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On October 26, 2022, the Securities and Exchange Commission (SEC) adopted final rules that will require listed companies to disclose and implement policies to “claw back” or recover incentive compensation paid as a result of erroneously reported financial information that is subject to a required accounting restatement. The rules implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 10D of the Securities Exchange Act of 1934.


New Exchange Act Rule 10D-1 directs the exchanges to establish listing standards that will require companies to develop, implement and properly disclose written policies for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers. The requirement to claw back will apply to incentive-based executive compensation awarded based on financial information that becomes subject to a subsequent accounting restatement due to its material noncompliance with financial reporting requirements during the three fiscal years immediately preceding the date that the issuer is required to prepare the accounting restatement. 

In short, companies must recover (on a pre-tax basis) the amount of incentive-based compensation received that was in excess of the amount that the current or former executive officer would have received based on the restated amount, subject to certain narrow exceptions.  

Additional Detail Regarding Clawbacks

Receipt of Compensation

The SEC has defined the “receipt” of compensation as occurring when the relevant financial reporting measure was attained, regardless of when the payment may have actually been made, within the three-year period preceding the date the issuer is required to prepare the restatement. Compensation received prior to the time an individual is deemed an executive officer (using the Rule 3b-7 definition), will not be subject to clawback, but incentive compensation received during the recovery period by a former executive officer will be subject to clawback.

The clawback will only apply to “incentive-based” compensation, which does not include compensation based solely on continued employment for a specified period of time, such as time-vesting awards, or compensation awarded solely at the discretion of the Board of Directors, and which is in no way tied to a financial reporting measure.


Recovery of incentive-based compensation required by Rule 10D-1 will be triggered by any accounting restatement of an issuer listed on any national securities exchange or association that results from material noncompliance with reporting requirements under securities laws, without regard to fault or misconduct. In other words, recovery may be required both in the circumstance of a material error that requires a restatement of prior years’ financial statements (known as a “capital R” restatement), as well as in circumstances requiring the preparation of accounting restatement that corrects an error that, while not material to previously issued financial statements, would either result in a material misstatement if left uncorrected in the current report, or was recognized in the current period (a “small r” restatement). Situations where there is an out of period accounting adjustment, where the error is immaterial to the previously issued and current period financial statements, would not trigger the clawback requirement. Also of note is the fact that the restatement must be triggered by an error, not by revisions required due to changes in accounting principles or internal restructuring or segment revision.

Additional Compliance Requirements

The final rule further requires all listed issuers to: 1) attach their written recovery policies as exhibits to their annual reports; 2) indicate by check boxes on their annual reports whether the financial statements included in the filings reflect correction of an error to previously issued financial statements and whether any of those error corrections are restatements that required a recovery analysis; and 3) if applicable, disclose in any filing that includes executive compensation disclosure, certain actions taken pursuant to such recovery policies as outlined in Item 402 of Regulation S-K. When a listed issuer files its policy as an exhibit to its annual report and discloses how it has applied the policy, it must include, as relevant:

  • The date it was required to prepare an accounting restatement and the aggregate dollar amount of erroneously awarded compensation attributable to such accounting restatement (including the estimates used in calculating the recoverable amount in the case of awards based on stock price or total shareholder return).
  • The aggregate amount that remains outstanding and any outstanding amounts due from any current or former named executive officer for 180 days or more.
  • The details regarding any reliance on the impracticability exceptions. Issuers will be required to use Inline XBRL to tag their compensation recovery disclosure.

An issuer will be subject to delisting if it does not adopt and comply with a compensation recovery policy that meets the requirements of the listing standards.


The requirements will apply to all listed companies, including foreign private issuers, smaller reporting companies, emerging growth companies and controlled companies. The new rules will require an issuer to recover erroneously awarded compensation, subject to limited impracticability exceptions available only in circumstances where:

  • Direct expenses paid to third parties to assist in enforcing the policy would exceed the amount to be recovered and the issuer has made a reasonable attempt to recover.
  • Recovery would violate home-country law that existed at the time of adoption of the rule, and the issuer provides an opinion of counsel to that effect to the exchange.
  • Recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the Internal Revenue Code.

Effective Date

Rule 10D-1 will become effective 60 days following the publication of the release in the Federal Register. Exchanges will be required to file proposed listing standards within 90 days of such publication, which will become effective within one year of publication. Issuers subject to such listing standards will be required to adopt a recovery policy no later than 60 days following the date on which the applicable listing standards become effective.

Suggested Actions

Companies will need to prepare for the effective implementation of these rules, including taking the following suggested steps:

  • Undertake a review of any currently effective clawback policies that are in place and determine whether to undertake necessary revisions to comply with the new structure and requirements, or to create a separate stand-alone policy.
  • Work with compensation committees, consultants and advisors to evaluate current compensatory plans and arrangements to ensure that the company is well-positioned to comply with the new requirements.
  • Model what a potential clawback may look like under the company’s current compensation programs and determine whether alterations to current programs may be warranted.
  • Revisit existing protocols and documentation processes regarding each element of executive compensation programs to ensure that there is sufficient clarity and support for those elements of compensation that would be viewed as being incentive-based, and as such subject to potential future clawback.

Buchanan’s cross-disciplinary team of securities and executive compensation attorneys are ready to help your listed company navigate the impact that these new rules will have on your organization and compensation programs.