December 16, 2022

Recovery of Erroneously Awarded Compensation

Recovery of Erroneously Awarded Compensation Capital Markets

On October 26, 2022, the Securities and Exchange Commission (SEC) released new guidance on issues pertaining to erroneously awarded incentive-based executive compensation. According to the new rules, the SEC will direct the national securities exchanges and associations that list securities to establish listing standards that will require each issuer to develop and implement a recovery policy. The policy must apply to compensation received during the three years preceding the date of the accounting restatement.

When an issuer prepares an accounting restatement to correct a material error in the current period or was left uncorrected, the issuer must recover incentive-based compensation from any current or former executive officers who were erroneously awarded. The recoverable amount is any excess incentive-based compensation received based on the restated financial measure. Recovering erroneously awarded compensation is subject to limited impracticability exceptions.

The new rule requires an issuer to file its policy as an exhibit to its annual report and disclose how it has applied the policy. Issuers must include:

  1. The required date to prepare an accounting restatement and the aggregate dollar amount of erroneously awarded compensation.
  2. The aggregate amount that remains outstanding, and any outstanding amounts from any current or former named executive officers for 180 days or more.
  3. Details regarding any reliance on the impracticability exceptions.

The rule also requires the issuers to use Inline XBRL to tag their compensation recovery disclosure. The ruling applies to any company or issuer listed on a national securities exchange or national securities association, including emerging growth companies, smaller reporting companies, foreign private issuers, and controlled companies. After considering the feedback provided, the SEC did provide exemptions for certain security futures products and standardized options, as well as securities issued by certain registered investment companies from the mandated listing standards.

The rule becomes effective 60 days after publication in the federal register. Exchanges will be required to file the proposed listing standards within 90 days of the publication, and the listing standards must be effective within one year of publication.

The release also amends the cover page of Form 10-K, Form 20-F, and Form 40-F to add check boxes that indicate separately (a) whether the financial statements of the registrant included in the filing reflect correction of an error to previously issued financial statements, and (b) whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period.



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