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SEC Adopts Final Dodd-Frank Act Clawback Rules

The Securities and Exchange Commission has issued final rules under which the national securities exchanges and associations will require listed issuers to adopt and operate accounting restatement-based clawback policies that apply to current or former executive officers, on a "no-fault" basis, for the recoupment of erroneously awarded incentive compensation.

On October 26, 2022, the Securities and Exchange Commission adopted final rules implementing the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act clawback policy requirements. Under these requirements, the SEC directed the national securities exchanges and national securities associations that list securities to establish clawback listing standards. These clawback listing standards will require each listed issuer to adopt and provide certain disclosure regarding a written compensation recovery (clawback) policy providing for the recovery, in the event of a required accounting restatement, of incentive-based compensation received by current or former executive officers (generally Section 16 officers) that is based on erroneously reported financial information. The SEC's final rules also require disclosure regarding the clawback policy, including filing it as an exhibit to the listed issuer's annual report and providing (where applicable) certain disclosure regarding the operation of the clawback policy. 

The SEC's final rules generally reflect adoption of the initially proposed rules but with certain modifications, primarily to broaden the scope of covered accounting restatements to include so-called "little r" accounting restatements and to clarify the applicable rules. Importantly, the SEC's final rules do not permit listed issuers to condition clawback in any way on the fault or culpability of an affected executive officer regarding the accounting restatement, to implement de minimis thresholds for clawbacks or recoverable amounts of erroneously awarded incentive compensation, or allow for boards of directors to exercise broad discretion in connection with determining whether certain compensation should be clawed back in light of the circumstances.

The stock exchanges must file their proposed clawback listing standards with the SEC no later than 90 days after the SEC's final rules are published in the Federal Register, and the clawback listing standards must become effective no later than one year following such publication. Affected issuers then must: (i) adopt a compliant clawback policy no later than 60 days after the applicable clawback listing standards become effective; and (ii) comply with new clawback disclosure requirements under the SEC's final rules on and after the clawback deadline. Under this timetable, the clawback deadline for issuers to adopt compliant clawback policies will likely occur during late 2023 or early 2024.

The full release detailing the new rules can be found on the SEC's website.

A more comprehensive White Paper that explains the key elements or operation of the SEC's final rules can be found here.

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