5 May 2023
The deadline for US listed companies to comply with the new clawback reforms looks to be sooner than anticipated following recent SEC discussions.
On 26 October 2022, the US Securities and Exchange Commission (the "SEC") adopted final "clawback" rules under Section 954 of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010. Pursuant to these rules, US national exchanges and associations (i.e., the NYSE and Nasdaq) must adopt listing standards that require listed companies to develop and implement a "clawback" policy. Under such policy, in the event of certain accounting restatements, any incentive-based compensation received during the three fiscal years preceding such restatement must be recovered from current and former executive officers to the extent that the amount received exceeds the amount they would have otherwise received under the accounting restatement.
The rules also require that the listing standards become effective no later than 28 November 2023, and that companies adopt a compliant policy within 60 days following the effective date of the new listing standards.
- 28 November 2022: the final recovery rules are officially published in the Federal Register, giving the US national exchanges and associations until 26 February 2023 to propose listing standards in compliance with the final rules.
- 22 February 2023: the NYSE and Nasdaq propose their new listing standards, which will take effect once approved by the SEC.
- 13 March 2023: the new NYSE and Nasdaq listing standards are officially published in the Federal Register, giving the public an opportunity to comment on the proposed listing standards until 3 April, 2023. Under the draft proposals, the SEC must approve or disapprove the proposed listing standard by 27 April, 2023, or within such longer period up to 11 June 2023 (as determined by the SEC).
- 3 April 2023: a collection of large US and international law firms submit a comment on the proposed listing standards requesting that the SEC not approve the adoption and effectiveness of the proposed listing standard until the 28 November 2023 deadline in order to allow listed companies time to implement compliant policies and any controls and procedure necessary to administer such policies.
- 25 April 2023: the SEC extends the deadline for it to approve or disapprove the proposed listing standards until at least 11 June 2023.
- 11 June 2023:
- this is the current deadline for the SEC to approve or disapprove the proposed listing standards.
- At the date of sending this alert, there has been no clear indication of exactly when the SEC may approve the NYSE and Nasdaq proposals, or whether the deadline will be further extended, but we understand that recent informal conversations between the SEC and US practitioners suggest that the SEC is leaning towards treating 11 June 2023 as the final date for the listing standards to become effective (though practically this will likely become 9 June 2023, since 11 June is a Sunday).
- 8 August 2023: once approved by the SEC, a listed company will have 60 days to adopt and file a compliant clawback policy. If the SEC do approve the listing standards on 9 June 2023, this means NYSE and Nasdaq listed companies will need to have a compliant policy in place by 8 August 2023 (being 60 days later).
Companies listed on the NYSE or Nasdaq should consider the timings above and bear in mind that, aside from drafting the clawback policy itself, they will also need to:
- obtain any necessary internal approvals for the new policy;
- identify affected persons and arrangements;
- update grant documentation / portal processes to make sure the relevant individuals are subject to the policy;
- consider interaction with any existing wider group malus & clawback provisions;
- consider implications of recovery under non-US laws;
- implement mechanisms that will allow for the recovery of impacted incentive-based compensation when required (e.g., holding periods); and
- attach a copy of the policy with their Form 10-K or 20-F filing with the SEC each year.
If a company does not adopt a policy by the deadline, it will be required to notify the exchange within 5 days of the effective date to explain the status of the delay, and issue a press release disclosing the failure to adopt a policy.
We appreciate the uncertainty on timing of implementation, and the uncertainty of whether the SEC will approve or disapprove the NYSE/Nasdaq listing standards as proposed, is making it difficult for companies to assess exactly by when they need to be ready to implement their compliant clawback policy.
Whilst we understand that the compliance date may be delayed until November depending on the outcome of the SEC discussions, companies should look to have a contingency plan in place in the event 8 August does become the final date for company compliance. Companies might therefore decide to draft/finalise a policy now on the basis of the current proposals so that, in the event of any SEC amendments to the proposed listing standards, quick changes can be made and any timelines can be met internally and externally. We will keep you updated on any developments on the deadlines.
It is important to also consider:
- the process for filing the clawback policy, and note that, if a company continues to fail to provide a compliant policy, the SEC can begin delisting procedures – so it is not a deadline you want to miss!
- the future disclosure requirements in connection with any accounting restatements that actually occur.
Thank you to our US counsel Chris Potash (from Harter Secrest & Emery LLP) for his continued support on these developments.
If you need any assistance with your approach to clawback following the reforms, in the US or globally, please do contact us and we would be happy to help.
Emilie and Sally