SEC Finalizes New Clawback Rules

Introduction and Background

On October 26, 2022, the Securities and Exchange Commission (SEC) adopted the final rule requiring that all listed companies adopt and disclose a clawback policy as required under Dodd-Frank. These final rules follow the SEC’s issuance of proposed rules in July 2015, which laid dormant until the re-opening of two separate comment periods in October 2021 and June 2022.

The new clawback rule requires that a listed company adopt and disclose a policy for the recoupment of incentive compensation from its current and former executive officers in the event the company is required to prepare “an accounting restatement due to material noncompliance” under the securities law (colloquially referred to as a “clawback” policy).

The final rule also requires national exchanges to prohibit the listing of any security of an issuer that does not develop and implement a clawback policy that complies with the new rule.

Recap of the Final Rules

The key provisions of the final clawback rules include the following:

Covered Group

  • Applicable to current and former executive officers (Sec. 16 definition) who received incentive-based compensation during the three fiscal years preceding the date of the restatement
  • Newly appointed executive officers are not subject to clawback for prior periods (this is a modification from the proposed rules)


  • Restatements that correct errors that are material to previously issued financial statements (“big R” restatements), or
  • Restatements that correct errors that are not material to previously issued financial statements but would result in a material misstatement if (i) the errors were left uncorrected in the current report or (ii) the error correction was recognized in the current period (“little r” restatements)

          - Excludes “out of period” adjustments (corrections of immaterial errors recorded in the current period)

          - Excludes revisions due to internal reorganizations impacting reportable segment disclosures or changes in capital structure (e.g., stock splits, stock dividends, etc.)

No Fault

  • The recovery of compensation must be made on a “no fault” basis, without regard to whether any misconduct occurred or an executive officer's responsibility for the misstated financial statements

Recovered Amount

  • The amount of the recovered incentive compensation, calculated on a pre-tax basis, is the amount that exceeds what the executive officer would have received based on the restated financial statements
  • In the case of incentive compensation that was based on total shareholder return (TSR) or stock price, companies may use “reasonable estimates” to determine the impact of the restatement on TSR or stock price to determine the recoverable amount

           - This calculation must be filed with the applicable exchange

  • The rules do not require a clawback if it is determined by the Compensation Committee or Board of Directors to be impracticable. The SEC defines impracticable to be situations where the direct cost of hiring a third-party, such as a lawyer of consultant would exceed the amount to be recovered or if the recovery would violate home country law

           - To avail itself of this exception, a company must make a good faith attempt to recover the erroneous compensation and document the cost of recovery

           - In the case of a violation of home country law, the company must obtain a legal opinion from counsel that a recovery is impermissible under local law

Definition of Incentive Pay

  • Incentive-based compensation is defined as any compensation that is granted, earned, or vested based upon the attainment of a financial reporting measure used in the Company’s financial statements or non-GAAP measures, metrics, and ratios, plus stock price and total shareholder return (TSR)
  • The final rules do not apply to time vested stock options, time vested restricted stock/units, base salaries, tax qualified retirement plans, or discretionary/subjective bonuses not linked to attainment of financial measures, including bonuses tied to operational/strategic measures

            - We suggest companies review the representative list of operational and strategic measures provided by the SEC in the final rule to evaluate which of its existing financial measures might be subject to clawback (e.g., an increase in same store sales is considered a financial metric, whereas an increase in store openings is considered an operational metric)

Disclosure Requirements

  • Policy : Must be disclosed as an exhibit to an issuer’s annual 10-K
  • Execution : Companies are required to disclose in the proxy:

           - Date required to prepare the accounting restatement;

           - Aggregate dollar amount of clawback and analysis of how the amount was calculated;

           - Aggregate amount that remains unrecovered at the end of the current fiscal year;

           - If the clawback is attributable to incentive compensation based on stock price or TSR, the estimates used to calculate the clawback amount and methodology used; and

           - Amounts owed by each executive officer that is outstanding more that 180 days or longer

  • The SEC allows aggregate disclosure for executive officers who were not NEOs to protect their privacy
  • Disclosure of recovered amounts will be in a new column on the Summary Compensation Table and reduce the “total” and applicable column (e.g., non-equity incentive plan) amounts
  • Checkbox: in addition to the above disclosure, the 10-K must include two new checkboxes on the face of the 10-K

           - One checkbox indicates whether prior year period financial statements included in the filing have been restated

           - The other checkbox indicates if a restatement triggered a clawback during the current fiscal year

Board/Committee Discretion

  • Limited discretion: Issuers must recover incentive compensation unless the recovery is determined by the Compensation Committee (or independent Board members if there is no Compensation Committee) to be impractical (as discussed above); Boards do have discretion as to the means of recovery (e.g., setting up a deferred payment plan for recovered amounts), but are required to act promptly

Indemnification Prohibition

  • Indemnification of executive officers against the loss of incentive compensation is prohibited
  • Companies are also prohibited from reimbursing executives for premiums paid for third-party insurance

Lookback Period

  • Lookback period starts on the date the issuer (board, committee, or management) concludes that a restatement is required (or should have known a restatement was required) or a regulator, court or other legally authorized entity determines a restatement is required by the issuer

Effective Date

  • The stock exchanges have 90 days after the final rule is published to update their listing standards to include the clawback policy requirement. The listing standard must be effective no later than one-year following the publication date in the Federal Register. Companies will be allowed a 60-day grace period to adopt a clawback policy following the effective date established by the applicable exchange
  • Transition Period: The final rules provide that each company is required to comply with the recovery policy for all incentive-based compensation (i) received or (ii) granted, earned, or vested by current or former executive officers on or after the effective date of the applicable listing standard (as opposed to the effective date of the rule). Compensation agreements entered prior to the effective date are not grandfathered

SEC Clawback Rules-Implications and Considerations

Companies will need to adopt new or review and amend existing clawback policies, to comply with the new rules. Some of the changes might require:

  • The inclusion of all active and former executive officers — not just the executive officer(s) whose misconduct led to the restatement;
  • The removal of Compensation Committee or Board discretion to pursue a clawback (unless the “impractical to do so” exemption applies) or determine the amount of clawback;
  • The inclusion of “little r” restatements as a clawback trigger; or
  • The adjustment of clawback trigger to ensure the policy would recover compensation regardless of fault or misconduct leading to a restatement.

This may also be a good opportunity to evaluate other aspects of existing clawback policies including whether (i) the clawback triggers should include misconduct, material violation of the company’s code of conduct, or action/inactions that led to significant reputational damage to the company or (ii) an expansion of incentive plan participants that would be subject to some or all the clawback triggers. For example, non-executives could be subject to the clawback trigger for a material violation of the company’s code of conduct, but not a restatement.

In addition, a recent Department of Justice (DOJ) memorandum on corporate criminal enforcement indicates one of the factors it will consider in evaluating remediation and the effectiveness of compliance programs will include whether compensation systems that are designed to deter and penalize misconduct and reward compliance, (i.e., clawbacks) are implemented. Thus, the inclusion of a general misconduct trigger in a clawback policy might help mitigate DOJ penalties and other actions.

A copy of the final SEC rule can be found here.

General questions about this Viewpoint can be directed to Mike Kesner ( or Lane Ringlee (

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