November 10, 2022Calculating...

SEC adopts compensation clawback rules for U.S.-listed companies

The U.S. Securities and Exchange Commission (SEC) has adopted final rules directing U.S. stock exchanges (such as the NYSE or Nasdaq) to establish listing standards that will require their listed companies to implement a clawback policy for the recovery of incentive-based executive compensation received by current or former executive officers if the company has to restate its financial statements1. The SEC rules will also require U.S-listed companies to publicly file their clawback policy with their annual report and disclose how they have applied the policy, if relevant.

What you need to know

  • Applicable to MJDS and foreign private issuers: Subject to limited exceptions, the new rules will apply to all U.S.-listed companies, including, among others, U.S.-listed Canadian companies that report under the U.S./Canada multijurisdictional disclosure system (MJDS) and foreign private issuers.
  • Compliance timeline: U.S. stock exchanges will have to adopt clawback listing standards that take effect no later than one year after the SEC’s final rules are published in the Federal Register2. Every U.S.-listed company will have to adopt a clawback recovery policy within 60 days after its stock exchange’s new clawback listing standards become effective. Consequently, the substantive requirement for U.S.-listed companies to develop and implement a clawback policy might not go into effect until over a year from now, and the disclosure requirements will not take effect until after the company is required to adopt a clawback policy under its exchange’s listing standards.
  • What will trigger compensation clawback? The required clawback policy must provide for the recovery of “erroneously awarded” incentive-based compensation from the company’s current and former executive officers. Incentive-based compensation will be considered to have been erroneously awarded if:
    • a listed company is required to make an accounting restatement due to material non-compliance with any financial reporting requirement under U.S. securities laws; and
    • it was paid to the company’s current or former executive officers during the three completed fiscal years immediately preceding the date that the issuer is required to prepare the accounting restatement.
  • What must be clawed back? The company’s clawback policy must provide for the recovery of the pre-tax amount of incentive-based compensation received by executive officers in excess of what would otherwise have been received if the compensation had been determined based on the restated financial measure. Such compensation is subject to clawback regardless of whether there has been any formal adjudication of wrongdoing (such as in connection with a shareholder lawsuit or SEC enforcement action).
  • Disclosure requirements: The SEC rules will also require every U.S.-listed company to publicly file its clawback policy as an exhibit to its annual report on Form 10-K, 20-F or 40-F (whichever is applicable).


Subject to limited exceptions, the new rules will apply to all companies with equity, preferred or debt securities listed on a “national securities exchange”, such as the NYSE or Nasdaq (but not companies whose securities are merely quoted on an over-the-counter market in the U.S). There are no exceptions for foreign private issuers, Canadian companies reporting under the MJDS, controlled companies, emerging growth companies, smaller reporting companies, special purpose acquisition companies or business development companies.

Exceptions, however, will apply to U.S.-listed issuers of security futures products and standardized options, issuers of unit investment trust securities and certain issuers of registered investment company securities.

Summary of the SEC clawback rules

The SEC’s compensation clawback rules were adopted to implement Section 10D of the Securities Exchange Act of 1934, which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Once the applicable U.S. listing standards take effect, every U.S.-listed company (including any U.S.-listed company that is a foreign private issuer and Canadian company reporting under the MJDS) subject to the rules must:

  • adopt and comply with a written policy for the recovery of erroneously awarded incentive-based compensation (as described under “What you need to know” above);
  • publicly file the clawback policy as an exhibit to the company’s annual report on Form 10-K, 20-F or 40-F, whichever is applicable, including providing the information in XBRL-tagged format;
  • check a box on the cover of its annual report to indicate whether the financial statements included in the filing reflect correction of an error to previously issued financial statements and whether any of those error corrections are restatements that required a clawback recovery analysis; and
  • if any accounting restatement occurred during the most recently completed fiscal year (or at any time thereafter and prior to the date of the report), include disclosure in its annual report on the following matters3:
    • the dates of any accounting restatements and the amounts recoverable under the clawback policy for such restatements,
    • the company’s approach to recovery of recoverable amounts under its clawback policy,
    • the aggregate recoverable amount that remains outstanding and any outstanding amounts due from any current or former executive officer for 180 days or more, and
    • details regarding the company’s reliance on any impracticality exceptions to recovery (as described under “Impracticality exceptions to recovery” below).

The required clawback policy will apply both to restatements that are required to correct a material error in previously-issued financial statements (so-called “Big R Restatements”) and restatements that are required in the current period only to avoid a material misstatement resulting from either an uncorrected error or the recognition of a corrected error in the current period (so-called “Little r Restatements”). Little r Restatements may include restatements that are sometimes required due to the cumulative effects of an error over multiple reporting periods. By contrast, clawbacks will not apply to out-of-period adjustments that are not “accounting restatements” or to changes in accounting principles, reclassifications due to discontinued operations and other retrospective revisions and adjustments that do not represent error corrections.

The mandated clawback policy will require a U.S.-listed company to recover the amount of pre-tax, incentive-based compensation received by its executive officers4 in excess of the amount that otherwise would have been received had that compensation been determined based on the restated financial measure. “Incentive-based compensation” means any compensation that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure.

The SEC has defined “financial reporting measures” broadly to mean measures that are determined and presented in accordance with the accounting principles used in preparing the issuer’s financial statements, and any measures derived wholly or in part from such measures. As defined, this would include non-GAAP financial measures, as well as other measures, metrics and ratios that are not non-GAAP measures, such as same-store sales or turnover rates. In addition, the definition of “financial reporting measures” specifically includes stock price and total shareholder return (TSR).

Erroneously awarded incentive-based compensation must be clawed back regardless of whether:

  • there has been any formal adjudication of wrongdoing; and
  • the executive officers had knowledge of or direct involvement in the error that led to an accounting restatement.

The policy must also be applied to former executive officers who served as executive officers at any time during the applicable performance period.

U.S.-listed companies will be prohibited from indemnifying or insuring any current or former executive officer for the recovery of clawback amounts.

Once the rules come into effect, a U.S.-listed company may be subject to delisting if it does not adopt and disclose its clawback policy in accordance with the rules.

Impracticality exceptions to recovery

The requirement for U.S.-listed companies to recover incentive-based compensation from executive officers if there is a financial restatement is subject to the following impracticality exceptions:

  • the direct expenses paid to third parties to assist in enforcing the clawback policy would exceed the amount to be recovered and the company has made a reasonable attempt to recover;
  • recovery would violate home country law adopted prior to the time of publication of the new SEC rules in the Federal Register and the issuer provides an opinion of counsel to that effect to the U.S. stock exchange; or
  • recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the U.S. Internal Revenue Code.

The applicability of each of these exceptions must be confirmed by the company’s independent directors and is subject to review by the applicable U.S. stock exchange. We do not expect that Canadian companies will be able to rely on the home country law exception described above.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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