Stock Exchange Deadline Approaches for Adopting SEC Compliant Clawback Policy

With the Labor Day holiday now in the rear view mirror, we wanted to remind companies whose shares are listed on the NYSE/Nasdaq stock exchanges that the deadline for implementing a so-called “Clawback Policy” is fast approaching. As we reported in our November 3, 2022 blog, “Another Seven Year Wait is Over! SEC Finalizes Regulations on Clawback of Incentive Compensation for Restated Financial Statements”), the Securities and Exchange Commission (the “SEC”) published final regulations (Release No. 34-96159) (the “Final Rules”) requiring specified publicly-held companies to adopt, disclose and maintain a policy to recover incentive compensation which was previously paid to specified company employees based on financial statements that were subsequently restated by the company such that the overpaid incentive compensation needs to be repaid back to the company by the covered employees. 

On June 9, 2023, the SEC approved (see NYSE approval and Nasdaq approval) the NYSE and Nasdaq proposals which augmented their listing standards (see NYSE rule 303A.14 and Nasdaq rule 5608) in order to comport with the Final Rules. Each new listing standard has an effective date of October 2, 2023 such that incentive-based compensation received on or after this date must be subject to the Clawback Policy. However, listed companies have until 60 days after this effective date (i.e., until December 1, 2023) to adopt a compliant Clawback Policy. The listing standards essentially mirror and track to the Final Rules.

We note that Institutional Shareholder Services (“ISS”) in determining whether or not to recommend that stockholders approve new/amended equity compensation plans has a published FAQ that recites a clawback “policy should authorize recovery upon a financial restatement and cover all or most equity-based compensation for all NEOs (including both time- and performance-vesting equity awards). A clawback policy that adheres to the minimum requirements of the SEC’s finalized clawback rules under Dodd-Frank will not receive EPSC points, because the final rules generally exempt time-vesting equity from compensation that must be covered by the policy.” In other words, a Clawback Policy that does not cover time-based equity compensation awards would not receive any credit under the ISS scoring process. Companies will want to consider this and whether to have their Clawback Policy go beyond the SEC minimum requirements and cover time-based awards.

What’s Next?

Publicly-held companies who are subject to the Final Rules and stock exchange listing standards should ensure that they are on track to adopt and implement a compliant Clawback Policy by no later than required deadline. As we have noted above and in our prior blogs, companies may also wish to have their Clawback Policies go beyond what is required (e.g., covering awards other than just performance-based awards; covering a broader group of employees; or imposing a clawback based on employee culpability whether or not there is a financial restatement).

If you have any questions regarding this information, please contact Greg Schick at (415) 774-2988; gschick@sheppardmullin.com.

Disclaimer

This update has been prepared by Sheppard, Mullin, Richter & Hampton LLP for informational purposes only and does not constitute advertising, a solicitation, or legal advice, is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments. Sheppard, Mullin, Richter & Hampton LLP expressly disclaims all liability in respect to actions taken or not taken based on the contents of this update.