by Effective January 27, 2023, some employers will be subject to a new regulation requiring them to recoup money from company officers who got bonuses or other incentives based on incorrect financial reporting. The regulation comes from the Securities and Exchange Commission (SEC), the federal agency that sets reporting requirements for publicly traded companies (i.e., companies with stock listed on a national security exchange).
The rule addresses situations where a company prepares and distributes a required accounting statement and the company uses the financial reporting measures in the statement to determine executive incentive pay. The company may be required to prepare an accounting restatement if the statement is later determined to be inaccurate or based on incorrect data. This may mean that the incentive pay received due to the original accounting statement was erroneously granted. The new regulation requires national securities exchanges to establish listing standards that require every issuer of their listed securities to develop and implement a clawback policy providing for incentive-based compensation erroneously received during the three years preceding the date of an accounting restatement to be recouped. This mandated company policy is not contingent on the executive’s knowledge of the erroneous financial accounting. The recoupment from the executive is not based on a determination that the executive committed any misconduct regarding the faulty financial accounting.
The national security exchanges have 90 days from the rule’s effective date to file their proposed clawback listing standards with the SEC. The standards must be effective by November 28, 2023. Listed employers will have sixty days from the date of the exchange’s new listing standards to adopt a compliant clawback policy.
Not all incentive pay is subject to this rule. If compensation was not based on the achievement of one of the financial reporting measures, it would not be subject to the clawback requirement. There are other details of the rule, including a prohibition on employers indemnifying executives for compensation repayment and exceptions to the requirements that could affect specific situations. Publicly traded companies should consult with their legal counsel to understand how this new requirement will affect their compensation plans and practices.
For more information: https://www.sec.gov/files/221025-clawbacks-final-rule-fact-sheet-embargo.pdf
