FAQs on Nasdaq & NYSE Executive Compensation Clawback Policy Requirements | JD Supra

The NYSE and Nasdaq recently made changes to their proposed policies, which now require all businesses to implement suitable policies for reclaiming executive compensation. The updated regulations will take effect on October 2, 2023, and firms must adopt compliant clawback policies by December 1, 2023, which is 60 days after the regulations take effect.

What does the term clawback entail?

According to Section 10D of the Exchange Act, it's mandatory to implement the suggested listing standards that call for recovery of incentive compensation paid to top-ranking officers if it was figured out using financial statements that had to be corrected because of serious violations of financial reporting regulations. Moreover, this noncompliance led to overpayment of the incentive compensation in the three fiscal years preceding the day the correction had to be made.

Clawbacks may be triggered by restatements that fix mistakes in financial statements that were previously issued. These are known as "Big R" restatements. In addition, if a restatement is made to fix a mistake that wasn't significant in previous financial statements but would have a big impact on the current period if left uncorrected, it is called a "Little r" restatement and may also trigger a clawback.

Which entities are included?

Every company that is listed is obligated to abide by the clawback rule, except for a few exceptions. This involves international private issuers, minor reporting companies, developing enterprises, and firms under control by a few individuals.

Who does the clawback policy apply to?

The clawback policy should apply to all previous and present executive officers. The meaning of executive officer is the same as defined by the Section 16 officer in the Exchange Act. The group should include at least the executive officers mentioned by the issuer in their proxy statement or Form 10-K.

Have you ever heard of "incentive-based compensation"? It refers to a type of compensation that is tied to performance. This means that an employee's compensation can increase or decrease based on how well they are doing their job. Some common examples of incentives include bonuses, commissions, and profit-sharing plans. Incentive-based compensation can be a powerful motivator for employees, as it gives them a direct stake in the success of the company. However, it is important to have clear and objective criteria for determining performance, as well as a system for monitoring and evaluating employee performance.

Incentive-driven wages entail compensation, whether in cash or equity, that is awarded, gained, or qualified based on achieving any financial reporting criteria.

Incentive-driven payment does not include salary earned without meeting a financial goal, like fixed pay, impromptu rewards, or time-driven prizes, along with rewards based on personal judgement, strategic or operational standards.

At what point is incentive-based pay considered as being "received"?

Reward-based payment is considered "earned" in the company's accounting period in which the specific financial performance target outlined in the reward-based payment system is achieved. This is true even if the actual payment or allocation of the reward-based payment takes place after the accounting period has ended.

What is the method used to calculate the reclaimed compensation?

The tally of the funds recovered is the same as the payment received as a result of incentives, but goes beyond the payment that would've been received if it was determined based on the revised amounts and isn't calculated with the consideration of any taxes that were paid.

What's the process for deciding the recovery of incentive-driven payment connected to share value or overall shareholder profits (TSR)?

When the compensation given depends on the stock price or TSR, the amount that needs to be recovered should be calculated based on reasonable guesses of how the accounting restatement will impact the TSR. The company must keep track of these calculations and show them to the exchange.

Which duration should the clawback policy encompass?

The rule should be valid for all types of rewards a person may receive (as described earlier) within three whole years before the date when the company needs to make a financial correction.

What circumstances make it necessary for an issuer to create an accounting restatement?

The company must create a report of their financial status as soon as one of the following occurs:

Does the provider have to try and get back incentive-based payment that was sent to them in error?

Certainly, issuers must make efforts to recover funds in a timely manner with only a few exceptions. This rule applies even when the amount in question is small.

Can businesses decide how they want to recover their losses?

Definitely, if incentive-based compensation was received by accident, the issuer has the freedom to choose how it should be recovered, as long as it's done in a reasonable timeframe. It's possible to forfeit equity awards, give back received shares, or repay any profits made from selling mistakenly received shares.

Is it possible for a company to compensate its former or current executives in case they suffer losses due to receiving incentive-based compensation erroneously?

What happens if you don't follow these listing requirements?

Companies that are listed on Nasdaq or NYSE will be in danger of being removed from those exchanges if they do not implement a clawback policy that meets the requirements within two months of the date it becomes effective, or if they do not follow through with enforcing their clawback policies.

What is the start date for the new listing standards?

In case the SEC nods in agreement, the NYSE and Nasdaq standards for listing will take effect on October 2, 2023. Issuers will then have to put in place clawback policies that meet the requirements by December 1, 2023, which is 60 days after the standards become effective.

What are the responsibilities for revealing information?

Companies must include their clawback policy as an attachment to their annual report on Form 10-K. If a top-level executive is affected by the policy, businesses must provide more information such as how much wrongly granted incentive-based money they received and how this was calculated. They must also disclose any funds that have not yet been repaid.

What measures must the individuals who issue something contemplate?

Those who release something should think about doing the subsequent activities:

Paul Tetenbaum, who is a summer associate, collaborated on this piece of writing for the blog.

.01; each of these codes refers to a set of corporate governance standards that publicly traded companies must adhere to. These standards cover a range of topics, including board composition, executive compensation, and shareholder rights. [2] Companies listed on the New York Stock Exchange (NYSE) and Nasdaq stock market must follow certain rules related to how their boards are made up, how much executives are paid, and how shareholders are treated. These rules are called NYSE 303A.14 and Nasdaq 5608.01. They help ensure companies are taking steps to be transparent and accountable to investors.

The Securities Exchange Act of 1934 has a specific section, namely 10D, that is now in effect as of January 27, 2023. This section requires national securities exchanges and associations to create a written clawback policy for securities issuers that are listed. Every listed issuer must create and implement a policy that ensures the recovery of incentive-based compensation that was given to current or former executive officers in error.

The latest regulations do not allow for the retrieval of the incentive-based pay given to a present executive officer when they held a non-executive position. Someone who used to be an executive working for the company and received incentive-based salary within the past three fiscal years before the accounting restatement is considered a former executive officer.

This implies that people who hold the position of Section 16 officers but are not categorized as executive officers by the company, like a non-executive controller, may face the possibility of having to return their compensation under the clawback policy.

If the entity needs to submit a Form 8-K informing about discrepancies in previously provided financial statements under Item 4.02(a), the date on the form should match when the related event took place.

There are three situations where the recovery of incentive compensation is allowed. Firstly, if the issuer finds that it would be too expensive to pay a third party to recover the incentive compensation and it would be impractical to do so. Secondly, if the recovery would be against a law in the issuer's home country that was in place before the final rule was published in the Federal Register. And thirdly, if the recovery of the incentive compensation would prevent a tax-qualified retirement plan from meeting the qualification requirements.