On June 8, the U.S. Securities and Exchange Commission (SEC) reopened the comment period for the “clawback” rule proposed in July 2015 to strengthen the disclosures and standards for recovery of erroneously awarded compensation by publicly listed companies (proposed rule). According to SEC Chair Gary Gensler, the proposed rule provides companies with an “opportunity to strengthen the transparency and quality of corporate financial statements as well as the accountability of corporate executives to their investors.” This article will provide a brief summary of the proposed rule and other SEC guidance with respect to executive compensation clawbacks.

Proposed Rule on Listing Standards for Recovery of Erroneously Awarded Compensation

The proposed rule seeks to amend certain rules and forms to implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended (Dodd-Frank Act), which added Section 10D to the Securities Exchange Act of 1934 (Exchange Act), and create new Rule 10D-1 of the Exchange Act. Under Section 10D(a) of the Exchange Act, national securities exchanges are instructed to prohibit the listing of a company’s securities if they are not in adherence with the requirements of Section 10D(b) of the Exchange Act. Section 10D(b) of the Exchange Act requires companies to disclose their policies on incentive-based compensation as based on their financial information; and in the event of material noncompliance with financial reporting requirements, to prepare an accounting restatement to correct the errors and recover from any “current or former executive officers who received incentive based compensation (including stock options awarded as compensation) during the three-year period preceding the date the [company] is required to prepare the accounting restatement, based on the erroneous data, in excess of what would have been paid to the executive officer under the accounting restatement.”