Executive Compensation Clawbacks: SEC Proposes Rules for U.S.-Listed Issuers

The SEC has proposed new executive compensation clawback rules. At risk would be any type of incentive compensation tied to a financial reporting measure or tied to stock price or total shareholder return, in situations where the issuer restates its financial statements to correct a material error. Incentive compensation received by an executive officer based on erroneous data would have to be clawed back to the amount that would have been received had the accounting been done correctly.

The proposed clawback rules would apply to issuers listed on U.S. stock exchanges, including Canadian MJDS issuers, other foreign private issuers, controlled companies and emerging growth companies.

Impact on Canadian Cross-Listed Issuers

There are currently no Canadian rules mandating clawbacks of executive compensation, although the Canadian Coalition of Good Governance recommends that issuers adopt clawback policies and over 75% of issuers in the S&P/TSX 60 Index have done so. A Canadian issuer that has a clawback policy or that decides to adjust or recover incentive compensation must disclose its practices in its annual meeting circular.

Compared to Canadian issuers’ voluntary clawback policies, the rules being proposed by the SEC are very broad. They would be triggered even in the absence of wrongdoing by any officer and they would grant the issuer very little discretion to decide not to pursue full recovery of erroneously awarded compensation.

The SEC may revise its proposed rules in response to feedback from market participants, so we do not recommend that Canadian issuers amend their existing clawback policies or adopt a policy for the first time until the new rules are finalized—likely in Q4 2015 or Q1 2016. We do recommend that issuers begin to prepare for new clawback requirements, including considering the need for a revised or new policy and potential amendments to incentive compensation arrangements.

Overlap With Existing U.S. Clawback Rules

The SEC’s proposed rules, which are mandated by the Dodd-Frank Act, would supplement, not replace, the existing U.S. clawback rules under the Sarbanes-Oxley Act, which similarly apply to both U.S. and non-U.S. issuers (see Appendix A for a summary of the differences between the proposals under Dodd-Frank and the existing Sarbanes-Oxley rules). The SEC has stated that executive officers will not be subject to double recovery; compensation clawed back under one set of rules would offset any amount owing under the other set of rules.

Key Elements of the Proposed Clawback Rules

  1. Issuers would have to adopt and enforce a clawback policy that complies with SEC requirements. Failing to do so could result in the issuer being delisted from a U.S. stock exchange. The policy would have to be filed with the SEC.
  2. “No-Fault” Rule. Incentive-based compensation must be clawed back even if the accounting restatement was not caused by any wrongdoing and even if an executive officer had no responsibility for financial reporting. Issuers would not be permitted to indemnify or insure executive officers in respect of clawed-back compensation.
  3. Three-Year Look Back. Once it is determined that a financial restatement is necessary due to a material error, executive officers’ incentive compensation for the preceding three fiscal years, to the extent based on erroneous data, is liable to be clawed back. The three-year look-back applies even if the executive officer is no longer employed by the issuer.
  4. Compensation at Risk. Compensation at risk of being clawed back includes annual and long-term cash bonuses, shares, options, share appreciation rights (SARs), performance share units (PSUs) and any other award that is granted, vested or earned based on a financial reporting measure or based on the issuer’s stock price or total shareholder return. Examples of financial reporting measures include revenue, EBITDA, return on assets, working capital, operating cash flow and segment performance measures. In the case of incentive compensation based on the issuer’s stock price or total shareholder return, where the amounts cannot be recalculated simply from information in the accounting restatement, issuers will be permitted to use reasonable estimates.   
  5. Discretion not to Pursue Recovery. Issuers would have discretion not to pursue recovery of erroneously awarded compensation if
      • the issuer makes a reasonable effort to recover the compensation and the compensation committee determines that the direct costs of further recovery efforts would exceed the amount to be recovered; or
      • in the case of a non-U.S. issuer, recovering the compensation would violate home-country law (clawbacks would not violate Canadian law but their enforceability is more certain if they are reflected in an officer’s employment or award agreement).  
  1. Form of Compensation Recovered. The form of compensation to be recovered by the issuer would depend on what the executive officer holds at the time of recovery, as follows:
      • erroneously awarded cash would be recovered if an officer were awarded cash;
      • erroneously awarded shares, options, SARs, PSUs or other securities would be recovered if the officer still held them at the time of recovery;
      • in respect of exercised awards, the underlying securities would be recovered if not yet sold by the officer; and
      • the proceeds of sale would be recovered if shares or underlying securities were already sold at the time of recovery.

Annual Disclosure About Clawbacks

The SEC’s proposed rules would require issuers to disclose the following each year:  

  • the total amount of erroneously awarded incentive compensation attributable to a financial restatement;
  • the outstanding amount to be recovered from executive officers in aggregate as of fiscal year end;
  • any estimates used to determine the amount of erroneously awarded compensation based on stock price or total shareholder return;
  • the name of any executive officer and the amount of his or her excess compensation outstanding for more than 180 days; and
  • if the issuer has exercised discretion not to pursue recovery, the reasons why, the name of the executive officer and the amount forgone.


The SEC’s proposed rules are open for a 60-day comment period. The U.S. stock exchanges will have one year to amend their listing standards after the SEC publishes final rules. Once the listing standards are amended, issuers will have 60 days to adopt a clawback policy. This means issuers could wait until 2017 to adopt a policy. However, we expect the SEC’s final rules to be published sometime in Q4 2015 or Q1 2016, and that date will be the relevant look-back date, meaning incentive compensation granted, earned or vested in respect of a fiscal period ending on or after that date will be subject to potential clawback in case of a financial restatement.

Appendix A: Proposed vs. Existing Executive Compensation Clawback Rules


Proposed SEC Rules

Existing SOX Rules

Officers Affected

current and former executive officers1


Culpability Trigger

accounting restatement (no-fault)

accounting restatement due to misconduct

Period of Compensation-at-Risk

three fiscal years preceding determination that accounting restatement is required (but no earlier than date of SEC final rules)

12 months following publication of misstated financial statements

Type of Compensation

incentive compensation erroneously received during at-risk period based on financial reporting measure, stock price or total shareholder return; trace to sales of securities

incentive compensation received, and profits from sales of securities, during 12-month at-risk period


issuers must adopt and enforce their own clawback policies or risk being delisted from U.S. stock exchange

SEC enforcement action


1 The proposed rules define the term "executive officer" as the issuer’s president, principal financial officer, principal accounting officer, vice-president in charge of a principal business unit, division or function, any other officer who performs a policy-making function, and any other individual who performs a similar policy-making function for the issuer.

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