounting officer, the controller), any vice-president of the issuer in charge of a principal business unit, division, or function (such as sales, administration, or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer. This also includes executive officers of the issuer’s parents or subsidiaries who perform such policy making functions for the issuer. At a minimum, all executive officers identified in either the issuer’s proxy statement or Form 10-K pursuant to Regulation S-K Item 401(b) are in scope. These executive officers are covered without regard to whether they were the cause of the restatement or have any role in financial reporting.

Accounting Restatement

Critically, the types of accounting restatements covered by the new requirement are quite broad and far exceed the 2015 proposal.  Under the final rules, clawbacks are triggered irrespective of wrongdoing or misconduct – an honest accounting error can trigger a clawback. In addition to “Big R” restatements where an issuer amends previously issued financial statements to correct errors that are material to such financial statements, a clawback would also be triggered by “little r” restatements, which do not involve restating previously issued financial statements. As defined in the adopting release, “little r” restatements are those that “correct errors that would only result in a material misstatement if the errors were left uncorrected in the current report or the error correction was recognized in the current period.” A clawback would not, however, be triggered if an issuer makes an out-of-period adjustment “when the error is immaterial to the previously issued financial statements, and the correction of the error is also immaterial to the current period.” In addition, a clawback would not be triggered in a number of limited circumstances specified in the adopting release where the restatement does not involve the correction of an error:

  • Retrospective application of a change in accounting principle;
  • Retrospective revision to reportable segment information due to a change in the structure of an issuer’s internal organization;
  • Retrospective reclassification due to a discontinued operation;
  • Retrospective application of a change in reporting entity, such as from a reorganization of entities under common control;
  • Retrospective adjustment to provisional amounts in connection with a prior business combination (IFRS filers only); and
  • Retrospective revision for stock splits, reverse stock splits, stock dividends or other changes in capital structure.

Incentive-Based Compensation and Periods Subject to Clawback

The compensation potentially subject to clawback includes “any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a financial reporting measure.” This includes equity- and cash-based compensation. The Commission opted for a broad principles-based definition to ensure the rule will “capture new forms of compensation that are developed and new measures of performance upon which compensation may be based.” The adopting release sets forth several examples of incentive-based compensation measures, many of which clearly are GAAP or non-GAAP measures derived from an issuer’s financial statements (e.g., revenues, segment profitability, EBITDA, etc.). The adopting release also lists other examples of incentive-based compensation measures that may not be apparent from the general principles-based definition, including:

  • Unitized measures that include a GAAP measure subject to restatement (e.g., sales per square foot, revenue per user or cost per employee);
  • Financial measures relative to a peer group where the issuer’s financial reporting measure is subject to restatement; 
  • Tax basis income;
  • Stock price; and
  • Total stockholder return (TSR).

The amount of the clawback must be equal to the amount of 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 by the executive officer. The adopting release acknowledges challenges that may arise when calculating recoverable amounts for compensation measures, particularly those based on stock price and TSR. In those circumstances, the calculation must be based on a reasonable estimate of the effect of the accounting restatement on the stock price or TSR measures. Additionally, recovery under the clawback policy would not preclude recovery under Sarbanes-Oxley Act Section 304 (Forfeiture of Certain Bonuses and Profits), to the extent any applicable amounts have not been reimbursed to the issuer.

In terms of the periods covered, clawback policies must apply to all incentive-based compensation received at any time during the three fiscal years prior to the fiscal year in which the board, a committee of the board, or an authorized  officer “concludes, or reasonably should have concluded, that the issuer is required to prepare an accounting restatement” or a court, regulator, or other legally authorized body directs the issuer to prepare a restatement, whichever comes first. Compensation covered by a clawback extends to compensation received by a person who served as an “executive officer” during this period, provided the compensation was received after the person became an executive officer. Thus, receipt of incentive-based compensation while an executive officer during the look-back period would be included. Awards granted prior to becoming an executive officer that are “received” after the person becomes an executive officer would also be subject to clawback. Under the rules, an award is deemed “received” in the fiscal year when the applicable financial performance condition is satisfied – ministerial acts or other conditions occurring thereafter to effect issuance or payment, such as calculating the amount earned or obtaining the board of directors’ approval or certification, do not affect the determination of the date received. Additionally, the obligation to recover erroneously awarded compensation is not dependent on if or when the restated financial statements are actually filed.


The new rules will also require several new disclosures in the Form 10-K and proxy statement. Starting with the Form 10-K, two new checkboxes will be added to the cover for issuers to indicate if they have had a restatement requiring a clawback. In addition, issuers’ clawback policies must be filed as an exhibit to Form 10-K. For compensation reporting in proxy statements and Form 10-K, Regulation S-K Item 402 has been amended to require additional disclosures when the issuer is required to prepare an accounting restatement that triggers a clawback. Issuers are required to disclose the aggregate amount of recoverable compensation and any amounts that remain unrecovered for more than 180 days. Recovered compensation amounts will also be reflected in the Summary Compensation Table by reducing the amount reported in the applicable column for the fiscal year in which such compensation was initially reported.  As with other recent disclosure rulemaking, the new disclosures must be tagged using inline XBRL.


Stock exchanges are required to propose new listing standards no later than 90 days following the publication of the new rules in the Federal Register, and such listing standards are to be effective no later than one year following publication of the new rules in the Federal Register. Assuming the new rules are published in the Federal Register by November 2022, the exchanges will be required to propose new listing standards by February 2023, which are to be effective by November 2023. Listed companies will then be required to have a compliant clawback policy no later than 60 days after the listing standards take effect.

What This Means for Public Companies

Issuers should start planning for the adoption of a clawback policy that satisfies the listing standards to be adopted by the national exchanges. Given the prescriptive nature of the SEC’s rules, issuers have sufficient insights into the clawback policy requirements to begin thinking about the scope and implications of such policies, while recognizing that there could be additional considerations once listing standards are proposed and adopted by the exchanges. Conversations among boards, board committees (particularly audit and compensation), outside advisors, and management should take place prior to the exchanges’ proposals of new listing standards. Topics for consideration may include the procedural and technical requirements for implementing the new clawback requirements, the impact on any existing clawback policies or compensation agreements, the impact on issuer controls around financial reporting and restatement determinations, pay program designs (e.g., metrics used to grant incentive-based compensation), and governance around executive compensation more broadly.

What This Means for Executive Officers

The new rules increase financial risks for executive officers who receive incentive-based compensation awards. The rules require that issuers claw back compensation “reasonably promptly” and may not recover less than the entire affected compensation unless the issuer can demonstrate that recovery is impracticable. Significantly, the rules also require that the clawback amount be computed without regard to taxes paid and any such taxes may be difficult to recoup in whole or in part depending on the circumstances of the clawback.

Not surprisingly, issuers are barred from indemnifying their executive officers for required recovery of erroneously awarded compensation. Executive officers are not prohibited, however, from seeking third-party insurance to fund potential recovery obligations, provided the premiums for such insurance are not paid for or reimbursed by the issuer. Issuers are also afforded some degree of flexibility in how they settle the full recovery amount, which may include establishing a deferred payment plan, though this is an area where exchanges may prescribe more specific guidelines in proposed listing standards.



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