Reed Smith Client Alerts

The SEC adopted final compensation clawback rules (the “Clawback Rules”) that direct the national (US) securities exchanges and associations (“exchanges”) to adopt listing standards requiring listed issuers to (i) adopt and comply with a written clawback policy, (ii) file the clawback policy as an exhibit to their annual report and (iii) disclose information in their annual report and proxy statement if there was a restatement that triggered clawback during the last fiscal year, or if there was an outstanding balance of excess incentive-based compensation from a prior year.

Under the Clawback Rules, a compliant clawback policy must provide for recovery of incentive-based compensation erroneously received by a current or former executive officer during the three fiscal years preceding a required accounting restatement. The amount subject to clawback is the excess of the compensation received over the amount that would have been received based on the restated amounts.

Notably, the Clawback Rules differ in many respects from the executive clawback requirements under Section 304 of the Sarbanes-Oxley Act of 2002, including by applying to a broader group of executive officers and irrespective of fault or misconduct on the part of the executive officers. They also differ from most issuer’s existing clawback policies by using a three-year lookback period and calculating the excess compensation that must be recovered on a pre-tax basis.


Each exchange must adopt listing standards consistent with the Clawback Rules effective no later than one year following publication of the Clawback Rules in the Federal Register. Issuers must adopt a compliant clawback policy within 60 days after the effective date of the exchange’s new listing standard.

Key Provisions

Affected Issuers

The Clawback Rules will generally apply to all issuers, including smaller reporting companies, emerging growth companies and foreign private issuers. Failure to adopt and comply with a compliant clawback policy will result in an issuer being subject to delisting.

Covered Executive Officers

The clawback policy must cover any current or former “executive officers”, which consists of the same officers covered by Rule 16a-1(f) and includes the issuer’s president, principal financial officer, principal accounting officer (or if there is no accounting officer, the controller), any vice president in charge of a principal business unit, division or function, and any other person who performs policymaking functions for the company, who received incentive-based compensation during the applicable lookback period.

Covered Compensation

The compensation potentially subject to clawback includes any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a financial reporting measure. The Clawback Rules included the following non-exhaustive list of financial reporting measures:

  • Revenues
  • Net income
  • Operating income
  • Stock price
  • Total stockholder return
  • Liquidity measures such as working capital or operating cash flow
  • Profitability of one or more reportable segments
  • Financial ratios such as accounts receivable turnover and inventory turnover rates
  • Net assets or net asset value per share
  • Funds from operations and adjusted funds from operations
  • Return measures such as return on invested capital and return on assets
  • Earnings measures such as earnings per share
  • Cost per employee, where cost is subject to an accounting statement
  • Any financial reporting measures relative to a peer group, but only where the company’s financial reporting measure is subject to an accounting restatement
  • Tax basis income

Restatement Triggers; Lookback Period

The Clawback Rules require recovery of incentive-based compensation erroneously received during the three fiscal years prior to the fiscal year in which the issuer is required to prepare an accounting restatement that corrects (i) an error in previously issued financial statements that is material to the previously issued financial statements (“Big R” restatement) or (ii) an error that is not material to previously issued financial statements, but would result in a material misstatement if (A) the error was left uncorrected in the current report or (B) the error correction was recognized in the current period (“little r” restatement). Whether an error is material should be determined based on the relevant facts and circumstances and consistent with SEC guidance for other materiality judgments, such as Staff Accounting Bulletin No. 99.

Recovery Amount

The amount subject to clawback is the excess of the compensation received over the amount the executive officer would have received based on the restated numbers, determined on a pre-tax basis. Where the incentive compensation is based on stock price or total stockholder return and the amount of erroneously awarded compensation is not subject to mathematical recalculation directly, reasonable estimates can be used to calculate the excess amount.

No Indemnification or Issuer-Paid Insuranc

The Clawback Rules prohibit issuers from indemnifying or providing insurance for their executive officers for required recovery of erroneously awarded compensation.