In good news, the rule-making process has slowed down, with a December 1 compliance date (closer to that originally envisaged), which gives affected companies more time to prepare. (As we noted in our December 2022 client alert on the US SEC’s new clawback rules, full compliance by companies listed in the US was expected to be required by the end of this year or early 2024. We then noted in our May 2023 client alert that the rule-making process had accelerated with a possible earliest compliance date of August 8, 2023.)
In early June, the NYSE and Nasdaq filed Amendments to their proposed clawback listing standards, delaying the effective date of the standards to October 2, 2023. On Friday, June 9, the SEC approved these Amendments as proposed, on an accelerated basis (usually SEC approval occurs after a 30-day interval). As a result, US-listed companies now have until Friday, December 1, 2023 to adopt a clawback-compliant policy. Such policies will cover executive incentive compensation “attained” on or after the effective date of October 2, 2023.
The other significant change included in the Amendment filed by the NYSE relates to the delisting procedures. The original NYSE proposed clawback listing standards allowed for a cure period only in the event a US-listed company failed to adopt a recovery policy within the required time period. All other instances of noncompliance (e.g., failure to reasonably promptly recover erroneously awarded compensation or failure to provide required disclosures) required immediate commencement of delisting procedures with no cure period. The NYSE Amendment provides for a cure process in all instances of noncompliance. Unlike the original NYSE proposed listing standards, the original Nasdaq proposed clawback listing standards allowed for a cure process in all instances of noncompliance. As a result, no other changes were proposed in the Nasdaq Amendment other than the delay in the effective date.
To recap, the SEC’s final clawback rule directed the US exchanges to adopt listing standards requiring all US-listed companies to implement the clawback rule. Broadly, these listing standards must require all US-listed companies:
- To adopt and comply with a written policy to claw back excess incentive pay (ie based on financial reporting measures) from executive officers where the company restates its results (“Big R” or “little r” restatements) due to its material noncompliance with any financial reporting requirements under US securities laws
- To disclose the policy including filing it as an exhibit to its annual report
- To include various other disclosures in the event that a clawback is triggered under the policy.
As noted above, failure to comply could result in the company being delisted. For more detail, see our recent blog posts here and here. You can see the approved amended clawback listing standards for the NYSE Listed Company Manual here (see exhibit 5 on page 44) and for The Nasdaq Stock Market LLC Rules here (see exhibit 5 on page 16).
If you would like to discuss this development, please reach out to your usual Freshfields contact.