Rule2022-23757
Listing Standards for Recovery of Erroneously Awarded Compensation
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Published
November 28, 2022
Effective
January 27, 2023
Issuing agencies
Securities and Exchange Commission
Abstract
We are adopting a new rule and rule amendments to implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act"), which added Section 10D to the Securities Exchange Act of 1934 ("Exchange Act"). In accordance with Section 10D of the Exchange Act, the final rules direct the national securities exchanges and associations that list securities to establish listing standards that require each issuer to develop and implement a policy providing for the recovery, in the event of a required accounting restatement, of incentive-based compensation received by current or former executive officers where that compensation is based on the erroneously reported financial information. The listing standards must also require the disclosure of the policy. Additionally, the final rules require a listed issuer to file the policy as an exhibit to its annual report and to include other disclosures in the event a recovery analysis is triggered under the policy.
Full Text
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<title>Federal Register, Volume 87 Issue 227 (Monday, November 28, 2022)</title>
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[Federal Register Volume 87, Number 227 (Monday, November 28, 2022)]
[Rules and Regulations]
[Pages 73076-73142]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-23757]
[[Page 73075]]
Vol. 87
Monday,
No. 227
November 28, 2022
Part II
Securities and Exchange Commission
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17 CFR Parts 229, 232, et al.
Listing Standards for Recovery of Erroneously Awarded Compensation;
Final Rule
Federal Register / Vol. 87 , No. 227 / Monday, November 28, 2022 /
Rules and Regulations
[[Page 73076]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 232, 240, 249, 270, and 274
[Release Nos. 33-11126; 34-96159; IC-34732; File No. S7-12-15]
RIN 3235-AK99
Listing Standards for Recovery of Erroneously Awarded
Compensation
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: We are adopting a new rule and rule amendments to implement
Section 954 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''), which added Section 10D to
the Securities Exchange Act of 1934 (``Exchange Act''). In accordance
with Section 10D of the Exchange Act, the final rules direct the
national securities exchanges and associations that list securities to
establish listing standards that require each issuer to develop and
implement a policy providing for the recovery, in the event of a
required accounting restatement, of incentive-based compensation
received by current or former executive officers where that
compensation is based on the erroneously reported financial
information. The listing standards must also require the disclosure of
the policy. Additionally, the final rules require a listed issuer to
file the policy as an exhibit to its annual report and to include other
disclosures in the event a recovery analysis is triggered under the
policy.
DATES: The amendments are effective January 27, 2023.
FOR FURTHER INFORMATION CONTACT: Steven G. Hearne, Senior Special
Counsel, at (202) 551-3430, in the Office of Rulemaking, Division of
Corporation Finance, U.S. Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are adopting amendments to:
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Commission reference CFR citation (17 CFR)
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Regulation S-K............................
Item 10 through 1406.................. Sec. Sec. 229.10 through
229.1406.
Item 402.............................. Sec. 229.402.
Item 404.............................. Sec. 229.404.
Item 601.............................. Sec. 229.601.
Rule 10 through 903................... Sec. Sec. 232.10 through
232.903.
Rule 405.............................. Sec. 232.405.
Exchange Act \1\..........................
Rule 10D-1............................ Sec. 240.10D-1.
Schedule 14A.......................... Sec. 240.14a-101.
Form 20-F................................. Sec. 249.220f.
Form 40-F............................. Sec. 249.240f.
Form 10-K............................. Sec. 249.310.
Exchange Act and Investment Company Act of
1940 (``Investment Company Act'')\2\.
Form N-CSR............................ Sec. Sec. 249.331 and
274.128.
Investment Company Act....................
Rule 30a-2............................ Sec. 270.30a-2.
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Table of Contents
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\1\ 15 U.S.C. 78a et seq.
\2\ 15 U.S.C. 80a-1 et seq.
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I. Introduction and Background
II. Discussion of Final Amendments
A. Issuers and Securities Subject To Exchange Act Rule 10D-1
1. Proposed Amendments
2. Comments
3. Final Amendments
B. Restatements
1. Restatements Triggering Application of Recovery Policy
a. Proposed Amendments
b. Comments
c. Final Amendments
2. Date the Issuer Is Required To Prepare an Accounting
Restatement
a. Proposed Amendments
b. Comments
c. Final Amendments
C. Application of Recovery Policy
1. Executive Officers Subject to Recovery Policy
a. Proposed Amendments
b. Comments
c. Final Amendments
2. Incentive-Based Compensation
a. Incentive-Based Compensation Subject to Recovery Policy
i. Proposed Amendments
ii. Comments
iii. Final Amendments
b. When Compensation Is ``Received'' and Time Period Covered
i. Proposed Amendments
ii. Comments
iii. Final Amendments
3. Recovery Process
a. Calculation of Erroneously Awarded Compensation
i. Proposed Amendments
ii. Comments
iii. Final Amendments
b. Board Discretion Regarding Whether To Seek Recovery
i. Proposed Amendments
ii. Comments
iii. Final Amendments
c. Board Discretion Regarding the Means of Recovery
i. Proposed Amendments
ii. Comments
iii. Final Amendments
D. Disclosure of Issuer Policy on Incentive-Based Compensation
1. Proposed Amendments
2. Comments
3. Final Amendments
E. Indemnification and Insurance
1. Proposed Amendments
2. Comments
3. Final Amendments
F. Transition and Timing
1. Proposed Amendments
2. Comments
3. Final Amendments
III. Other Matters
IV. Economic Analysis
A. Baseline
B. Analysis of Potential Economic Effects
1. Direct Effects on Issuers and Shareholders
2. Effects on U.S. Exchanges and Listings
3. Costs of Recovery
4. Effects on Financial Reporting
5. Effects on Executive Compensation
6. Effects of Disclosure and Tagging Requirements
7. Indemnification and Insurance
8. Effects May Vary for Different Types of Issuers
C. Alternatives
1. Exemptions for Certain Categories of Issuers
2. Excluding Incentive-Based Compensation Tied to Stock Price
3. Including Only ``Big R'' Restatements as Trigger Events
4. Other Alternatives Considered
V. Paperwork Reduction Act
A. Summary of the Collection of Information
B. Summary of the Final Amendments and Effect of the Final
Amendments on Existing Collections of Information
C. Burden and Cost Estimates Related to the Final Amendments
VI. Final Regulatory Flexibility Act Analysis
A. Need for, and Objectives of, the Final Amendments
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Amendments
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
Statutory Authority
I. Introduction and Background
Section 954 of the Dodd-Frank Act added 15 U.S.C. 78j-4 (``Section
10D'') to the Exchange Act. Title 15 Section 78j-4 (a) of the U.S. Code
(``Section 10D(a)'') requires the Securities and Exchange Commission
(the ``Commission'') to adopt rules directing the national securities
exchanges \3\
[[Page 73077]]
(``exchanges'') and the national securities associations \4\
(``associations'') to prohibit the listing of any security of an issuer
that is not in compliance with the requirements of 15 U.S.C. 78j-4(b)
(``Section 10D(b)''). Section 10D(b) of the Exchange Act requires the
Commission to adopt rules directing the exchanges to establish listing
standards that require each issuer to develop and implement a policy
providing:
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\3\ A ``national securities exchange'' is an exchange registered
as such under 15 U.S.C. 78f (``Section 6 of the Exchange Act'').
Certain exchanges are registered with the Commission through a
notice filing under Section 6(g) of the Exchange Act for the purpose
of trading security futures. As discussed in Section II.A.2, because
the final rules exempt security futures products and standardized
options from their scope, any registered national securities
exchange that lists and trades only security futures products or
standardized options is not required to file a rule change in order
to comply.
\4\ A ``national securities association'' is an association of
brokers and dealers registered as such under 15 U.S.C. 78o-3
(``Section 15A of the Exchange Act''). The Financial Industry
Regulatory Authority (``FINRA'') is the only association registered
with the Commission under Section 15A(a) of the Exchange Act.
Because FINRA does not list securities, generally we refer only to
exchanges in this release. However, if any associations were to list
securities, the rules would apply to them.
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<bullet> For the disclosure of the issuer's policy on incentive-
based compensation that is based on financial information required to
be reported under the securities laws; and
<bullet> That, in the event that the issuer is required to prepare
an accounting restatement due to the issuer's material noncompliance
with any financial reporting requirement under the securities laws, the
issuer will recover from any of the issuer's current or former
executive officers incentive-based compensation (including stock
options awarded as compensation) that was received during the three-
year period preceding the date the issuer 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.
In seeking to implement this statutory mandate, we have been guided
by the language, structure, and legislative history of Section 10D. As
a part of the Dodd-Frank Act legislative process, in a 2010 report, the
Senate Committee on Banking, Housing and Urban Affairs stated that
``Section 954 [Section 10D] requires public companies to have a policy
to recover money that they erroneously paid in incentive compensation
to executive officers as a result of material noncompliance with
accounting rules.'' \5\ The Senate Report further clarified that
application of the recovery policy mandated by Section 10D ``does not
require adjudication of misconduct in connection with the problematic
accounting that required restatement.'' \6\
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\5\ See Report of the Senate Committee on Banking, Housing, and
Urban Affairs, S.3217, Report No. 111-176 at 135-36 (Apr. 30, 2010)
(``Senate Report'') at 135.
\6\ Id.
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The Senate Report highlighted the Committee's belief that it is
``unfair to shareholders for corporations to allow executive officers
to retain compensation that they were awarded erroneously.'' \7\ The
language and legislative history of the Dodd-Frank Act make clear that
Section 10D is premised on the notion that an executive officer should
not retain incentive-based compensation that, had the issuer's
accounting been correct in the first instance, would not have been
received by the executive officer, regardless of any fault of the
executive officer for the accounting errors. The Senate Report also
indicates that shareholders should not ``have to embark on costly legal
expenses to recoup their losses'' and that ``executives must return
monies that should belong to the shareholders.'' \8\
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\7\ Id.
\8\ Id.
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Informed by this legislative history, we read Section 10D to
express a simple proposition: executive officers of exchange-listed
issuers should not be entitled to retain incentive-based compensation
that was erroneously awarded on the basis of materially misreported
financial information that requires an accounting restatement. The
statute thus mandates that exchange-listed issuers maintain policies to
recover such compensation for the benefit of the issuers' owners--their
shareholders. In light of the straightforward nature of the goal
Congress sought to achieve, we have approached implementation of the
statute with the view that discretion to implement and execute these
mandated recovery policies generally should be limited.
For similar reasons, we believe Section 10D's mandated recovery
policies were intended to apply broadly. Because Congress specifically
referenced ``incentive-based compensation (including stock options
awarded as compensation),'' we infer that it intended the provision to
cover any incentive-based compensation that may be impacted by
financial reporting. Further, Congress did not define ``executive
officers'' narrowly by limiting the term to include only the named
executive officers or another subset of executives; rather it appears
that Congress intended the scope of the statute to reach more broadly
to include all of an issuer's executive officers.\9\ While this scope
may result in recovery from officers who did not play a direct role in
an accounting error or who did not help to set a ``tone at the top''
that affects financial reporting accuracy, we understand that effect to
be consistent with the statutory purpose of recovering compensation
erroneously paid to executive officers regardless of whether the
executive officer directly contributed to the error.
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\9\ While Section 10D applies broadly to all executive officers
and Congress did not specify a subset of executive officers, the
Senate Report makes clear it is not intended to apply to rank-and-
file employees. See Senate Report at 136 (``This policy is required
to apply to executive officers, a very limited number of employees,
and is not required to apply to other employees'').
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In addition to the benefits and purposes that Congress identified
when enacting Section 10D, our implementation of the statute has been
informed by certain additional benefits of the recovery requirement. As
discussed in Section IV.B., the recovery requirement may provide
executive officers with an increased incentive to take steps to reduce
the likelihood of inadvertent misreporting and will reduce the
financial benefits to executive officers who choose to pursue
impermissible accounting methods, which we expect will further
discourage such behavior. These increased incentives may improve the
overall quality and reliability of financial reporting, which further
benefits investors. These additional benefits further support our view
that the most appropriate means of implementing the Section 10D mandate
is to require robust recovery policies that will help to ensure that
executive officers at exchange-listed issuers do not retain the
benefits of erroneously awarded incentive-based compensation.
On July 1, 2015, the Commission proposed a new rule, and rule and
form amendments \10\ to implement the provisions of Section 10D.\11\ On
October 14, 2021, the Commission reopened the comment period for the
Proposing Release to allow interested persons further opportunity to
analyze and comment upon the proposed rules in light of developments
since the publication of the Proposing Release and the Commission's
further consideration of the statutory mandate.\12\ In the Reopening
Release, the Commission stated that it was considering, and requested
public comment on, certain revisions to the proposals included in the
Proposing Release, including a broader
[[Page 73078]]
interpretation of the statutory term ``an accounting restatement due to
material noncompliance.'' \13\ The Commission re-opened the comment
period again on June 8 2022, in connection with the addition to the
comment file of a memorandum prepared by Commission staff providing
additional analysis on compensation recovery policies and accounting
restatements.\14\ We have received numerous comment letters pursuant to
our initiative to receive advance public comment in implementing the
Dodd-Frank Act,\15\ in response to the Proposing Release, and in
response to the reopening releases.\16\ Commenters broadly supported
the objectives of the proposed rules, although commenters offered
various recommendations and expressed various concerns regarding the
proposed implementation. As discussed further below, after reviewing
and considering the public comments and recommendations and guided by
our understanding of the goal Congress was trying to achieve, we are
adopting the proposed rules substantially as proposed, but with certain
modifications to broaden the scope of covered restatements, clarify the
rules, and address comments received on the proposals.
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\10\ See Listing Standards for Recovery of Erroneously Awarded
Compensation, Release No. 34-75342 (Jul. 1, 2015) [80 FR 41144 (July
14, 2015)] (``Proposing Release'').
\11\ Public Law 111-203, 124 Stat. 1900 (2010).
\12\ See Reopening of Comment Period for Listing Standards for
Recovery of Erroneously Awarded Compensation, Release No. 34-93311
(Oct. 14, 2021) [86 FR 58232 (Oct. 21, 2021)] (``Reopening
Release'').
\13\ See generally, Reopening Release.
\14\ See Reopening of Comment Period for Listing Standards for
Recovery of Erroneously Awarded Compensation, Release No. 34-95057
(June 8, 2022) [87 FR 35938 (June 14, 2022)] (``Second Reopening
Release''). See also Memorandum from the Division of Economic and
Risk Analysis (June 8, 2022) (submitted to the comment file in
connection with Second Reopening Release) (``2022 staff
memorandum'').
\15\ Comment letters related to the executive compensation
provisions of the Dodd-Frank Act provided prior to the Proposing
Release are available at <a href="http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml">http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml</a>.
\16\ Comment letters related to the Proposing Release, the
Reopening Release, and the Second Reopening Release are available at
<a href="https://www.sec.gov/comments/s7-12-15/s71215.htm">https://www.sec.gov/comments/s7-12-15/s71215.htm</a>. A comment letter
from two members of Congress raised concerns about the Reopening
Release. See comment letter from Sen. Pat Toomey and Sen. Richard
Shelby, dated Feb. 1, 2022 (``Toomey/Shelby''). Specifically, the
letter criticized the Commission for reopening the comment period on
the Proposing Release and seeking comment on a number of regulatory
alternatives without updating the cost-benefit analysis and analysis
required by 44 U.S.C. 3501 et seq. (``Paperwork Reduction Act'' or
``PRA'') and 5 U.S.C. 601 et seq. (``Regulatory Flexibility Act'' or
``RFA'') and urged the Commission to repropose the rulemaking. The
letter asserted that the approach taken in the Reopening Release
significantly impaired the public's ability to comment thoughtfully
on the proposals and was inconsistent with 5 U.S.C. 551 through 559
(``Administrative Procedure Act''). In response to these concerns,
we note that the Reopening Release included a robust discussion of
the broader interpretation of the statutory term under consideration
and certain potential changes and solicited comment on that
interpretation and those potential changes. The 2022 staff
memorandum in connection with the Second Reopening Release analyzed
the benefits and costs of the potential changes. The 2022 staff
memorandum also considered the impact on smaller registrants. Given
the discussion included in the Proposing Release, the Reopening
Release, the Second Reopening Release, and the 2022 staff
memorandum, and in this adopting release, we believe the final rules
satisfy the requirements of the Administrative Procedure Act and
other applicable statutes and that a reproposal is unnecessary.
Moreover, in response to both the Reopening and Second Reopening
Releases, we received numerous comments from members of the public
on the potential changes and additional disclosures, including
comments on their economic effects, and we have considered those
comments in adopting the final rules.
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II. Discussion of Final Amendments
New Exchange Act Rule 10D-1 sets forth the listing requirements
that exchanges and associations that list securities are directed to
establish pursuant to Section 10D of the Exchange Act. Amendments to
Regulation S-K, Form 10-K, Form 20-F, Form 40-F, and for certain
investment companies, Form N-CSR and Schedule 14A, require disclosure
of the listed issuer's policy on recovery of incentive-based
compensation and information about actions taken pursuant to such
recovery policy.
New Exchange Act Rule 10D-1 and the rule amendments adopted in this
release supplement existing provisions \17\ by directing the exchanges
to establish listing standards that require issuers to: \18\
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\17\ See 15 U.S.C. 7243 (providing that the chief executive
officer (``CEO'') and chief financial officer (``CFO'') of an issuer
must reimburse the issuer for bonus or other incentive-based or
equity-based compensation resulting from an accounting restatement
due to the material noncompliance of the issuer, as a result of
misconduct) and 17 CFR 229.402(b) (requiring disclosure of company
policies and decisions regarding the adjustment or recovery of
awards or payments to named executive officers in the issuer's
Compensation Discussion and Analysis (``CD&A'')). The CD&A
disclosure requirement is principles-based in that it identifies the
disclosure concept and provides several non-exclusive examples.
Under 17 CFR 229.402(b)(1), companies must explain all material
elements of their named executive officers' compensation by
addressing mandatory principles-based topics in CD&A. 17 CFR
229.402(b)(2) sets forth nonexclusive examples of the kind of
information that should be addressed in CD&A, if material.
\18\ Exchanges may adopt listing standards with requirements
that are more extensive than those of Rule 10D-1. Listed issuers
may, of course, adopt policies more extensive than those called for
by the listing standards, so long as those policies at a minimum
satisfy the listing standards.
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<bullet> Develop and implement written policies for recovery of
incentive-based compensation based on financial information required to
be reported under the securities laws, applicable to the issuers'
executive officers, during the three completed fiscal years immediately
preceding the date that the issuer is required to prepare an accounting
restatement; and
<bullet> Disclose those compensation recovery policies in
accordance with Commission rules, including providing the information
in tagged data format.
To assure that issuers listed on different exchanges are subject to
the same disclosure requirements regarding erroneously awarded
compensation recovery policies, amendments to the Commission's
disclosure rules require all issuers listed on any exchange to file
their written compensation recovery policy as an exhibit to their
annual reports,\19\ to indicate by check boxes on their annual reports
whether the financial statements of the registrant included in the
filing reflect a correction of an error to previously issued financial
statements and whether any such corrections are restatements that
required a recovery analysis,\20\ and to disclose any actions an issuer
has taken pursuant to such recovery policy.\21\
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\19\ See 17 CFR 229.601(b)(97), 17 CFR 240.14a-101, 17 CFR
249.220f, 17 CFR 249.240f, and 17 CFR 274.128 Item 19(a)(2).
\20\ See 17 CFR 249.220f, 17 CFR 249.240f, and 17 CFR 249.310.
But see Section II.D.3. regarding check box disclosure on 17 CFR
274.128.
\21\ See 17 CFR 229.402(w) (``Item 402(w) of Regulation S-K''),
17 CFR 240.14a-101(b)(20), 17 CFR 249.220f Item 6.F., 17 CFR
249.240f Item 19, and 17 CFR 274.128 Item 18.
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A. Issuers and Securities Subject To Exchange Act Rule 10D-1
Section 10D of the Exchange Act provides that the Commission shall,
by rule, direct the exchanges to prohibit the listing of any security
of an issuer that does not comply with the requirements of Section 10D.
Section 10D does not distinguish among issuers or types of securities
and does not specifically instruct the Commission to exempt any
particular types of issuers or securities or direct the Commission to
permit the exchanges to provide such exemptions.\22\
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\22\ In this regard, Section 10D differs from other Dodd Frank
Act governance-related provisions, such as Section 951 Shareholder
Vote on Executive Compensation Disclosure (amending the Exchange Act
to add Section 14A) and Section 952 Compensation Committee
Independence (amending the Exchange Act to add Section 10C), which
include specific direction for either the Commission or the
exchanges to consider exemptions for classes of issuers, to provide
exemptions, or to take into account whether the requirements
disproportionately burden small issuers.
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1. Proposed Amendments
The Commission proposed to require exchanges to apply the
disclosure and recovery policy requirements to all listed issuers, with
only limited exceptions. As Section 10D refers to ``any security'' of
an issuer, the Commission proposed that the listing
[[Page 73079]]
standards and other requirements apply without regard to the type of
securities issued, including to issuers of listed debt or preferred
securities that do not have listed equity.\23\ The Commission did
however propose to exempt security futures products and standardized
options because the Commission recognized that information about the
compensation practices at the clearing agencies that issue these
securities is less relevant to investors,\24\ and to exempt the
securities of certain registered investment companies from the proposed
listing standards because the Commission recognized that the
compensation structures of issuers of these securities render
application of the rules unnecessary.\25\
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\23\ As proposed, an exchange would not be permitted to list an
issuer that it has delisted or that has been delisted from another
exchange for failing to comply with its recovery policy until the
issuer comes into compliance with that policy. See proposed Rule
10D-1(b)(1)(vi).
\24\ ``Equity security'' as defined in 15 U.S.C. 78c(a)(11)
includes any security future on any stock or similar security. A
``security future'' as defined in 15 U.S.C. 78c(a)(55) means ``a
contract of sale for future delivery of a single security or of a
narrow-based security index.'' ``Security futures product'' as
defined in 15 U.S.C. 78c(a)(56) and 7 U.S.C. 1a(32) include a
security future or any put, call, straddle, option or privilege on
any security future. Security futures products may be traded on
exchanges registered under 15 U.S.C. 78f and associations registered
under 15 U.S.C. 78o-3 without such securities being subject to the
registration requirements of the Securities Act and the Exchange Act
so long as they are cleared by a clearing agency that is registered
under 15 U.S.C. 78q-1 or that is exempt from registration under 15
U.S.C. 78q-1(b)(7). See 15 U.S.C. 77c(a)(14), 15 U.S.C. 78l(a), 17
CFR 240.12h-1(e). Comparable regulatory treatment exists for
standardized options, which are defined in 17 CFR 240.9b-1(a)(4) as
option contracts trading on an exchange, an automated quotation
system of a registered association, or a foreign securities exchange
which relate to option classes the terms of which are limited to
specific expiration dates and exercise prices, or such other
securities as the Commission may, by order, designate. See 17 CFR
230.238, 17 CFR 240.12a-9, 17 CFR 240.12h-1(d).
\25\ The Commission proposed to exempt the listing of any
security issued by a registered management investment company if
such company has not awarded incentive-based compensation to any
executive officer of the registered management investment company in
any of the last three fiscal years or, in the case of a company that
has been listed for less than three fiscal years, since the initial
listing. The Commission additionally proposed to exempt the listing
of any security issued by a unit investment trust.
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The Commission did not propose to otherwise exempt categories of
listed issuers, such as emerging growth companies (``EGCs''),\26\
smaller reporting companies (``SRCs''),\27\ foreign private issuers
(``FPIs''),\28\ and controlled companies.\29\ The Commission further
did not propose to grant the exchanges discretion to decide whether
certain categories of securities should be exempted from the Section
10D listing standards.
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\26\ See 15 U.S.C. 77b(a)(19) and 15 U.S.C. 78c(a)(80).
\27\ See 17 CFR 240.12b-2.
\28\ See 17 CFR 240.3b-4(c). The Commission did propose to
permit a FPI to make a determination regarding impracticability to
recover in limited circumstances where doing so would violate home
country law. See Section II.C.3.b, of the Proposing Release and
Section II.C.3.b. for a discussion of impracticability of recovery.
\29\ Under New York Stock Exchange Rule 303A.00 and NASDAQ Stock
Market LLC Rule 5615(c) a ``controlled compan[y]'' is defined as a
company of which more than 50% of the voting power for the election
of directors is held by an individual, group or another company.
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2. Comments
We received substantial comment on whether certain classes of
issuers and securities should be subject to the proposal. Some
commenters supported the scope of issuers covered by the proposal.\30\
Other commenters recommended that the Commission exercise its exemptive
authority to exclude certain issuers and classes of securities from the
requirements.\31\
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\30\ See, e.g., comment letters from American Federation of
Labor and Congress of Industrial Organizations (``AFL-CIO'');
Americans for Financial Reform (Sept. 14, 2015) (``AFR 1''); Better
Markets, Inc. (Sept. 14, 2015) (``Better Markets 1''); Council of
Institutional Investors (Aug. 27, 2015) (``CII 1''); California
Public Employees' Retirement System (Sept. 14, 2015) (``CalPERS
1''); CFA Institute (Sept. 14, 2015) (``CFA Institute 1''); Robert
E. Rutkowski (Sept. 15, 2015) (``Rutkowski 1''); and State Board of
Administration (``SBA''). Some of these commenters contended that
investors deserve the same protections regardless of the category of
listed issuer. See comment letters from AFL-CIO; CII 1; the Office
of the Comptroller of the State of New York; and Public Citizen
(Nov. 19, 2021) (``Public Citizen 2'').
\31\ See, e.g., comment letters from American Bar Association
Committee on Federal Regulation of Securities of the Section of
Business Law (Feb. 11, 2016) (``ABA 1''); Davis Polk & Wardwell LLP
(Sept. 11, 2015) (``Davis Polk 1''); Duane Morris LLP (``Duane'');
Financial Services Roundtable (``FSR''); Freshfields Bruckhaus
Deringer (``Freshfields''); Japanese Bankers Association (``Japanese
Bankers''); Kaye Scholer LLP (``Kaye Scholer''); SAP SE (``SAP'');
Sullivan & Cromwell LLP (Sept. 22, 2015) (``S&C 1''); TELUS
Corporation (``TELUS''); and UBS Group AG (``UBS'').
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A number of commenters expressed concern regarding application of
the rules to FPIs,\32\ and suggested that application of the rules
could impose inconsistent standards \33\ and questioned the feasibility
of implementation by FPIs.\34\ Some of these commenters recommended
that the Commission unconditionally exempt FPIs,\35\ noting that FPIs
have been exempted from many of the Commission's executive compensation
regulations and are not subject to Section 16 of the Exchange Act,\36\
and that other U.S. listing standards permit FPIs to comply with home
country standards rather than the U.S. listing standard
requirements.\37\ Commenters alternatively recommended that the
Commission exempt FPIs where the home country has an appropriate
governance regime or law governing erroneously awarded
compensation.\38\
---------------------------------------------------------------------------
\32\ See, e.g., comment letters from ABA 1 (suggesting that the
general presumption against the extraterritorial application of
United States law, as well as the general principle of international
comity, should apply); Davis Polk 1; Duane; FSR (noting the burden
of having to comply with U.S.-based executive compensation
governance in addition to home country laws); Freshfields; Japanese
Bankers (suggesting that ``a penalty on restatement of financial
statements prepared in accordance with the home country accounting
standard should be determined by judicial ruling of the home
country, and should not be governed by the U.S. listing rules'');
Kaye Scholer; SAP; S&C 1; TELUS; and UBS.
\33\ See, e.g., comment letters from the U.S. Chamber of
Commerce Center for Capital Markets Competitiveness (Sept. 14, 2015)
(``CCMC 1'') (suggesting that ``affected [issuers] may find
themselves endeavoring to comply with contradictory laws in multiple
jurisdictions creating conflicts that cannot be addressed with a
single solution''); Freshfields (expressing concerns regarding
potential conflicts between the proposed listing standard and home
country rules and noting potential conflicts with home country laws,
stock exchange requirements, or corporate governance arrangements);
and S&C 1 (stating that ``[r]equiring a non-U.S. issuer to comply
with U.S. and home country requirements would upset the regulatory
framework established by the home country and potentially impose
inconsistent standards''). See also comment letter from Duane
(suggesting the rule could force issuers to choose between violating
home country law or the listing standards).
\34\ See comment letters from CCMC 1; and Kaye Scholer
(suggesting that an issuer's home country has a more appropriate
interest in determining whether companies domiciled there should be
subject to a compensation recovery requirement). See also comment
letters from ABA 1 (noting that such issuers generally adhere to
IFRS, which sets forth criteria for determining when a restatement
is required that differ from GAAP, such that applying the rule to
FPIs may lead to inconsistent treatment among issuers); and Davis
Polk 1.
\35\ See comment letters from ABA 1; Davis Polk 1; Duane; FSR;
Freshfields; Japanese Bankers; Kaye Scholer; SAP; S&C 1; TELUS; and
UBS.
\36\ See, e.g., comment letter from FSR (noting that FPIs have
been exempted from many of the executive compensation regulations
enacted under the Dodd-Frank Act, as well as disclosure requirements
under Item 402 of Regulation S-K, and further stating that because
such issuers are not subject to Section 16, the proposed rules would
require such issuers to design and implement new executive
compensation governance structures).
\37\ See comment letters from UBS (citing the NYSE Group, Inc.
(``NYSE'') audit committee independence rule); and Duane (citing
Exchange Act Section 10C). See also comment letter in response to
the Reopening Release from Cravath, Swaine & Moore LLP (``Cravath'')
(noting the burden placed on FPIs that may be subject to different
corporate governance standards in their home countries).
\38\ See, e.g., comment letters from Freshfields; and TheCityUK
(suggesting permitting compliance with home country provisions that
provide for similarly rigorous disciplines meeting the same goals).
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One commenter urged the Commission to exempt all registered
investment companies unconditionally, rather than the proposed
exemption for registered unit investment trusts (``UITs'') and for
registered management
[[Page 73080]]
investment companies (``listed funds'') that have not awarded
incentive-based compensation in the last three fiscal years.\39\ The
commenter asserted that the legislative history of the Dodd-Frank Act
does not indicate that the purpose of Section 10D was to address abuses
with respect to listed funds; that listed funds have been exempted from
certain prior compensation-related rulemakings; and that listed fund
financial statements are less complex than operating company financial
statements, resulting in accounting restatements being rare for listed
funds.\40\ The commenter therefore believed that the costs to affected
listed funds would outweigh the benefits. The commenter also stated
that the proposal could affect more than the small number of internally
managed listed funds that the Commission estimated in the proposal,
because some externally managed listed funds may pay some or all of the
funds' chief compliance officers' compensation.
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\39\ See comment letter from Investment Company Institute (Sept.
14, 2015). ICI submitted a comment letter on the original proposal
in 2015 as well as on the Reopening Release (Nov. 22, 2021). Because
the letters largely made the same points, the letters are referred
to collectively as if they were a single letter (``ICI''). Another
commenter supported the Commission's proposed conditional exemption
for listed funds, while also urging the Commission to exempt them
and certain other issuers unconditionally, but without any further
analysis supporting this recommendation for listed funds. See
comment letter from FSR.
\40\ See comment letter from ICI.
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Another commenter urged the Commission to extend the proposed
conditional exemption to externally managed business development
companies (``BDCs'').\41\ The commenter asserted that the same policy
considerations supporting the conditional exemption for listed funds
apply to externally managed BDCs, and that provisions of the Investment
Advisers Act of 1940 \42\ and the Investment Company Act effectively
prohibit these BDCs from offering certain incentive compensation plans
to their officers.\43\
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\41\ See comment letter from Clifford Chance et al.
\42\ 15 U.S.C. 80b-1 through 15 U.S.C. 80b-21.
\43\ See comment letter from Clifford Chance et al.
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We received limited comment on the Commission's proposal to exempt
security futures products and standardized options. One commenter
generally supported the proposed exemption and no other commenters
objected to the proposal to exempt security futures products and
standardized options, or otherwise addressed this aspect of the
proposal.\44\ Some commenters recommended exemptions for debt-only
issuers \45\ and controlled companies.\46\
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\44\ See comment letter from ABA 1.
\45\ See, e.g., comment letters from ABA 1; Davis Polk 1 (noting
protections from the indenture contract and Trust Indenture Act, the
ability to negotiate for indenture covenants, and that a wholly-
owned subsidiary of a reporting company are not required to provide
executive compensation disclosure); FSR (suggesting that the harm
that the proposal is designed to address is immaterial to such
investors and that a public parent issuer would have oversight over
its executive compensation and financial statements); Jesse M. Fried
(``Fried''); and Society for Corporate Governance (formerly Society
of Corporate Secretaries & Governance Professionals) (Sept. 18,
2015) (``SCG 1''). See also comment letter in response to the
Reopening Release from Davis Polk (Nov. 22, 2021) (``Davis Polk 3'')
(further noting that debt-only issuers are exempt from many rules
related to executive compensation). In contrast, one commenter
specifically opposed such an exemption. See comment letter from
Better Markets 1.
\46\ See comment letters from Duane; and Fried (both suggesting
that debt-only and controlled companies may have greater control
over executive officers and can employ incentives, such as extra pay
or threat of termination, that would dwarf the incentive effect of a
potential compensation recovery).
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Some commenters expressed support for requiring recovery by SRCs
and EGCs as proposed,\47\ while others recommended that the Commission
exempt SRCs and EGCs, citing the costs and burdens associated with
imposing compensation recovery policies containing the detail and scope
contemplated by the proposal.\48\ As an alternative to exemption, these
commenters recommended deferring compliance for these issuers.\49\ In
response to the Reopening Release, a number of commenters additionally
noted the burdens on smaller issuers and recommended
accommodations.\50\
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\47\ See, e.g., comment letters from Better Markets 1; CalPERS 1
(noting small issuers may offer substantial incentive compensation
packages); Public Citizen (Sept. 14, 2015) (``Public Citizen 1'')
(suggesting such issuers lack the wider and potentially more
vigilant shareholder base of larger companies); and SBA
(recommending that strong governance practices should be applied at
early growth stages). See also comment letter from CFA Institute 1
(suggesting it would not be appropriate or necessary to scale the
proposed disclosure requirements for smaller or EGCs).
\48\ See, e.g., comment letters from ABA 1 (further suggesting
that such issuers should not be required to disclose their reasons
for not pursuing recovery or the aggregate amount of excess
compensation remaining outstanding at fiscal year-end); Compensia;
Mercer; and National Association of Corporate Directors (``NACD'').
See also Annual Report for Fiscal Year 2021: Office of the Advocate
for Small Business Capital Formation (``2021 OASB Annual Report''),
available at <a href="https://www.sec.gov/files/2021-OASB-Annual-Report.pdf">https://www.sec.gov/files/2021-OASB-Annual-Report.pdf</a>,
at 68 (recommending generally that in engaging in rulemaking that
impacts small businesses, the Commission tailor the disclosure and
reporting framework to the complexity and size of operations of
companies, either by scaling obligations or delaying compliance for
the smallest of the public companies, particularly as it pertains to
potential new or expanded disclosure requirements).
\49\ See, e.g., comment letters from ABA 1; Compensia; Mercer;
and NACD.
\50\ See, e.g., comment letters in response to the Reopening
Release from Committee on Federal Regulation of Securities of the
Section of Business Law of the American Bar Association (Jan. 24,
2022) (``ABA 2''); CCMC (Nov. 22, 2021) (``CCMC 2''); and Hunton
Andrews Kurth (``Hunton'').
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3. Final Amendments
After considering the comments, we are adopting rules to require
exchanges to apply the disclosure and compensation recovery policy
requirements to all listed issuers,\51\ with only limited exceptions,
substantially as proposed.\52\ Under the final rules, an issuer would
be subject to delisting if it does not adopt and comply with its
compensation recovery policy.\53\ In a clarification to the proposal,
17 CFR 240.10D-1(a) as adopted provides that the requirements of
Section 10D apply to each exchange and association to the extent such
exchange or association lists securities. Accordingly, the requirements
will not apply to exchanges that only trade securities pursuant to
unlisted trading privileges but do not list securities.\54\ We are
exempting the listing of certain security futures products,
standardized options, securities issued by unit investment trusts, and
the securities issued by certain registered investment companies from
the mandated listing standards, as proposed.\55\
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\51\ In a modification from the proposal, the rule refers to a
national securities association that lists securities generally,
rather than the more specific reference to an association that
``lists securities in an automated inter-dealer quotation system.''
In addition, we are simplifying the rule by not adopting proposed
Rule 10D-1(b)(1)(vi), which would have specifically provided that an
issuer that had been delisted for failing to comply with its
recovery policy may not list its securities on an exchange, and an
exchange would not be permitted to list a delisted issuer until the
issuer comes into compliance with its recovery policy, because such
a delisted issuer that remained out of compliance with the recovery
policy would already not be permitted to list its securities on an
exchange by function of 17 CFR 240.10D-1(a)(1), which requires
exchanges to ``prohibit the initial or continued listing of any
security of an issuer that is not in compliance with the
requirements of any portion of this section.''
\52\ See 17 CFR 240.10D-1(a)(3).
\53\ Under the rule and rule amendments, it would also be
subject to delisting if it does not disclose its compensation
recovery policy in accordance with Commission rules. See Section
II.D.3.
\54\ Such exchanges may not list securities until their listing
standards comply with the requirements of Rule 10D-1. Exchanges that
do not list securities should consider updating any applicable
listing standards to comply with the requirements of Rule 10D-1 or
including an appropriate limitation acknowledging that they may only
trade securities pursuant to unlisted trading privileges.
\55\ See 17 CFR 240.10D-1(c)(1) through (4).
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As the Commission stated in the Proposing Release, Section 10D does
not distinguish among issuers or types of
[[Page 73081]]
securities, and does not instruct the Commission to exempt any
particular types of issuers or securities or direct the Commission to
permit the exchanges to provide for such exemptions. In evaluating
whether to exempt specific categories of issuers and securities, in
addition to the views of commenters, we have considered whether
providing exemptions from the requirements of Section 10D would be
consistent with our understanding of the purpose of this statutory
provision. We have also considered the incidence of restatements by
different categories of issuers and whether, in light of such
incidence, exempting these classes of issuers would be necessary or
appropriate in the public interest and consistent with the protection
of investors. Although we recognize commenters' concerns regarding
application of the rule to FPIs, SRCs, and EGCs, as discussed more
fully below, we have determined not to exempt these categories of
issuers from the final rules.
With respect to application of the final amendments to FPIs, we
note that Section 10D does not exempt FPIs. While the Commission could
exercise its discretion to exempt such issuers by rule, we decline to
do so. We acknowledge some of the practical concerns regarding
implementation of the recovery policy raised by commenters, as
discussed above; however, these concerns are not unique to FPIs and, in
any event, do not in our view justify exempting such issuers from the
obligation to recover incentive-based compensation that was erroneously
awarded. We believe that shareholders of FPIs listed in the United
States should benefit from recovery of erroneously awarded compensation
in the same manner as shareholders of domestic issuers. Moreover, the
recovery requirements will help to encourage reliable financial
reporting by listed issuers, which is as important for investors in
FPIs as for other issuers. Studies have shown that foreign companies
present a similar risk of restatement as other companies \56\ and that
U.S. issuers who are non-accelerated filers \57\ accounted for
approximately 53% of restatements.\58\ To the extent that recovery
under Rule 10D-1 would be wholly inconsistent with a foreign regulatory
regime, we have included an impracticability accommodation, as
discussed in Section II.C.3.b., which may alleviate some of the
implementation challenges faced by FPIs.
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\56\ See 2020 Financial Restatements: A Twenty-Year Review,
Audit Analytics (2021) (``A Twenty-Year Review'') (analyzing data
related to accounting restatements, including specific analysis for
accelerated foreign filers, non-accelerated foreign filers,
accelerated U.S. filers, and non-accelerated U.S. filers), and
Financial Restatement Trends in the United States: 2003-2012,
Professor Susan Scholz, University of Kansas, Study Commissioned by
the Center for Audit Quality (comparing U.S. and foreign private
issuers). Foreign companies in this study included both FPIs and
foreign companies filing on Form 10-K.
\57\ 17 CFR 240.12b-2.
\58\ See A Twenty-Year Review.
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We also do not view the application of the final amendments to FPIs
listed on U.S. national exchanges as an extraterritorial application of
U.S. law. The statutory language generally identifies the types of
conduct that trigger the relevant requirement and, by extension, the
focus of the statute for the purpose of an extraterritoriality
analysis.\59\ Having identified the activity regulated by the statutory
provision, we can determine whether a person is engaged in conduct that
the statutory provision regulates and whether this conduct occurs
within the United States. The statutory focus of Section 10D is on
``the listing of any security of an issuer'' on a national securities
exchange. The recovery policies mandated by Section 10D apply only to
those foreign issuers who have chosen to access the U.S. capital
markets by listing on a U.S. national exchange. We thus do not view the
final rules as an extraterritorial application of U.S. legal
requirements.
---------------------------------------------------------------------------
\59\ See Morrison v. National Australia Bank, Ltd., 130 S. Ct.
2869, 2884 (2010) (identifying the focus of statutory language to
determine what conduct was relevant in determining whether the
statute was being applied to domestic conduct).
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With respect to the application of the rule to SRCs and EGCs, we
note that, unlike in other provisions of the Dodd-Frank Act, Congress
did not direct the Commission to consider differential treatment for
certain classes of issuers, such as SRCs and EGCs.\60\ Similar to our
reasons for not exercising our discretion to exempt FPIs, we decline to
exempt SRCs and EGCs from the final amendments. In our view, recovery
of incentive-based compensation that was not earned and should not have
been paid is as appropriate for smaller listed issuers as it is for
larger issuers. We believe shareholders of smaller issuers should
benefit from recovery of erroneously awarded compensation in the same
manner as shareholders of larger issuers. Similarly, recovery
encourages the preparation of reliable financial information, which may
be even more important for smaller issuers and EGCs than for others
because of their susceptibility to an increased likelihood of reporting
an accounting error and to material weakness in internal control over
financial reporting, as studies have found.\61\
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\60\ In contrast, Section 952 of the Dodd-Frank Act directs the
Commission to take ``into consideration the size of an issuer and
any other relevant factors'' when providing exemption authority.
\61\ See, e.g., Jacquelyn Gillette, Sudarshan Jayaraman, and
Jerold Zimmerman Accounting Restatements: Malfeasance and/or Optimal
Incompetence? (working paper Mar. 2017), available at <a href="https://pages.business.illinois.edu/accountancy/wp-content/uploads/sites/12/2017/02/YSS-2017-Gillette.pdf">https://pages.business.illinois.edu/accountancy/wp-content/uploads/sites/12/2017/02/YSS-2017-Gillette.pdf</a> (finding that ``larger and more
profitable firms invest more in accounting resources'', and that
``accounting resources are negatively associated with the likelihood
of a restatement''); see also Preeti Choudhary, Kenneth Merkley and
Katherine Schipper, Immaterial Error Corrections and Financial
Reporting Reliability, 38 Contemp. Acct. Rsch. 2423 (Winter 2021)
(finding that future restatements are less likely for larger firms)
(``Choudhary et al''). See also Jeong-Bon Kim, Jay Junghun Lee, and
Jong Chool Park, Internal Control Weakness and the Asymmetrical
Behavior of Selling, General, and Administrative Costs, (37) J.
Acct. Auditing & Fin 259-292 (2022) (finding that firms with
internal control weaknesses are significantly smaller in terms of
sales revenue, selling, general and administrative costs, and total
assets). See also discussion above and Section IV.A. discussing the
number of restatements for smaller issuers as compared to other
issuers.
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We recognize, as some commenters asserted, that shareholders of
controlled companies and certain private companies with listed debt may
have a greater degree of control over executive officers than at other
companies. We further recognize that debt holders of debt-only issuers
receive certain protections from the Trust Indenture Act and indenture
covenants governing such debt. Recovery of erroneously awarded
compensation will encourage executive officers to reduce errors
requiring restatements, which could benefit potential future investors
and enhance the efficiency of the market as a whole. Further, while
controlling shareholders generally face fewer difficulties in directing
and incentivizing executive officers, the final amendments will help
minimize any gaps that remain, such as those that could exist for an
issuer's minority shareholders. Although a controlling majority
shareholder may owe state law duties to minority shareholders, we do
not believe that investors' confidence in the accuracy of financial
reporting should depend on their assessment of the likelihood of
successful litigation under state law to vindicate minority shareholder
rights.
We are not granting the exchanges discretion to exempt certain
categories of securities from the listing standards. In reaching these
conclusions, in addition to the plain language of the statute and the
fundamental inequity of permitting executive officers to retain
compensation they did not earn, we
[[Page 73082]]
considered the relative burdens of compliance on different categories
of issuers and types of securities. As discussed more fully in Section
IV, while we recognize that the listing standards could, in certain
respects, impose burdens on particular categories of issuers, there is
also reason to believe that these issuers, their shareholders, and the
markets in general, may derive benefits from the listing standards. The
compensation recovery requirements may reduce the financial benefits to
executive officers when an issuer is required to prepare an accounting
restatement, and thus may increase incentives for reporting accurate
financial results.\62\ Additionally, the recovery requirements may
encourage issuers and their executive officers to devote more resources
to the production of high-quality financial reporting. Shareholders of
listed issuers will, in turn, benefit from improved financial
reporting, and issuers may derive benefits in the form of reduced costs
of capital. As with other categories of listed issuers, we believe that
these benefits justify the costs imposed by the final amendments for
specific categories of issuers, such as EGCs, SRCs, FPIs, controlled
companies, and debt-only issuers.
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\62\ As discussed more fully in Section IV, academic research
finds that companies with strong compensation recovery provisions
experience improved financial reporting, lower CEO turnover, and
lower CEO compensation. See Michael H.R. Erkens, Ying Gan, and B.
Burcin Yurtoglu, Not all clawbacks are the same: Consequences of
strong versus weak clawback provisions, 66 J. Acct & Econ., 291
(2018). See also Lillian H. Chan et al., The Effects of Firm-
Initiated Clawback Provisions on Earnings Quality and Auditor
Behavior 54 J. Acct. & Econ. 180 (2012) (finding that after the
adoption of clawback provisions, incidence of accounting
restatements declines, firms' earnings response coefficients
increase, and auditors are less likely to report material internal
control weaknesses, charge lower audit fees, and issue audit reports
with a shorter lag); Ed DeHaan, Frank Hodge, and Terry Shevlin, Does
Voluntary Adoption of a Clawback Provision Improve Financial
Reporting Quality?, 30 Contemp. Acct. Rsch. 1027 (2013) (finding
improvements in financial reporting quality following clawback
adoption, including decreases in meet-or-beat behavior and
unexplained audit fees, a decrease in restatements, a significant
increase in earnings response coefficients and a significant
decrease in analyst forecast dispersion).
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We are adopting, as proposed, the exemptions for the listing of
security futures products cleared by a registered clearing agency or a
clearing agency that is exempt from the registration requirements of
the Exchange Act and for standardized options issued by a registered
clearing agency because the role of a clearing agency as the issuer of
these securities is fundamentally different from that of other listed
issuers.\63\ Whereas in most cases the purchaser of a security is
making an investment decision regarding the issuer of a security, the
purchaser of security futures products and standardized options does
not, except in the most formal sense, make an investment decision
regarding the clearing agency, even though the clearing agency is the
issuer of those securities. As a result, information about the clearing
agency's business, its officers and directors and their compensation,
and its financial statements is less relevant to investors in these
securities than information about the issuer of the underlying
security. Moreover, the investment risk in security futures products
and standardized options is largely determined by the market
performance of the underlying security rather than the performance of
the clearing agency, which is a self-regulatory organization subject to
regulatory oversight.\64\ Accordingly, pursuant to our authority under
Section 36 of the Exchange Act, we find that it is necessary or
appropriate in the public interest, and consistent with the protection
of investors, to exempt the listing of a security futures product and a
standardized option from the requirements of Rule 10D-1 under the
Exchange Act.\65\
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\63\ See Fair Administration and Governance of Self-Regulatory
Organizations; Disclosure and Regulatory Reporting by Self-
Regulatory Organizations; Recordkeeping Requirements for Self-
Regulatory Organizations; Ownership and Voting Limitations for
Members of Self-Regulatory Organizations; Ownership Reporting
Requirements for Members of Self-Regulatory Organizations; Listing
and Trading of Affiliated Securities by a Self-Regulatory
Organization, Release No. 34-50699 (Nov. 18, 2004) [69 FR 71126], at
n. 260 (``Standardized options and security futures products are
issued and guaranteed by a clearing agency'').
\64\ The Commission has previously recognized these fundamental
differences and provided exemptions for security futures products
and standardized options when it adopted the audit committee listing
requirements in 17 CFR 240.10A-3 and the compensation committee
listing requirements in 17 CFR 240.10C-1. See Listing Standards for
Compensation Committees, Release No. 33-9330 (June 20, 2012) [77 FR
38422 (June 27, 2012)].
\65\ See 17 CFR 240.10D-1(c)(1) and (2).
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Similarly, we are adopting the proposal to exempt the listing of
any security issued by a listed fund on the condition that the fund has
not awarded incentive-based compensation to any current or former
executive officer of the fund in any of the last three fiscal years or,
in the case of a fund that has been listed for less than three fiscal
years, since the initial listing.\66\ We make this conditional
exemption pursuant to our authority under Section 36 of the Exchange
Act, because we find that it is necessary or appropriate in the public
interest, and consistent with the protection of investors. The
conditional exemption would permit listed funds that do not pay
incentive-based compensation to avoid the burden of developing recovery
policies they may never use.\67\ Listed funds that have paid incentive-
based compensation in that time period, however, would be subject to
the rule and rule amendments and be required to implement a
compensation recovery policy like other listed issuers.\68\
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\66\ See 17 CFR 240.10D-1(c)(4). Listed funds, unlike most other
issuers, are generally externally managed and often have few, if
any, employees that are compensated by the fund (i.e., the issuer).
Instead, listed funds typically rely on employees of the investment
adviser to manage fund assets and carry out other related business
activities. Such employees are typically compensated by the
investment adviser of the registered management investment company
as opposed to the fund. In order to apply the new rules to listed
funds, we are amending Form N-CSR as proposed to redesignate Item 18
as Item 19 and to add a new paragraph (a)(2) to this Item (with
current paragraph (a)(2) redesignated as (a)(3)) to require any
listed fund that would be subject to the requirements of Rule 10D-1
to include as an exhibit to its annual report on Form N-CSR its
policy on recovery of incentive-based compensation. We are also
adding new Item 18 to Form N-CSR as well as amending Item 22 of
Schedule 14A of the Exchange Act to require listed funds that would
be subject to Rule 10D-1 to provide information that would generally
mirror the disclosure requirements of Item 402(w) of Regulation S-K.
\67\ In addition, because the exemption applies to the listing
of securities of registered investment companies, it would not apply
to business development companies, which are a category of closed-
end management investment company that is not registered under the
Investment Company Act.
\68\ One commenter observed that the rule would cover any
incentive-based compensation paid to listed fund chief compliance
officers (``CCOs'') if they are within the rule's definition of an
``executive officer.'' See comment letter from ICI. We agree that if
a listed fund pays an executive officer incentive-based compensation
within the time period specified in the final rule, then the fund
would be required to implement a compensation-recovery policy.
Although the commenter urged the Commission to interpret the
executive officer definition to exclude a listed fund's CCO, we do
not see a basis for this interpretation and the commenter did not
provide one.
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We are not exempting listed funds unconditionally, as two
commenters suggested. The final rules are designed to reflect the
structure and compensation practice of listed funds by requiring funds
to implement compensation recovery policies only when they in fact
award incentive-based compensation covered by Section 10D. While listed
funds' financial statements may in general be less complex than those
of operating companies, restatements can and do still occur. To the
extent that executive officers of listed funds receive incentive-based
compensation on the basis of a financial reporting measure that is
restated, we
[[Page 73083]]
believe that the policy concerns underlying the rule apply equally to
listed funds, regardless of whether they were specifically mentioned in
the Dodd-Frank Act's legislative history or the treatment of registered
investment companies for purposes of other compensation-related
disclosure requirements.
We also are not exempting externally managed BDCs, as one commenter
suggested. Although BDCs whose advisers receive certain forms of
compensation are subject to certain limitations on their ability to
offer equity compensation such as options, or to establish a profit-
sharing plan, the definition of incentive-based compensation in Section
10D applies to a broader range of incentive-based compensation
arrangements. In addition, BDCs are generally subject to other
disclosure requirements in Regulation S-K, and the final rules treat
all BDCs, whether managed externally or internally, in a consistent
manner.\69\
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\69\ A commenter suggested that the Commission had previously
exempted externally managed BDCs from pay ratio disclosure
requirements adopted in 2015. See comment letter of Clifford Chance
et al. The rule did not provide an exemption for externally managed
BDCs. Instead, the Commission observed that as a practical matter no
externally managed BDCs would be subject to it. See Pay Ratio
Disclosure, Release No. 33-9877 (Aug. 5, 2015) [80 FR 50103 (Aug.
18, 2015)] at n.90 (``Business development companies will be treated
in the same manner as issuers other than registered investment
companies and therefore will be subject to the pay ratio disclosure
requirement'').
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As proposed, we are exempting the listing of any security issued by
a UIT because, unlike listed funds, UITs are pooled investment entities
without a board of directors, corporate officers, or an investment
adviser to render investment advice during the life of the UIT, and
they do not file a certified shareholder report. In addition, because
the investment portfolio of a UIT is generally fixed, UITs are not
actively managed. Accordingly, pursuant to our authority under Section
36 of the Exchange Act, we find that it is necessary or appropriate in
the public interest, and consistent with the protection of investors,
to exempt the listing of any security issued by a UIT from the
requirements of Rule 10D-1 under the Exchange Act.\70\
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\70\ See 17 CFR 240.10D-1(c)(3) and (4).
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B. Restatements
1. Restatements Triggering Application of Recovery Policy
Sections 10D(a) and 10D(b)(2) require the Commission to adopt rules
directing exchanges and associations to establish listing standards
that require issuers to develop and implement policies that require
recovery ``in the event that the issuer is required to prepare an
accounting restatement due to the material noncompliance of the issuer
with any financial reporting requirement under the securities laws.''
The Senate Report indicated that Section 10D was intended to result in
``public companies [adopting policies] to recover money that they
erroneously paid in incentive compensation to executives as a result of
material noncompliance with accounting rules. This is money that the
executive would not have received if the accounting was done properly .
. . .'' \71\
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\71\ See Senate Report at 135.
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a. Proposed Amendments
The Commission proposed to require that issuers adopt and comply
with a written policy providing that in the event the issuer is
required to prepare a restatement \72\ to correct an error \73\ that is
material \74\ to previously issued financial statements,\75\ the
obligation to prepare the restatement would trigger application of the
compensation recovery policy. In connection with this proposed trigger,
the Commission proposed to define an ``accounting restatement'' \76\
and specifically noted that issuers should consider whether a series of
immaterial error corrections, whether or not they resulted in filing
amendments to previously filed financial statements, could be
considered a material error when viewed in the aggregate.\77\
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\72\ Under U.S. Generally Accepted Accounting Principles
(``GAAP''), a restatement is ``the process of revising previously
issued financial statements to reflect the correction of an error in
those financial statements.'' See Financial Accounting Standards
Board Accounting Standards Codification Topic 250, Accounting
Changes and Error Corrections (``ASC Topic 250''). Under
International Financial Reporting Standards as issued by the
International Accounting Standards Board (``IFRS''), a retrospective
restatement is ``correcting the recognition, measurement and
disclosure of amounts of elements of financial statements as if a
prior period error had never occurred.'' See International
Accounting Standard 8, Accounting Policies, Changes in Accounting
Estimates and Errors (``IAS 8''), paragraph 5.
\73\ Under GAAP, an error in previously issued financial
statements is ``[a]n error in recognition, measurement,
presentation, or disclosure in financial statements resulting from
mathematical mistakes, mistakes in the application of generally
accepted accounting principles (GAAP), or oversight or misuse of
facts that existed at the time the financial statements were
prepared. A change from an accounting principle that is not
generally accepted to one that is generally accepted is a correction
of an error.'' See ASC Topic 250. Under IFRS, prior period errors
are ``omissions from, and misstatements in, the entity's financial
statements for one or more prior periods arising from a failure to
use, or misuse of, reliable information that: (a) was available when
financial statements for those periods were authorised for issue;
and (b) could reasonably be expected to have been obtained and taken
into account in the preparation and presentation of those financial
statements. Such errors include the effects of mathematical
mistakes, mistakes in applying accounting policies, oversights or
misinterpretations of facts, and fraud.'' See IAS 8, paragraph 5.
\74\ The Commission did not propose any additional clarification
about when an error would be considered material for purposes of the
listing standards required by proposed Rule 10D-1 because
materiality is a determination that must be analyzed in the context
of particular facts and circumstances and has received extensive and
comprehensive judicial and regulatory attention. See, e.g., TSC
Industries, Inc. v. Northway, 426 U.S. 438 (1976); Basic v.
Levinson, 485 U.S. 224 (1988).
\75\ When we refer to financial statements, we mean the
statement of financial position (balance sheet), statement of
comprehensive income, statement of cash flows, statement of
stockholders' equity, related schedules, and accompanying footnotes,
as required by Commission regulations. When we refer to financial
statements for registered investment companies and business
development companies, we mean the statement of assets and
liabilities (balance sheet) or statement of net assets, statement of
operations, statement of changes in net assets, statement of cash
flows, schedules required by 17 CFR 210. 6-10, financial highlights,
and accompanying footnotes, as required by Commission regulations.
\76\ The Commission proposed to define the term as ``the result
of the process of revising previously issued financial statements to
reflect the correction of one or more errors that are material to
those financial statements.''
\77\ See Section II.B.1 of the Proposing Release.
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After the Commission issued the Proposing Release, some
commentators expressed concerns that some issuers may not be making
appropriate materiality determinations for errors identified \78\ and
may be seeking to avoid recovery under their compensation recovery
policies.\79\ In the Reopening Release, the Commission stated that it
was considering whether to interpret the phrase ``an accounting
restatement due to material noncompliance'' to include all required
restatements made to correct an error in previously issued financial
statements and sought public feedback on such an interpretation. In
particular, the Commission requested comment on whether to provide that
recovery is required with respect to both (1) restatements that correct
errors that are material to previously issued financial statements
(commonly referred to as ``Big R'' restatements), and (2) restatements
that correct errors that are not material to previously issued
financial statements, but would result in a material misstatement if
(a) the errors were left uncorrected in the current
[[Page 73084]]
report or (b) the error correction was recognized in the current period
(commonly referred to as ``little r'' restatements).\80\ A ``little r''
restatement differs from a ``Big R'' restatement primarily in the
reason for the error correction (as noted above), the form and timing
of reporting, and the disclosure required. For example, a ``Big R''
restatement requires the issuer to file an Item 4.02 Form 8-K and to
amend its filings promptly to restate the previously issued financial
statements.\81\ In contrast, a ``little r'' restatement generally does
not trigger an Item 4.02 Form 8-K, and an issuer may make any
corrections ``the next time the registrant files the prior year
financial statements.'' \82\ In connection with the Second Reopening
Release, the Commission provided further opportunity to analyze and
comment upon a memorandum prepared by Commission staff containing
additional analysis and data on compensation recovery policies and
accounting restatements.\83\
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\78\ See Choudhary et al., supra note 61.
\79\ See, e.g., Jean Eaglesham, Shh! Companies Are Fixing
Accounting Errors Quietly, Wall St. J. (Dec. 5, 2019), available at
<a href="https://www.wsj.com/articles/shh-companies-are-fixing-accounting-errors-quietly-11575541981">https://www.wsj.com/articles/shh-companies-are-fixing-accounting-errors-quietly-11575541981</a>. See also Rachel Thompson, Reporting
Misstatements as Revisions: An Evaluation of Managers' Use of
Materiality Discretion (working paper Sept. 17, 2021) available at
<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3450828">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3450828</a>
(retrieved from SSRN Elsevier database).
\80\ See Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements (Sept. 13, 2006). Studies cited
and data included in this release on ``little r'' restatement
frequency may define ``little r'' restatements differently than the
definition used herein and are generally based on the total number
of revisions to previously issued financial statements where the
issuer did not file an Item 4.02 Form 8-K.
\81\ An Item 4.02 Form 8-K is required to be filed when an
issuer concludes that any of its previously issued financial
statements should no longer be relied upon because of an error in
such financial statements. It is due within four business days after
the conclusion.
\82\ See supra note 80.
\83\ In the 2022 staff memorandum, the staff refers to ``little
r'' restatements as restatements that correct errors that would only
result in a material misstatement if the errors were left
uncorrected in the current report or the error correction was
recognized in the current period. This reference has the same
meaning as the description of ``little r'' restatements in this
release.
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b. Comments
We received a range of comments on the proposals regarding
restatements triggering application of the compensation recovery
policy. In response to the Proposing Release, some commenters expressed
support for the proposed use of the concept of a ``material error'' as
the standard for the recovery trigger.\84\ Some commenters suggested
that the materiality standard was vague, or thought examples would be
helpful.\85\ Other commenters recommended that the Commission expressly
provide that a restatement to correct immaterial errors would not
trigger a compensation recovery,\86\ or sought additional guidance for
aggregating immaterial error corrections.\87\ Some commenters
recommended that recovery should not be limited to restatements for
errors that were material to the previously issued financial
restatements,\88\ or recommended revisions to the proposed definition
of ``accounting restatement.'' \89\ Other commenters suggested that
recovery should be triggered when any revision to previously issued
financial statements occurred.\90\ Other commenters, noting a decline
in the number of formal accounting restatements, recommended that the
Commission expand the scope of the rulemaking beyond implementation of
Section 10D to require compensation recovery policies to address
instances of misconduct by executive officers that do not result in a
financial restatement.\91\
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\84\ See comment letters from Business Roundtable (Sept. 14,
2015) (``BRT 1''); Better Markets 1; Center On Executive
Compensation (Sept. 14, 2015) (``CEC 1''); CFA Institute 1; Ernst &
Young LLP (``EY'') (Sept. 15, 2015); NACD; PricewaterhouseCoopers
LLP (``PWC''); SCG 1; and SBA.
\85\ See comment letters from CalPERS 1; Exxon/Mobil Corporation
(``Exxon'') (suggesting that recovery should only be triggered by a
restatement that ``significantly altered the total mix of
information available''); International Bancshares Corporation
(``IBC'') (suggesting that recovery should only be triggered by a
restatement if there is a substantial likelihood a reasonable
investor would consider the restatement as important in deciding how
to vote); Japanese Bankers; National Association of Manufacturers
(``NAM'') (suggesting ambiguity could result in great variation
among issuers in which restatements should trigger recovery); and
SBA.
\86\ See comment letters from CCMC 1; Chevron Corporation
(``Chevron''); EY; and SCG 1. See also comment letter from PWC
(suggesting that inclusion of the word ``material'' clarifies that
the listing standard would not apply to restatements that reflect
the correction of immaterial errors).
\87\ See comment letters from ABA 1; Chevron; Corporate
Governance Coalition for Investor Value (``Coalition''); Davis Polk
1; FSR; and IBC.
\88\ See comment letters from AFL-CIO (Sept. 14, 2015)
(expressing concern regarding ``revision restatements'' that would
allow an issuer to avoid the application of the proposed
compensation recovery provisions); As You Sow (Sept. 15, 2015) (``As
You Sow 1''); CII 1; CalPERS 1; and SBA. But see comment letter from
ABA 1 (noting ``that the analysis of an error's materiality takes
into account the error's impact on executive compensation'').
\89\ See comment letters from Chevron and SCG 1 (recommending
that the definition include a specific reference to GAAP) and from
ABA 1 (recommending that the definition refer to the applicable
accounting standards). See also comment letter from PWC (noting that
the proposed definition permits the listing standard to be applied
regardless of the accounting framework a listed issuer follows).
\90\ See, e.g., comment letters from As You Sow 1; CII 1; and
CalPERS 1.
\91\ See comment letters from AFL-CIO; AFR 1; Plamen Kovachev
(``Kovachev'') (recommending the rule include ethical misconduct
triggers to more closely align the rule with executives' fiduciary
duties); Rutkowski 1; and UAW Retiree Medical Benefits Trust, et al.
(``UAW, et al.'').
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In response to the Reopening Release, we received a similar range
of comments relating to the recovery trigger and the meaning of ``an
accounting restatement due to material noncompliance.'' \92\ A number
of commenters supported the standard set forth in the Proposing Release
that would apply recovery policies only when a restatement is required
to correct errors that are material to previously issued financial
statements and triggers disclosure under Item 4.02(a) of Form 8-K.\93\
These commenters further contended that an ``accounting restatement due
to material noncompliance'' should not include ``little r''
restatements.\94\ Other commenters supported interpreting what it means
to be required to prepare an accounting restatement due to material
noncompliance in the manner described in the Reopening Release.\95\
[[Page 73085]]
Some of these commenters noted research suggesting that issuers may be
deeming revisions to be immaterial even though the revisions meet at
least one of the indicators of materiality described in Staff
Accounting Bulletin No. 99.\96\ Some of these commenters additionally
suggested that the increasing prevalence of revisions may stem from
management seeking to avoid restatements that would trigger an Item
4.02 Form 8-K filing or the application of a compensation recovery
policy provision.\97\ Some commenters further recommended expanding the
recovery policy triggers.\98\
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\92\ One commenter on the Reopening Release suggested ``it would
be easier and more streamlined for issuers to rely on existing
guidance, literature, and definitions concerning accounting errors
rather than define the terms `accounting restatement' and `material
noncompliance.' '' See comment letter in response to the Reopening
Release from ABA 2.
\93\ See, e.g., comment letters in response to the Reopening
Release from Davis Polk 3 (stating that ``immaterial errors should
not trigger clawback policies'' and cautioning against creating a
new materiality standard for disclosure of financial restatements
solely for Rule 10D-1 purposes); Hunton; McGuireWoods, LLP and
Brownstein Hyatt Farber Schreck LLP (``McGuireWoods'') (recommending
that the Commission define ``material error'' as occurring when the
issuer is required, by applicable accounting standards, to issue
restated financial statements to correct one or more errors that are
``material'' to previously issued financial statements); S&C
(contending that immaterial error corrections to the current
period--commonly referred to as out-of-period adjustments--should
not be included because they are not restatements or ``due to
material noncompliance'') (Nov. 16, 2021) (``S&C 2''); and SCG (Nov.
29, 2021) (``SCG 3'').
\94\ See, e.g., comment letters in response to the Reopening
Release from Davis Polk 3 (contending that Proposing Release
facilitates the purpose of the recovery rule in being triggered on
the basis of ``meaningful errors'' and that ``little r''
restatements do not meet this standard and would create costs due to
the uncertainty of the standard); Hunton (suggesting that ``little
r'' restatements are immaterial to investors and should not serve as
a recovery policy trigger); McGuireWoods (suggesting that Section
10D intended that not all restatements should trigger recovery and,
in particular, that immaterial restatements should be excluded from
recovery); and SCG 3. As discussed below, we disagree with how a
number of these commenters characterize ``little r'' restatements.
\95\ See, e.g., comment letters in response to the Reopening
Release from Better Markets (Nov. 22, 2021) (``Better Markets 2'')
(recommending including a definition in the final rule, such as one
defining an accounting restatement as either a revision restatement
or a re-issuance restatement, to avoid unintended, inconsistent
interpretations, and other enforcement challenges that could result
from reliance on guidance); CFA Institute (Nov. 22, 2021) (``CFA
Institute 2'') (suggesting a broad interpretation may serve to
mitigate the perception of misaligned motivations); Council of
Institutional Investors (Nov. 18, 2021) (``CII 3'') (suggesting that
Section 10D was not intended to narrowly limit the required recovery
policy to exclude ``little r'' restatements); International
Corporate Governance Network (``ICGN''); Occupy the SEC
(``Occupy''); Ohio Public Employees Retirement System (Nov. 22,
2021) (``OPERS 2'') (recommending that the Commission clarify ``that
its definition of `accounting restatement' includes all required
restatements made to correct an error in previously issued financial
statements, regardless of whether they are formal restatements or
revisions''); and Public Citizen 2. See also comment letters in
response to the Second Reopening Release from Americans for
Financial Reform (July 6, 2022) (``AFR 2'') (noting studies finding
that ``little r'' restatements have been issued in lieu of ``Big R''
restatements to avoid compensation recovery provisions); and Council
of Institutional Investors (June 24, 2022).
\96\ See, e.g., comment letters in response to the Reopening
Release from CFA Institute 2 (further suggesting that lack of
transparency in the issuer's materiality assessment and the reason
for the method of correction may be contributing factors); and OPERS
2.
\97\ See, e.g., comment letters in response to the Reopening
Release from Better Markets 2; and OPERS 2.
\98\ See, e.g., comment letters in response to the Reopening
Release from New York City Retirement Systems (``NYCRS'')
(recommending recouping compensation from executives responsible for
detrimental conduct causing significant financial or reputational
harm); and New York State Common Retirement Fund (``NYSCRF'')
(recommending recouping compensation awarded to executives during
periods of fraudulent activity, inadequate oversight, misbehavior,
including discrimination and harassment of any kind, or gross
negligence, which impacted or is reasonably expected to impact
financial results or cause reputational harm).
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A few commenters supported a requirement for an issuer to disclose
its evaluation that errors are immaterial,\99\ while some other
commenters opposed requiring this disclosure.\100\ Another stated that
``involvement of the independent auditors in evaluating management's
materiality analysis and concurring (through the audit opinion) with
management's conclusion, with oversight from the company's audit
committee, provides sufficient protection of investor interests that
material errors do not go uncorrected by a company trying to avoid the
clawback of incentive compensation.'' \101\
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\99\ See, e.g., comment letters from Better Markets 1; CalPERS
1; and CFA Institute 1. See also comment letter from CFA Institute 1
(noting that because of the inherent estimates, judgements, and
complexity involved, issuers should disclose their evaluations, the
process and assumptions used to determine whether the error(s) in
question were material or immaterial, and why they decided the
matter in this way and suggesting that thorough disclosure provides
investors enough information to understand the material facts and
the reasoning behind such determination, and thereby helps them to
make appropriate decisions about the board's actions); and ICGN.
\100\ See, e.g., comment letters from BRT 1 (suggesting it is a
tenet of the Federal securities laws that disclosure of immaterial
information is not required); EY; NACD; and SCG 1.
\101\ See comment letter from EY.
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c. Final Amendments
After considering comments received on the Proposing Release and
reopening releases, in a change from the proposal, we are adopting
rules to require listed issuers to adopt and comply with a written
compensation recovery policy that will be triggered in the event the
issuer is required to prepare an accounting restatement that corrects
an error in previously issued financial statements that is material to
the previously issued financial statements, or that would result in a
material misstatement if the error were corrected in the current period
or left uncorrected in the current period.\102\ While the proposed
rules focused on restatements for errors that are material to the
previously issued financial statements, after further consideration and
input from commenters, the final rules reflect a broader construction
of the phrase ``an accounting restatement due to the material
noncompliance of the issuer with any financial reporting requirement
under the securities laws'' based upon the fact that both types of
restatements are caused by material misstatements that either already
exist or would exist in the current period.
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\102\ See 17 CFR 240.10D-1(b)(1) (``Rule 10D-1(b)(1)'').
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In our view, the statutory language of Section 10D--``an accounting
restatement due to the material noncompliance of the issuer with any
financial reporting requirement under the securities laws''--can
appropriately be read to encompass both ``Big R'' and ``little r''
restatements. First, as a threshold matter, we disagree with those
commenters who stated that ``little r'' restatements are not accounting
restatements. We note that both are considered ``accounting
restatements'' under U.S. GAAP and IFRS \103\ because both result in
revisions of previously issued financial statements for a correction of
an error in those financial statements. In contrast, as noted by one
commenter, sometimes the correction of an error is recorded instead in
the current period financial statements--commonly referred to as an
out-of-period adjustment--when the error is immaterial to the
previously issued financial statements, and the correction of the error
is also immaterial to the current period.\104\ We agree with that
commenter that an out-of-period adjustment should not trigger a
compensation recovery analysis under the final rules, because it is not
an ``accounting restatement.'' \105\
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\103\ See supra note 72.
\104\ See comment letter from S&C 2.
\105\ See supra note 93. In response to commenters who requested
clarification about the statement in the Proposing Release that
``issuers should consider whether a series of immaterial error
corrections, whether or not they resulted in filing amendments to
previously filed financial statements, could be considered a
material error when viewed in the aggregate,'' we do not think this
is necessary. See supra note 87. Staff guidance on materiality is
already available which specifically addresses the aggregation of
misstatements that individually do not cause the financial
statements taken as a whole to be materially misstated. See infra
note 108. Furthermore, the scope of the final amendments includes
``little r'' restatements, which are sometimes required due to the
cumulative effects of an error over multiple reporting periods. See
more detailed discussion below.
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Second, both types of restatements address material noncompliance
of the issuer with financial reporting requirements. In the case of a
``Big R'' restatement, the material noncompliance results from an error
that was material to previously issued financial statements. In the
case of a ``little r'' restatement, the material noncompliance results
from an error that is material to the current period financial
statements if left uncorrected or if the correction were recorded only
in the current period.\106\ Due to the materiality of the impact the
error would have on the current period, the previously issued financial
statements must be revised to correct it even
[[Page 73086]]
though the error may not have been material to those financial
statements. We note that the plain language of Section 10D does not
limit the concept of ``an accounting restatement due to material
noncompliance'' to effects on previously issued financial statements,
and thus the final rules require compensation recovery analysis for
both ``Big R'' and ``little r'' restatements.
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\106\ We note that certain errors may compound over time. While
the initial error amount may not have been material to previously
issued financial statements, it may become material due to its
cumulative effect over multiple reporting periods. A material
adjustment to the current period that relates to an error from
previously issued financial statements would cause the current
period financial statements to be materially misstated. An example
of such error is an improper expense accrual (such as an overstated
liability) that has built up over five years at $20 per year. Upon
identification of the error in year five, the issuer evaluated the
misstatement as being immaterial to the financial statements in
years one through four. To correct the overstated liability in year
five a $100 credit to the statement of comprehensive income would be
necessary; however, $80 of it would relate to the previously issued
financial statements for years one through four. During the
preparation of its annual financial statements for year five, the
issuer determines that, although a $20 annual misstatement of
expense would not be material, the adjustment to correct the $80
cumulative error from previously issued financial statements would
be material to comprehensive income for year five. Accordingly, the
issuer must correct the financial statements for years one through
four.
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We also disagree with those commenters who asserted that including
``little r'' restatements would make it difficult to comply with the
rule. Issuers are already required to perform a materiality analysis on
each error that is identified in order to determine how to account for
and report the correction of that error. Thus, issuers will have
already performed the analysis necessary to identify these additional
accounting restatements. Furthermore, the final rules reduce
uncertainty regarding their scope by expressly identifying the types of
restatements that are required to be included within an issuer's
recovery policy.
In addition to being clear and consistent with applicable
accounting literature, guidance, and the plain language of Section 10D,
this construction of the statutory language addresses concerns that
issuers could manipulate materiality and restatement determinations to
avoid application of the compensation recovery policy.\107\ In this
regard, we note that Commission staff has provided guidance to assist
issuers in making materiality determinations. The staff guidance
emphasizes that an issuer's materiality evaluation of an identified
unadjusted error should consider the effects of the identified
unadjusted error on the applicable financial statements and related
footnotes, and evaluate quantitative and qualitative factors.\108\
Registrants, auditors, and audit committees should already be aware of
the need to assess carefully whether an error is material by applying a
well-reasoned, holistic, objective approach from a reasonable
investor's perspective based on the total mix of information. Further,
whether the misstatement has the effect of increasing management's
compensation, for example, by satisfying requirements for the award of
bonuses or other forms of incentive compensation, is a qualitative
factor that should be considered when making a materiality
determination.
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\107\ We note evidence supporting the materiality manipulation
concern. See, e.g., Brian Hogan and Gregory A. Jonas, The
association between executive pay structure and the transparency of
restatement disclosures, Acct. Horizons (Sept. 2016) (finding that
CFO pay structure is correlated with the transparency of restatement
disclosure (``Big R'' vs. ``little r'')). See also Thompson, supra
note 69 (finding that issuers with compensation recovery provisions
are more likely to report misstatements as ``little r'' restatements
instead of ``Big R'' restatements).
\108\ See Staff Accounting Bulletin No. 99, Materiality (Aug.
12, 1999) and Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements (Sept. 13, 2006). (This
guidance and any other staff statement cited in this release is not
a rule, regulation, or statement of the Commission and the
Commission has neither approved nor disapproved its content. This
guidance, like all staff statements, has no legal force or effect:
it does not alter or amend applicable law, and it creates no new or
additional obligations for any person.) We note that Commission
staff have observed that some materiality analyses appear to be
biased toward supporting an outcome that an error is not material to
previously issued financial statements. See id. Relatedly, it has
been reported that, while the total number of accounting
restatements by issuers declined each year from 2013 to 2020, the
percentage of ``little r'' restatements increased to approximately
76% of restatements in 2020. See Audit Analytics, 2020 Financial
Restatements: A Twenty-Year Review (November 2021).
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Requiring recovery analysis for both ``Big R'' and ``little r''
accounting restatements does not eliminate the risk that an issuer
could avoid a recovery obligation by manipulating its materiality
analysis of an error.\109\ While this is an inherent risk, we note the
involvement of an independent auditor in evaluating management's
materiality analyses, with the oversight of the audit committee,
protects investor interests by helping ensure that material errors do
not go uncorrected by an issuer seeking to avoid the recovery of
erroneously awarded compensation. Furthermore, we note the potential
serious consequences, including but not limited to Commission
enforcement action and private litigation, of mischaracterizing
material accounting errors as immaterial.
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\109\ This could occur if an issuer were to inappropriately
conclude that an identified error was not material to its previously
issued financial statements or the current period.
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For similar reasons, we are not adopting a requirement for an
issuer to disclose the materiality analysis of an error when the error
is determined to be immaterial, as recommended by some commenters.
Inclusion of ``little r'' restatements in the scope of restatements
triggering recovery, the involvement of independent auditors and
oversight of audit committees, and the serious potential consequences
of deliberate mischaracterizations of accounting errors, should
mitigate the risk that some errors will be incorrectly determined to be
immaterial. Further, many assessments of materiality are complex and
highly sensitive to particular facts and circumstances. Requiring
issuers to disclose sufficient information to make these assessments
meaningful to investors would likely entail lengthy disclosures that
may be of limited use for investors. Instead, we are adopting a
disclosure requirement, discussed in Section II.D., for issuers to
clearly identify on the cover page of their annual reports when the
financial statement periods presented contain restatements, which
should provide additional transparency regarding such restatements.
In a change from the proposal, Rule 10D-1 will not provide separate
definitions of ``accounting restatement'' or ``material noncompliance''
as proposed. Existing accounting standards and guidance already set out
the meaning of those terms.\110\ This rule is not intended to affect
that guidance. While we acknowledge that a number of commenters
supported the proposed definitions of ``accounting restatement'' and
``material noncompliance,'' in light of the modifications discussed
above, we agree with the commenter that suggested that it will be
easier for issuers to look to existing guidance, literature, and
definitions when assessing accounting errors \111\ and that such an
approach will help ensure that those standards are consistently applied
both across different issuers and over time.
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\110\ Rule 10D-1 clarifies the meaning of an ``accounting
restatement due to the material noncompliance of the issuer with any
financial reporting requirement under the securities laws.''
\111\ See comment letter in response to the Reopening Release
from ABA 2.
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As indicated in the Proposing Release, we understand that under
current accounting standards the following types of changes to an
issuer's financial statements do not represent error corrections, and
therefore would likewise not trigger application of the issuer's
compensation recovery policy under the listing standards:
<bullet> Retrospective application of a change in accounting
principle; \112\
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\112\ A change in accounting principle is ``[a] change from one
generally accepted accounting principle to another generally
accepted accounting principle when there are two or more generally
accepted accounting principles that apply or when the accounting
principle formerly used is no longer generally accepted. A change in
the method of applying an accounting principle also is considered a
change in accounting principle.'' See ASC Topic 250. IAS 8 has
similar guidance. A change from an accounting principle that is not
generally accepted to one that is generally accepted, however, would
be a correction of an error.
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<bullet> Retrospective revision to reportable segment information
due to a change in the structure of an issuer's internal organization;
\113\
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\113\ If an issuer changes the structure of its internal
organization in a manner that causes the composition of its
reportable segments to change, the corresponding information for
earlier periods, including interim periods, should be revised unless
it is impracticable to do so. See ASC Topic 280-10-50-34. IFRS 8 has
similar guidance.
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[[Page 73087]]
<bullet> Retrospective reclassification due to a discontinued
operation; \114\
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\114\ See ASC Topic 205-20. IFRS 5 has similar guidance.
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<bullet> Retrospective application of a change in reporting entity,
such as from a reorganization of entities under common control; \115\
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\115\ See ASC Topic 250-10-45-21. IFRS does not have specific
guidance addressing this reporting matter.
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<bullet> Retrospective adjustment to provisional amounts in
connection with a prior business combination (IFRS filers only); \116\
and
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\116\ See IFRS 3, paragraph 45.
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<bullet> Retrospective revision for stock splits, reverse stock
splits, stock dividends or other changes in capital structure.
2. Date the Issuer Is Required To Prepare an Accounting Restatement
Section 10D(b)(2) requires recovery of erroneously awarded
compensation ``during the 3-year period preceding the date on which the
issuer is required to prepare an accounting restatement.'' Section 10D
does not specify when an issuer is ``required to prepare an accounting
restatement'' for purposes of this provision.
a. Proposed Amendments
The Commission proposed that the date on which an issuer is
required to prepare an accounting restatement is the earlier to occur
of:
<bullet> The date the issuer's board of directors, a committee of
the board of directors, or the officer or officers of the issuer
authorized to take such action if board action is not required,
concludes, or reasonably should have concluded, that the issuer's
previously issued financial statements contain a material error; or
<bullet> The date a court, regulator or other legally authorized
body directs the issuer to restate its previously issued financial
statements to correct a material error.
A note to the proposed rule indicated that the first proposed date
generally is expected to coincide with the occurrence of the event
described in Item 4.02(a) of Exchange Act Form 8-K, although neither
proposed date would be predicated on if or when a Form 8-K was filed.
In the Reopening Release, the Commission solicited further comment as
to whether to remove the ``reasonably should have concluded'' language
in light of concerns that the language adds uncertainty to the
determination.
b. Comments
We received a range of comments on the proposed specification of
the date the issuer is required to prepare an accounting restatement
(referred to in this release as the ``trigger date''). Some commenters
supported including ``reasonably should have concluded'' as an
objective standard that provides certainty and prevents manipulation or
the potential for evasion,\117\ while others expressed concern that use
of ``reasonably should have concluded'' could introduce elements of
uncertainty and subjectivity into the determination.\118\ Some
commenters recommended a bright-line standard involving a single date,
such as the date of the Item 4.02(a) Form 8-K filing.\119\ Other
commenters recommended including as a trigger the filing of an Item
4.02(b) Form 8-K disclosing that independent accountants have advised
the issuer that the financial statements can no longer be relied
upon.\120\ Some commenters, however, did not believe that receipt of
such a notification from the auditor should be conclusive.\121\
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\117\ See comment letters from Better Markets 1; and Compensia.
Some commenters specifically supported using the earlier to occur of
the alternative dates, as proposed. See, e.g., letters from CalPERS
1; CII 1; and CFA Institute 1.
\118\ See, e.g., comment letters from ABA 1; BRT 1; CEC 1;
Exxon; and SCG 1. Some of these commenters further suggested that
the language could invite disputes or lead to litigation. See, e.g.,
comment letters from Exxon; and SCG 1.
\119\ See, e.g., comment letters from Davis Polk 1; Mercer; and
NACD. See also comment letters from Exxon (recommending the actual
issuance of a restatement); and Public Citizen 1 (recommending the
date the erroneous financial statement is filed).
\120\ See comment letters from CFA Institute 1; and EY.
\121\ See comment letters from ABA 1; and SCG 1.
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Some commenters expressed the view that existing legal requirements
provide sufficient deterrents against intentionally delaying issuance
of a restatement.\122\ Other commenters expressed concerns about the
potential for delay,\123\ and one suggested the proposed ``reasonably
should have concluded'' language would discourage issuers from
improperly delaying filing a restatement to avoid recovery.\124\
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\122\ See, e.g., comment letters from ABA 1 (noting that other
existing laws, including the certification requirements and anti-
fraud provisions of the Exchange Act as well as applicable corporate
law, provide the appropriate incentives to make timely financial
reporting determinations in connection with Commission filings); and
Exxon (noting Commission and private litigation liabilities likely
to accrue while a material error in an issuer's financial reporting
remains uncorrected, the personal certification requirements
applicable to the principal executive and financial officers, and
the risk that an issuer's independent auditors will refuse to give
an opinion on financial statements containing an uncorrected
material error).
\123\ See comment letters from Public Citizen 1; and CFA
Institute 1 (noting that considerable time can pass between the time
an error is detected and the time a court or regulator requires the
issuer to take action).
\124\ See comment letter from CII 1.
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In response to the Reopening Release, a number of commenters
expressed support for the inclusion of ``reasonably should have
concluded'' language in the proposed rule because in their view it
would create a more objective standard and appropriately limit board
discretion.\125\ In contrast, other commenters supported using the date
the issuer's board of directors (or a committee of the board of
directors or the officer or officers of the issuer authorized to take
such action if board action is not required) ``concludes that the
issuer's previously issued financial statements contain a material
error. Some of these commenters expressed concern about uncertainty or
ambiguity associated with the ``reasonably should have concluded''
determination.\126\
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\125\ See, e.g., comment letters in response to the Reopening
Release from Better Markets 2 (suggesting the ``reasonably should
have concluded'' language imposes an enforceable obligation on the
issuer and reduces the likelihood of litigation by inducing issuers
to act prudently to avoid the risk); CFA Institute 2 (suggesting the
language would mitigate concerns about internal investigations
taking longer than necessary, unreasonable delays in reaching a
conclusion, or misalignment of executives' incentives impacting the
timeliness or accuracy of the financial reporting); and ICGN. See
also comment letters in response to the Reopening Release from
Eileen Morrell; Public Citizen 2; Occupy; and OPERS 2 (supporting
the use of the ``reasonably should have concluded'' language); and
comment letter in response to the Second Reopening Release from AFR
2 (suggesting that the ``reasonably should have concluded'' language
discourages issuers from delaying actions necessary to fix erroneous
financial statements).
\126\ See, e.g., comment letters in response to the Reopening
Release from ABA 2 (suggesting the ``reasonably should have
concluded'' language would add subjectivity by using a triggering
event that differs from Form 8-K and would be open to second-
guessing and litigation); CEC (Nov. 17, 2021) (``CEC 2'')
(suggesting the language creates excessive uncertainty and excessive
legal risk based on the board's view of when the look back period
should commence versus the view of an impacted shareholder or an
executive who disputes that timing); Davis Polk 3; and McGuireWoods
(suggesting the standard would be ambiguous and overly broad and
noting that Item 4.02 of Form 8-K relies on when the board concludes
a restatement is required). See also comment letter in response to
the Reopening Release from SCG 1 (noting that knowingly, recklessly,
or negligently misreporting false or misleading financial
information already subjects the issuer to liability).
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Some commenters on the proposal additionally sought guidance as to
the types of facts that would support a finding that the issuer
reasonably should have concluded that its previously issued financial
statements contain a material error.\127\ Some
[[Page 73088]]
commenters also sought clarification regarding when a regulator or
other legally authorized body directs an issuer to restate its
previously issued financial statements to correct a material
error.\128\
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\127\ See comment letters from CEC 1; Compensia; and SCG 1
(seeking clarification that a restatement by an issuer's peer group
member does not trigger recovery when an issuer's incentive-based
compensation is based on performance relative to the peer group).
\128\ See comment letter from EY (suggesting that it may be
unclear whether a request for a restatement from a regulator would
be a trigger, given the lack of finality of the determination). See
also comment letters from CEC 1 (recommending that the date not be
established until a court order is final and non-appealable); and
SCG 1 (recommending that the date of the initial court or agency
restatement order should be designated as the starting point of the
three-year look-back period, but only after the order is final and
non-appealable).
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c. Final Amendments
After considering the comments, we are adopting the rules
substantially \129\ as proposed to provide that under the listing
standards the date on which an issuer is required to prepare an
accounting restatement is the earlier to occur of:
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\129\ In a nonsubstantive change from the proposal, we have
incorporated the standard for the date the issuer is required to
prepare an accounting restatement into 17 CFR 240.10D-1(a)(1)(ii)
rather than separately defining the term ``date on which an issuer
is required to prepare an accounting restatement'' in paragraph (c)
as proposed.
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<bullet> The date the issuer's board of directors, a committee of
the board of directors, or the officer or officers of the issuer
authorized to take such action if board action is not required,
concludes, or reasonably should have concluded, that the issuer is
required to prepare an accounting restatement due to the material
noncompliance of the issuer with any financial reporting requirement
under the securities laws as described in Rule 10D-1(b)(1); or
<bullet> The date a court, regulator or other legally authorized
body directs the issuer to prepare an accounting restatement.\130\
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\130\ See 17 CFR 240.10D-1(b)(1)(ii) (``Rule 10D-1(b)(1)(ii)'').
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We believe the final rule provides reasonable certainty for
issuers, shareholders, and exchanges while minimizing incentives for
issuers to delay their restatement conclusions. While we acknowledge
some commenters' assertion that a bright-line or single-date standard
might be easier to apply, we continue to have concerns that such an
approach would not address the potential for delay of a restatement
determination in order to manipulate the recovery date.
As noted in the Proposing Release,\131\ using the date the
erroneous financial statements were filed as the triggering date would
be inconsistent with the three-year look-back period because if the
date of filing of the erroneous financial statements were used,
recovery would not apply to any incentive-based compensation received
after that date, even when the amount was affected by the erroneous
financial statements. As a result, we disagree with the suggestion that
the look-back period should be triggered by the date the issuer files
the accounting restatement. The issuer will necessarily determine that
it is ``required to prepare'' a restatement on or before the day it
files the restatement. We have not adopted this suggestion because it
would allow an issuer to delay the recovery period, and potentially
reduce the amount of compensation subject to recovery, by delaying the
filing of a restatement it had already determined it was required to
prepare.
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\131\ See Proposing Release at Section II.B.2 (``For example, if
2014 net income was materially misstated, and a 2014-2016 long-term
incentive plan had a performance measure of three-year cumulative
net income, a look-back period that covered only the three years
before the erroneous filing would not capture the compensation
earned under that plan.'').
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Rather, we agree with the commenters that indicated that the timing
standard we are adopting is sufficiently certain and appropriately
limits board discretion. The standard promotes compliance with the rule
by making evasion of the application of a recovery policy more
difficult.\132\ The ``reasonably should have concluded'' concept
reduces the incentive for an issuer to delay the investigation of a
known error and the decision that a restatement is necessary, because
the delayed decision date would not determine the beginning of the
recovery period. We recognize that, as some commenters indicated,
establishing the trigger date as the date that the issuer's board
concludes, or reasonably should have concluded, that the issuer is
required to prepare an accounting restatement creates some risk that
the board's conclusions will be subject to litigation. We believe this
risk is acceptable in light of the benefit of deterring issuers from
manipulating the timing of their conclusions to avoid or delay a
recovery obligation. In order to trigger application of the recovery
policy, an issuer merely needs to have concluded that it is required to
prepare an accounting restatement, which may occur before the precise
amount of the error has been determined.\133\ We further note that
applying a reasonableness standard to the determination of the three-
year look-back supports an exchange's ability to enforce the recovery
provision by providing the exchange a standard by which to review an
issuer's conclusion.
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\132\ Rule 10D-1(b)(1)(ii) is being established specifically for
purposes of determining the relevant recovery period under Rule 10D-
1. The ``reasonably should have concluded'' language applies only
with respect to the determination of the three-year look-back timing
for purposes of compensation recovery. It does not apply with
respect to a conclusion under applicable accounting rules and
standards as to whether there is an error that requires a
restatement.
\133\ We disagree with commenters that asserted that the
reasonableness standard increases uncertainty or ambiguity. While we
acknowledge that the standard is not a fixed date in time, it is
intended to allow an exchange to assess, based on the facts
available to the issuer, the point at which a reasonable person
would have concluded that an accounting restatement is required.
Contrary to a subjective determination, this standard provides for
an objective assessment based on the facts available as to the
determination of the timing of the lookback.
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To the extent that an issuer is required to file an Item 4.02(a)
Form 8-K, the conclusion that it is required to prepare an accounting
restatement is expected to coincide with the occurrence of the event
disclosed in the Form 8-K.\134\ In addition, in applying a
reasonableness standard to the determination of a three-year look-back
period, while not dispositive, one factor that an issuer would have to
consider carefully would be any notice that it may receive from its
independent auditor that previously issued financial statements contain
a material error.\135\
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\134\ In a modification from the proposal, we are no longer
including a note indicating that the date generally is expected to
coincide with the occurrence of the event described in Item 4.02(a)
of Exchange Act Form 8-K because we are expanding the circumstances
that would trigger the analysis to include ``little r'' restatements
which generally do not require reporting on a Form 8-K.
\135\ We are not, however, adopting the suggestion of some
commenters that the filing of an Item 4.02(b) Form 8-K disclosing
that independent accountants have advised the issuer that the
financial statements can no longer be relied upon be included as a
trigger. See supra note 120. As noted by another commenter, such a
date may not be conclusive. See comment letter from ABA 1. However,
if a listed issuer files an Item 4.02(b) Form 8-K because it is
advised by, or receives notice from, its independent accountant that
disclosure should be made or action should be taken to prevent
future reliance on a previously issued audit report or completed
interim review related to previously issued financial statements
that contain a material error, the triggering event for the recovery
policy occurs, at the latest, when the listed issuer determines to
restate its financial statements, even if it subsequently neglects
to file an Item 4.02(a) Form 8-K to report that decision.
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While we anticipate that most issuers will make their determination
regarding the three-year look-back trigger based on the standard in 17
CFR 240.10D-1(b)(1)(ii)(A), some issuers may not conclude they are
required to prepare an accounting restatement and instead may choose to
contest whether an accounting restatement is required. While we expect
these occurrences to be rare, 17 CFR 240.10D-1(b)(1)(ii)(B) (``Rule
10D-
[[Page 73089]]
1(b)(1)(ii)(B)'') clarifies that in these circumstances, the trigger
date will be no later than the date a court, regulator, or other
legally authorized body directs the issuer to prepare an accounting
restatement. In the event that such date is different than the date an
issuer reasonably should have concluded that an accounting restatement
is required, Rule 10D-1(b)(1)(ii) mandates that the trigger date be the
earlier date. In response to questions raised by a commenter, we are
clarifying that for purposes of Rule 10D-1(b)(1)(ii)(B), the date of
the initial court order or agency action would be the trigger date for
the three-year look-back period, but that the determination and
application of the recovery policy would occur only after the order is
final and non-appealable.
Incorporating the triggering events into the rule rather than
leaving the determination solely to the issuer will better realize the
objectives of Section 10D while providing clarity about when a recovery
policy, and specifically the determination of the three-year look-back
period, is triggered for purposes of the listing standards. In this
regard, we note that the rule also states that an issuer's obligation
to recover erroneously awarded compensation is not dependent on if or
when the restated financial statements are filed with the
Commission.\136\
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\136\ See 17 CFR 240.10D-1(b)(1)(i)(B) (``Rule 10D-
1(b)(1)(i)(B)'').
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C. Application of Recovery Policy
1. Executive Officers Subject to Recovery Policy
Section 10D identifies the class of persons and the time frame
during which that class of persons is subject to recovery of
erroneously awarded incentive-based compensation. Specifically, Section
10D(b)(2) requires exchanges and associations to adopt listing
standards that require issuers to adopt and comply with policies that
provide for recovery of erroneously awarded compensation from ``any
current or former executive officer of the issuer who received
incentive-based compensation'' during the three-year look back
period.\137\
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\137\ Section 10D does not define ``executive officer'' for
purposes of the recovery policy. The Senate Committee on Banking,
Housing, and Urban Affairs noted that ``[t]his policy is required to
apply to executive officers, a very limited number of employees, and
is not required to apply to other employees.'' Senate Report at 136.
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a. Proposed Amendments
The Commission proposed to include in the listing standards a
definition of ``executive officer'' modeled on the definition of
``officer'' in 17 CFR 240.16a-1(f) (``Rule 16a-1(f)''). For purposes of
Section 10D, the proposed definition of ``executive officer'' included
the issuer's president, principal financial officer, principal
accounting officer (or if there is no such accounting officer, the
controller), any vice-president of the issuer in charge of a principal
business unit, division or function (such as sales administration or
finance), any other officer who performs a policy-making function, or
any other person who performs similar policy-making functions for the
issuer. The proposed definition expressly included the principal
financial officer and the principal accounting officer (or if there is
no such accounting officer, the controller), reflecting the view that
their responsibility for financial information justifies their
inclusion in the definition of ``executive officer'' for this purpose.
As proposed, executive officers of the issuer's parents or subsidiaries
would be deemed executive officers of the issuer if they perform such
policy making functions for the issuer.\138\
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\138\ The proposed definition also contained specific provisions
with respect to limited partnerships and trusts, and a note
providing that ``policy-making function'' is not intended to include
policy making functions that are not significant and that persons
identified as ``executive officers'' pursuant to 17 CFR 229.401(b)
are presumed to be executive officers for purposes of the proposed
rule.
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The Commission additionally proposed that the rules require
recovery of excess incentive-based compensation received by an
individual who served as an executive officer of the listed issuer at
any time during the performance period. This would include incentive-
based compensation derived from an award authorized before the
individual becomes an executive officer, and inducement awards granted
in new hire situations, as long as the individual served as an
executive officer of the listed issuer at any time during the award's
performance period.\139\
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\139\ As proposed, recovery would not apply to an individual who
is an executive officer at the time recovery is required if that
individual had not been an executive officer at any time during the
performance period for the incentive-based compensation subject to
recovery.
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b. Comments
Commenters provided varying recommendations on the appropriate
definition of ``executive officer.'' Some commenters expressly
supported the proposed definition,\140\ and one recommended expanding
the definition.\141\ Other commenters suggested that the proposed
definition was too broad.\142\ Some of these commenters contended that
Section 10D does not require the breadth of the proposed
definition,\143\ and some further recommended various other limits on
covered executive officers.\144\ In contrast, some commenters noted
that a narrower definition would exclude individuals with a significant
executive role at an issuer and could be contrary to the interests of
investors.\145\
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\140\ See, e.g., comment letters from AFL-CIO; AFR 1; As You Sow
1; Better Markets 1; CEC 1; CFA Institute 1; CII 1; OPERS (Sept. 14,
2015) (``OPERS 1'') (supporting the focus on policy-making
functions); Public Citizen 1; Rutkowski 1; and UAW, et al.
\141\ See comment letter from Better Markets 1 (recommending
including the principal legal officer, the chief compliance officer,
and the chief information officer). But see comment letter from CEC
1 (suggesting that expanding the pool of executives beyond Section
16 officers would go beyond Congress' intended purpose).
\142\ See, e.g., comment letters from ABA 1; American Vanguard
Corporation (``American Vanguard''); CCMC 1; Chevron; Coalition;
Compensia; Duane; FedEx Corporation (Sept. 14, 2015) (``FedEx 1'');
Fried; Hay Group, Inc. (``Hay Group''); IBC; Japanese Bankers;
Kovachev; NAM; Pay Governance LLC (``Pay Governance''); S&C 1; SCG
1; Steven Hall & Partners (``SH&P''); and WorldatWork (``WAW''). See
also comment letters in response to the Reopening Release
recommending limiting the term to executives who had a meaningful
role or responsibility over the issuer's financial reporting from
ABA 2; CCMC 2; McGuireWoods; and SCG (Nov. 3, 2021) (``SCG 2'').
\143\ See, e.g., comment letters from CCMC 1; Chevron;
Compensia; NAM; and SCG 1.
\144\ Some commenters recommended limiting the definition to the
issuer's named executive officers as defined in 17 CFR
229.402(a)(3). See, e.g., comment letter from Duane; FedEx 1; Fried;
Hay Group; and NACD. Other commenters recommended limiting the
definition to only the principal executive officer, principal
financial officer, principal accounting officer (or if there is no
such accounting officer, the controller), and, in addition, any
officer in charge of a principal business unit, division, or
function or who performs a policy-making function and whom the board
of directors or compensation committee determines to have had an
important role in contributing to the events leading to a financial
restatement. See, e.g., comment letters from ABA 1; Chevron; and SCG
1. Still other commenters recommended various forms of scienter
requirements. See, e.g., comment letters from American Vanguard;
CCMC 1; Coalition; Compensia; and SH&P.
\145\ See, e.g., comment letters from AFL-CIO; AFR 1; and
Rutkowski 1.
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We received limited comment specific to our proposal to base the
definition on the Rule 16a-1(f) definition of ``officer,'' instead of
the 17 CFR 240.3b-7 (``Rule 3b-7'') definition of ``executive
officer.'' \146\ A few commenters suggested that including all Section
16 officers, without providing the compensation committee discretion in
enforcing recovery, may affect issuers' practices in identifying their
executive officers.\147\
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\146\ See comment letters from Keith Paul Bishop (``Bishop'')
(recommending use of the Rule 3b-7 definition) and CalPERS 1
(supporting use of the Rule 3b-7 definition as an alternative to the
proposal).
\147\ See comment letters from ABA 1 (suggesting that some
issuers may have an incentive to reevaluate the identification of
their ``corporate insiders'' to see whether they should reduce the
number of individuals subject to those rules--particularly where the
individual has little or no responsibility for accounting and
finance matters); and Pearl Meyer (suggesting the definition may
lead some issuers to redefine duties of executive officers in order
to limit those subject to recovery). See also Compensia.
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[[Page 73090]]
Several commenters recommended limiting recovery only to incentive-
based compensation earned during the portion of the look-back period
when the individual was an executive officer of the issuer.\148\ Some
questioned whether recovery for periods when the individual was serving
in non-executive capacities would be consistent with the statute.\149\
Others questioned the fairness of applying recovery to periods when an
officer was not serving in an executive capacity.\150\ Some commenters
further expressed concern that this aspect of the proposal would
discourage employees from serving as executive officers, with a
detrimental impact on corporate governance and the issuer's ability to
provide for smooth transitions.\151\ In contrast, one commenter
expressly supported the proposal.\152\
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\148\ See, e.g., comment letters from ABA 1; CCMC 1; CEC 1;
Chevron; Compensia; Davis Polk 1; Duane; Ensco, PLC (``Ensco'');
Exxon; FSR; FedEx 1; IBC; Mercer; NACD; and S&C 1. See also comment
letters in response to the Reopening Release from Davis Polk 3; and
McGuireWoods. One commenter additionally suggested granting the
board discretion to recover only for the portion of the look-back
period when the person was an executive officer. See comment letter
from Ensco.
\149\ See comment letters from Exxon; and FSR.
\150\ See comment letters from FSR; and SH&P.
\151\ See comment letters from Davis Polk 1; IBC; and S&C 1.
\152\ See comment letter from CalPERS 1.
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c. Final Amendments
After considering the comments, we are adopting the rules defining
executive officers subject to recovery substantially as proposed, with
modifications in response to commenters.\153\ Section 10D uses the term
``executive officer'' to identify the persons who are to be subject to
the rules without reference to a specific scope or defined term. As
described above, while Congress did not intend to cover rank-and-file
employees, it also did not limit the scope of recovery to those
officers who may be ``at fault'' for accounting errors that led to a
restatement, nor to those who are directly responsible for the
preparation of the financial statements.
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\153\ See 17 CFR 240.10D-1(b)(1)(i) (``Rule 10D-1(b)(1)(i)'')
and the definition of ``executive officer'' in 17 CFR 240.10D-1(d)
(``Rule 10D-1(d)'').
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In developing the definition of ``executive officer'' for purposes
of Rule 10D-1, we considered the statutory purpose of the rule. First,
Section 10D seeks to recover erroneously awarded incentive-based
compensation, reducing a potential form of unjust enrichment, in which
executive officers would gain from accounting errors at the expense of
shareholders. The statute thus protects shareholders from bearing the
economic burden of erroneously awarded compensation derived from
material noncompliance with financial reporting requirements. The
statute also helps to maintain investor confidence in markets and
improve liquidity by incentivizing executive officers to provide more
accurate financial reporting. While some commenters recommended that we
use our discretion to apply Section 10D to a limited set of executive
officers, such as named executive officers, executive officers who had
a role in preparing the financial statements, or executive officers who
had a role in the accounting error leading to the restatement, we are
not persuaded that such limitations would be consistent with Congress'
goals. Further, Congress' use of the unqualified term ``executive
officer'' in Section 10D, compared to its application of qualifiers to
that term elsewhere in the Dodd-Frank Act, suggests that it did not
intend to limit the group of executive officers subject to recovery.''
\154\
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\154\ We note, for example, that Section 952 of the Dodd-Frank
Act uses the term ``named executive officer'' and Section 953
directly refers to 17 CFR 229.402, which makes extensive use of the
term ``named executive officer''.
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We also acknowledge commenters who recommended that we base the
definition on Rule 3b-7.\155\ The term ``executive officer'' as defined
in 17 CFR 240.3b-7 and the term we are adopting are similar. However,
we determined to establish a definition of ``executive officer'' in
Rule 10D-1 in order to expressly include officers with an important
role in financial reporting. This includes an issuer's president,
principal financial officer, and principal accounting officer (or if
there is no such accounting officer, the controller), which we note is
consistent with the term ``officer'' as defined in Rule 16a-1(f).
Although the compensation recovery provisions of Section 10D apply
without regard to an executive officer's responsibility for preparing
the issuer's financial statements, we believe that it is essential that
officers with an important role in financial reporting be subject to
the recovery policy, which is expected to further incentivize high-
quality financial reporting.
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\155\ See supra note 146.
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At the same time, because Congress broadly intended Section 10D to
ensure that erroneously awarded compensation be returned to the issuer,
we do not agree with commenters who suggested that the scope of the
rule should be limited to only officers with a direct role in financial
reporting. Further, including officers with policy-making functions or
important roles in the preparation of financial statements in the
definition of ``executive officer'' for purposes of Rule 10D-1 will
ensure that the recovery policy requirements have the additional
benefits of providing executive officers with an increased incentive to
reduce the likelihood of inadvertent misreporting and of reducing the
financial benefits to executive officers from failures to accurately
account for the issuer's results. Because officers with policy making
functions or important roles in the preparation of financial statements
play an important managerial role and help set the tone at the top,
ensuring that the required recovery policy will apply to any such
officers may enhance these benefits. Further, requiring the issuer to
establish a direct connection between an executive officer and a
material error would add significant time, uncertainty, and litigation
risk to recovery determinations, which in turn would increase costs to
the issuer and its shareholders.
Further, the definition of ``executive officer'' we are adopting,
like the Rule 16a-1(f) definition of ``officer,'' provides that
executive officers of the issuer's parents or subsidiaries may be
deemed executive officers of the issuer if they perform policy making
functions for the issuer. Identification of an executive officer for
purposes of this section would include, at a minimum, executive
officers identified pursuant to 17 CFR 229.401(b).\156\ With respect to
commenters who indicated that issuers may have an incentive to
mischaracterize an officer determination, we remind issuers that such a
determination must be an objective determination without regard to
whether that officer is subject to a recovery policy.
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\156\ See Rule 10D-1(d), modeled on the Note to Rule 16a-1(f).
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We also concluded that applying additional scienter or
responsibility requirements as suggested by some commenters would run
counter to the intent of the statute. Section 10D does not require the
issuer to establish scienter before it may recover erroneously awarded
incentive-based compensation, nor does the statute limit recovery to
executive officers who were directly involved with the accounting
error. This suggests that Congress intended that the recovery policy be
[[Page 73091]]
implemented without regard to the fault of the executive officers for
the accounting errors. In this regard, we believe Section 10D was
established not to punish wrongdoing, but to require executive officers
to return monies that rightfully belong to the issuer and its
shareholders.
The statute specifically requires recovery from any current or
former executive officers of the issuer who received incentive-based
compensation in excess of what would have been paid to the executive
officer under the accounting restatement. Section 10D(b)(2) expressly
states that the recovery policy must apply to ``any current or former
executive officer of the issuer.'' We believe recovery from former
executive officers is appropriate because otherwise, such individuals
would be in a position to improperly benefit from material errors that
occurred during their tenure as executive officers at the issuer.\157\
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\157\ The final amendments do not distinguish between former
executive officers that leave a company, retire, or transition to an
employee role (including after serving as an executive officer in an
interim capacity) during the recovery period. We disagree with
commenters who suggest that an individual who serves as an executive
officer and then transitions to an employee role should not be
subject to recovery of incentive based compensation received while
serving as an employee. Section 10D-1 specifically applies to
``former executive officers'' and does not distinguish among types
of former executive officers. Moreover, any former executive officer
who is now an employee who receives incentive-based compensation
that would be affected by the recovery policy is receiving
compensation that, had the issuer's financial statements not been in
error, the individual would not have received. Similarly, while we
acknowledge commenters' concerns regarding the application of the
statute and the rules to interim executive officers, the recovery
policy would only apply if such interim (and former interim)
executive officers received erroneously awarded compensation as a
result of errors in the financial statements. Like retired
executives, such individuals would be in a position to benefit from
erroneously awarded compensation as a result of such errors. The
potential for such benefit would weaken the individual's incentives
to ensure accurate financial statements while they were serving as
an executive.
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We agree, however, with commenters who suggested that requiring
recovery from individuals for incentive-based compensation received
prior to the period when they became an executive officer may not serve
the goals of the statute.\158\ Therefore, in a change from the
proposal, the final rule will only require recovery of incentive-based
compensation received by a person (i) after beginning service as an
executive officer and (ii) if that person served as an executive
officer at any time during the recovery period.\159\ Recovery of
compensation received while an individual was serving in a non-
executive capacity prior to becoming an executive officer will not be
required.\160\
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\158\ See supra note 150.
\159\ See 17 CFR 240.10D-1(b)(1)(i)(A) and (B). The rule further
provides that the recovery policy applies to incentive-based
compensation received while the issuer has a class of securities
listed on an exchange and during the three completed fiscal years
immediately preceding the date that the issuer is required to
prepare an accounting restatement. See 17 CFR 240.10D-1(b)(1)(i)(C)
and (D).
\160\ Id. Note that an award of incentive-based compensation
granted to an individual before the individual becomes an executive
officer will be subject to the recovery policy, so long as the
incentive-based compensation was received by the individual at any
time during the performance period after beginning service as an
executive officer.
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We further note that the recovery requirement also does not apply
to an individual who is an executive officer at the time recovery is
required if that individual was not an executive officer at any time
during the period for which the incentive-based compensation is subject
to recovery. Nevertheless, nothing in the rule would limit an issuer's
compensation recovery policy from requiring recovery more broadly.
2. Incentive-Based Compensation
a. Incentive-Based Compensation Subject to Recovery Policy
Section 10D(b)(2) requires exchanges and associations to adopt
listing standards that require issuers to adopt and comply with
recovery policies that apply to ``incentive-based compensation
(including stock options awarded as compensation)'' that is received,
based on the erroneous data, in ``excess of what would have been paid
to the executive officer under the accounting restatement.'' Implicit
in these statutory requirements is that the amount of such compensation
received in the three-year look-back period would have been less if the
financial statements originally had been prepared as later restated.
i. Proposed Amendments
The Commission proposed to define ``incentive-based compensation''
in a principles-based manner as ``any compensation that is granted,
earned or vested based wholly or in part upon the attainment of any
financial reporting measure.'' The proposed definition further provided
that ``financial reporting measures'' are measures that are determined
and presented in accordance with the accounting principles used in
preparing the issuer's financial statements, any measures derived
wholly or in part from such financial information, and stock price and
total shareholder return (``TSR''). As proposed, ``incentive-based
compensation'' would include options and other equity awards whose
grant or vesting is based wholly or in part upon the attainment of any
measure based upon or derived from financial reporting measures.
ii. Comments
We received a range of comments relating to the proposed definition
of ``incentive-based compensation.'' Some commenters endorsed the
proposed principles-based approach to defining ``incentive-based
compensation.\161\ Other commenters recommended that the definition
leverage existing executive compensation disclosure requirements and
look to the existing definition of ``incentive plan.'' \162\ We also
received a range of comments relating to the types of awards that
should be covered. Some commenters recommended that the Commission
expand the definition to include subjective awards as covered
incentive-based compensation,\163\ while others objected to recovering
compensation based on qualitative or discretionary standards.\164\
Similarly, a number of commenters expressed concern about excluding, or
recommended including, time- or service-based awards.\165\ Other
[[Page 73092]]
commenters supported excluding time- or service-based awards \166\ and
awards based on attaining nonfinancial measures.\167\ Some of these
commenters requested specific confirmation that time-based equity
awards are not considered incentive-based compensation for purposes of
the rule.\168\ Some commenters supported having the rule also apply to
deferred compensation as proposed; \169\ however, several other
commenters expressed concern that application to deferred compensation
plans and pension plans could violate the Internal Revenue Code or
Employee Retirement Income Security Act (``ERISA'').\170\
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\161\ See, e.g., comment letters from Better Markets 1; CalPERS
1; CFA Institute 1; and OPERS 1. Commenters generally did not see
the need for anti-evasion provisions. See, e.g., comment letters
from Better Markets 1; CalPERS 1; and NACD. But see comment letter
from OPERS 1.
\162\ See, e.g., comment letters from ABA 1 (recommending
including only awards already reported in an issuer's executive
compensation disclosure and reported in the equity incentive plan
and non-equity incentive plan awards columns of the Grants of Plan-
Based Awards Table pursuant to 17 CFR 229.402(d) that are granted,
earned or vested based wholly or in part upon attainment of a
financial reporting measure); and Kovachev (recommending reference
to the 17 CFR 229.402(a)(6)(ii) definition of ``incentive plan,''
excluding compensation determined by metrics such as market share or
customer satisfaction).
\163\ See, e.g., comment letters from Better Markets 1
(recommending a presumption that all incentive-based compensation is
based in whole or in part on financial reporting measures); and
Public Citizen 1 (recommending similar levels of recovery of all
incentive-based compensation). See also comment letter from CFA
Institute 1 (recommending board discretion to recover compensation
based on satisfying subjective standards to the extent the
subjective standards are satisfied in whole or in part by meeting a
financial reporting measure performance goal) and comment letter in
response to the Reopening Release form ICGN (recommending including
ESG-related metrics).
\164\ See, e.g., comment letters from FSR; Kovachev (contending
that including discretionary bonuses would be beyond the scope of
the statute); and NACD. See also comment letter from ABA 1 (noting
that subjective awards do not lend themselves to formulaic re-
creation).
\165\ See, e.g., comment letters from AFL-CIO (recommending that
for stock options awarded as compensation the board make reasonable
estimates of the effect on stock price); and Pay Governance
(suggesting that excluding service-based equity awards could create
an incentive to grant more such awards, thus shifting away from pay-
for-performance).
\166\ See, e.g., comment letters from ABA 1; CEC 1; Chevron;
Compensia; Davis Polk 1; FedEx 1; Japanese Bankers; Kovachev; and
SCG 1.
\167\ See comment letter from FedEx 1. See also Kovachev
(recommending defining covered equity awards by referencing
compensation reported in the Estimated Future Payouts Under Equity
Incentive Plan Awards column of the Grants of Plan-Based Awards
table provided pursuant to 17 CFR 229.402(c)).
\168\ See, e.g., comment letters from Chevron; Compensia; and
SCG 1. These commenters were concerned that the stock price metric
included in the proposed definition could be read to include an
equity award for which value is determined based on stock price but
vests solely upon completion of a specified employment period or
passage of time.
\169\ See comment letters from AFR 1; and Rutkowski 1.
\170\ See, e.g., comment letters from ABA 1; Exxon; FSR; IBC;
Mercer; SCG 1; Sutherland Asbill & Brennan LLP (``Sutherland''); and
WAW. But see comment letter from ABA 1 (noting that the forfeiture
of excess incentive-based compensation deferred into a holdback plan
as a recovery mechanism would be permissible and would not result in
an accelerated payment under Section 409A of the Internal Revenue
Code). See discussion relating to the exemption for tax-qualified
retirement plans in Section II.B.3.b.iii.
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We received a number of comments on the proposed inclusion of TSR/
stock price metrics. Some commenters expressly supported inclusion of
these metrics,\171\ some commenters expressed qualifications or
reservations but did not object to their inclusion,\172\ and other
commenters expressly opposed inclusion of stock price/TSR metrics.\173\
Commenters opposed to inclusion of these metrics noted the costs,
uncertainty, and subjectivity of calculating recoverable amounts,\174\
questioned the proposed definition of ``incentive-based compensation,''
\175\ expressed concern over the potential for litigation from
shareholders or executive officers challenging the amount
determined,\176\ questioned the statutory authority to cover the
metrics,\177\ and suggested that the metrics' inclusion could
discourage the use of TSR as a performance measure.\178\ Another
commenter recommended providing a safe harbor for determining the
amount subject to recovery if stock price and TSR metrics are
included.\179\
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\171\ See, e.g., comment letters from AFR 1; Better Markets 1
(suggesting that these metrics fall within the ambit of the
statutory formulation, which broadly encompasses all compensation
``based on financial information required to be reported under the
securities laws'' and provides for recovery of excessive
compensation ``based on'' erroneous data and that because stock
price and TSR are widely used in calculating executive compensation
their exclusion would substantially undermine the attainment of the
objectives underlying Section 10D); CalPERS 1; and Rutkowski 1
(suggesting that inclusion is appropriate because stock price is
based on investor expectation of cash flows, which are in turn
deeply informed by accounting metrics).
\172\ See, e.g., comment letters from CFA Institute 1 (noting
that establishing a link between financial errors and a change in
stock price would be easier in cases of fraud that are meant to
directly affect stock price); Compensia (expressing concern
regarding how to calculate the amounts subject to recovery); and
OPERS 1.
\173\ See, e.g., comment letters from ABA 1; BRT 1; Davis Polk
1; FSR; FedEx 1; Fried; IBC; Japanese Bankers; Mercer; Meridian
Compensation Partners LLC (``Meridian''); NACD; Pearl Meyer; and
SH&P. See also comment letters in response to the Reopening Release
from Cravath, McGuireWoods; and Hunton.
\174\ See, e.g., comment letters from Davis Polk 1; FedEx 1;
Fried; FSR; IBC (suggesting that analyses by third-party advisors
are expensive, highly speculative, and imprecise); Mercer (citing
the study of restatements by the Center for Audit Quality considered
in the Proposing Release to show that restatements at over 4,000
companies caused only an average 1.5% decline in stock price and a
median decline of 0.01%. The average impact of restatements as a
result of a material error was slightly higher (-2.3%), but the
median was also near zero%); and SH&P. Some of these commenters
suggested that the subjectivity of calculating the amounts for stock
price/TSR metrics would be incompatible with the no-fault standard
of the proposed rule. See, e.g., comment letters from Davis Polk 1;
FedEx 1; and SH&P (further recommending that due to the
subjectivity, recovery should be at the discretion of the board).
See also comment letters in response to the Reopening Release from
Cravath; Hunton; and McGuireWoods (suggesting that calculating the
amounts would be difficult and would require additional economic
analysis by issuers).
\175\ See, e.g., comment letter from ABA 1 (recommending that
the present disclosure requirements under Item 402 of Regulation S-K
adequately define the types of compensation that should be
considered ``incentive-based compensation'' for purposes of Section
10D: that is non-equity incentive plan awards as reported in columns
(c) through (e) of the Grants of Plan-Based Awards table pursuant to
17 CFR 229.402(d)(2)(iii) and equity incentive plan awards as
reported in columns (f) through (h) of that table pursuant to 17 CFR
229.402(d)(2)(iv)).
\176\ See comment letters from Davis Polk 1; and FSR.
\177\ See comment letters from ABA 1; Meridian (suggesting that
implicit in the determination of excess incentive-based compensation
is that the reach of Section 10D is limited to incentive-based
compensation that is linked to the achievement of specific financial
metrics); and NACD. See also comment letters in response to the
Reopening Release from ABA 1 (suggesting it is inconsistent with the
statutory mandate to include either an issuer's stock price or its
TSR in such definition as each measure reflects many factors beyond
the issuer's reported financial information, the sole criterion set
forth in Section 10D); and McGuireWoods (suggesting the term is
limited to financial reporting measures used in preparing the
issuer's financial statements that are accounting-based metrics).
\178\ See, e.g., comment letter from FSR (suggesting that
avoiding the use of TSR could be problematic in light of proposed
``pay-versus-performance'' rules requiring issuers to disclose the
relationship between company performance as reflected by TSR and the
compensation paid).
\179\ See comment letter in response to the Reopening Release
from McGuireWoods.
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iii. Final Amendments
After considering the statutory language of Section 10D, the views
of commenters, and the administrability of any mandatory recovery
policy that encompasses incentive-based compensation, we are adopting
substantially as proposed the defined term ``incentive-based
compensation.'' \180\ Specifically, for purposes of Rule 10D-1, we are
defining ``incentive-based compensation'' to be ``any compensation that
is granted, earned, or vested based wholly or in part upon the
attainment of any financial reporting measure.'' \181\ We determined to
define the term in a principles-based manner so that the rule will
capture new forms of compensation that are developed and new measures
of performance upon which compensation may be based. As noted above,
any incentive-based compensation recovered under the final rules is
compensation that an executive officer would not have been entitled to
receive had the financial statements been accurately presented. A
number of the alternatives recommended by commenters would omit
incentive-based compensation received outside of an incentive plan.
Allowing executive officers to retain such incentive-based pay when it
was erroneously awarded based on material accounting errors would
undermine the statutory purpose of Section 10D to recover these amounts
for the benefit of issuers and their shareholders. Absent recovery of
such compensation, executive officers would still be in a position to
benefit from
[[Page 73093]]
accounting errors, undermining their incentives to ensure reliable
financial reporting. Further, gaps in the forms of incentive-based pay
that would be subject to recovery might encourage issuers to shift
compensation towards omitted categories, further undermining the
purpose of the rule.
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\180\ See Rule 10D-1(d). The definition applies only to recovery
of incentive-based compensation under proposed Rule 10D-1, and does
not apply to the recovery of incentive-based compensation pursuant
to 15 U.S.C. 7243 (``Sarbanes-Oxley Act Section 304'').
\181\ ``In part'' is included in the definition to clarify that
incentive-based compensation need not be based solely upon
attainment of a financial reporting measure. An example of
compensation that is based in part upon the attainment of a
financial reporting measure would include an award in which 60% of
the target amount is earned if a certain revenue level is achieved,
and 40% of the target amount is earned if a certain number of new
stores are opened. Similarly, an award for which the amount earned
is based on attainment of a financial reporting measure but is
subject to subsequent discretion by the compensation committee to
either increase or decrease the amount would be based in part upon
attainment of the financial reporting measure.
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Consistent with the proposal, we are defining ``financial reporting
measures'' to be measures that are determined and presented in
accordance with the accounting principles used in preparing the
issuer's financial statements, and any measures derived wholly or in
part from such measures.\182\ This includes ``non-GAAP financial
measures'' for purposes of Exchange Act Regulation G and 17 CFR 229.10
as well other measures, metrics and ratios that are not non-GAAP
measures, like same store sales.\183\ Financial reporting measures may
or may not be included in a filing with the Commission, and may be
presented outside the financial statements, such as in Management's
Discussion and Analysis of Financial Conditions and Results of
Operations \184\ or the performance graph.\185\
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\182\ See Rule 10D-1(d).
\183\ See Conditions for Use of Non-GAAP Measures, Release No.
33-8176 (Jan. 22, 2003) [68 FR 4820 (Jan. 20, 2003)] and Commission
Guidance on Management's Discussion and Analysis of Financial
Condition and Results of Operations, Release No. 33-10751 (Jan. 30,
2020) [85 FR 10571 (Feb. 25, 2020)].
\184\ 17 CFR 229.303. See also Item 5, Form 20-F. Examples of
such measures could be accounts receivable turnover, Earnings before
interest, taxes, depreciation and amortization, or sales per square
foot.
\185\ 17 CFR 229.201(e).
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In order to provide guidance to issuers, we reiterate the examples
of financial reporting measures provided in the Proposing Release,
including, but not limited to, the following accounting-based measures
and measures derived from:
<bullet> Revenues;
<bullet> Net income;
<bullet> Operating income;
<bullet> Profitability of one or more reportable segments; \186\
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\186\ As disclosed in a financial statement footnote. See ASC
Topic 280.
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<bullet> Financial ratios (e.g., accounts receivable turnover and
inventory turnover rates);
<bullet> Net assets or net asset value per share (e.g., for
registered investment companies and business development companies that
are subject to the rule);
<bullet> Earnings before interest, taxes, depreciation and
amortization;
<bullet> Funds from operations and adjusted funds from operations;
<bullet> Liquidity measures (e.g., working capital, operating cash
flow);
<bullet> Return measures (e.g., return on invested capital, return
on assets);
<bullet> Earnings measures (e.g., earnings per share);
<bullet> Sales per square foot or same store sales, where sales is
subject to an accounting restatement;
<bullet> Revenue per user, or average revenue per user, where
revenue is subject to an accounting restatement;
<bullet> Cost per employee, where cost is subject to an accounting
restatement;
<bullet> Any of such financial reporting measures relative to a
peer group, where the issuer's financial reporting measure is subject
to an accounting restatement; and
<bullet> Tax basis income.
In addition, the definition of ``financial reporting measures''
also includes stock price and TSR, as proposed.\187\ As the Commission
noted in the Proposing Release, Section 10D(b) requires disclosure of
an issuer's policy with respect to ``incentive-based compensation that
is based on financial information required to be reported under the
securities laws'' and recovery of compensation awarded ``based on the
erroneous data.'' We note that Congress' direction to include
compensation that is ``based on'' financial information and to recover
compensation ``based on'' the erroneous accounting data suggests
Congress' intent to provide an expansive reading of those terms. The
final rule therefore encompasses incentive-based compensation tied to
measures such as stock price and TSR because improper accounting
affects such measures and in turn results in excess compensation.\188\
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\187\ In a nonsubstantive modification from the proposal, we
have broken out the inclusion of stock price and TSR in a separate
clause of the definition. By including a separate clause in the
definition, instead of using the conjunctive ``and,'' the
modification makes clear that stock price and TSR are financial
reporting measures.
\188\ One commenter recommended using the definition of
``incentive plan award'' in 17 CFR 229.402(a)(6)(iii) of Regulation
S-K, which includes ``any other performance measure.'' See comment
letter from ABA 1. Using the existing definition of ``incentive plan
award'' to define ``incentive-based compensation'' would apply the
recovery to a different scope of incentive compensation. The Rule
10D-1 definition does not include ``other performance measures'' in
light of Section 10D's reference to incentive-based compensation
based on financial information required to be reported under the
Federal securities laws.
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Although the phrase ``financial information required to be reported
under the securities laws'' might be interpreted as applying only to
accounting-based metrics, in consideration of the statutory purpose
described above, we have determined that it is appropriate to interpret
the term to include performance measures including stock price and TSR
that are affected by accounting-related information and that are
subject to our disclosure requirements. Stock price and TSR are
frequently used incentive-based performance metrics for executive
compensation, such that excluding them could lead issuers to alter
their executive compensation arrangements in ways that would avoid
application of the mandatory recovery policy, undermining the
objectives of the rule, as well as impacting efficient incentive
alignment. While some commenters recommended that we narrow the scope
of the definition, we agree with other commenters that supported a
broader reading of the definition.\189\
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\189\ As one commenter noted, stock price is at least in part
based on investor expectation of cash flows, which is intrinsically
tied to a company's financial statement disclosures. See supra note
171.
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We disagree with the contention put forth by some commenters that
Section 10D is limited to incentive-based compensation that is linked
to the achievement of specific financial metrics. Section 10D requires
disclosure of the policy of the issuer on ``incentive-based
compensation that is based on financial information required to be
reported under the securities laws.'' The use of the term ``based on''
is expansive and the statute does not explicitly delineate the types of
financial information that should be considered. Section 10D(b)
separately requires the issuer to recover from any current or former
executive officer of the issuer who received ``incentive-based
compensation . . . based on the erroneous data.'' As we have previously
noted, if an executive officer erroneously receives incentive-based
compensation based on stock price or TSR that was inaccurate as a
result of an accounting misstatement, that compensation is based on
such erroneous data.\190\ Being mindful of the statutory language and
purpose of Section 10D, we do not see a basis for allowing that
executive officer to retain such compensation, given that it was
erroneously awarded. Absent recovery of such compensation, certain
executive officers would be in a position to benefit from accounting
errors, undermining their incentives to ensure reliable financial
reporting. We therefore believe that inclusion of incentive-based
[[Page 73094]]
compensation based on stock price and TSR is necessary and appropriate
for the implementation of Section 10D. Adopting a narrower definition
of ``incentive-based compensation'' or ``financial reporting measures''
would result in the failure to recover from executive officers
incentive-based compensation that was erroneously awarded to them, and
therefore would be less effective in achieving the goals of the
statute.
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\190\ We note that Rule 10D-1 applies only to erroneously
awarded incentive-based compensation based on stock price or TSR
that was inaccurate as a result of the issuer's accounting
restatement. For example, if the issuer is using TSR where the
performance measure is linked to a peer group (such as relative
TSR), only an accounting restatement by the issuer, not accounting
restatements by other issuers in the peer group, would result in
application of the rule and potential recovery.
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We recognize, as some commenters noted, concerns relating to costs,
uncertainty, and subjectivity of calculating amounts of recoverable
erroneously awarded compensation with respect to the calculation of
stock price and TSR. These commenters highlighted that, once an issuer
concludes that its compensation is incentive-based compensation for the
purposes of this rule, issuers may need to engage in complex analyses
that require technical expertise and specialized knowledge and may
involve substantial exercise of judgment in order to determine the
stock price impact of the error that led to a restatement. Due to the
presence of confounding factors, it may be difficult to establish the
relationship between an accounting restatement and the stock price.
While we recognize these challenges, we believe the additional
costs associated with these factors are justified in order to better
achieve the objectives of the statute, as outlined above. The
significance of these costs would depend on the size and financial
condition of the issuer, as well as the board's approach to determining
the amount, if any, of erroneously awarded compensation to be recovered
following an accounting error. In an accommodation to address concerns
relating to costs, uncertainty, and subjectivity of calculating these
amounts, Rule 10D-1 permits issuers to use reasonable estimates when
determining the impact of a restatement on stock price and TSR.\191\
Allowing the use of reasonable estimates to assess the effect of the
accounting restatement on these performance measures in determining the
amount of erroneously awarded compensation should help to mitigate
these potential difficulties.\192\ Further, since ``little r''
restatements are less likely to be associated with significant stock
price reactions, we expect that recovery of incentive-based
compensation as a result of ``little r'' restatements that is tied to
TSR would be relatively small and infrequent, which should further
mitigate these costs.\193\
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\191\ See 17 CFR 240.10D-1(b)(1)(iii)(A) (``Rule 10D-
1(b)(1)(iii)(A)''). In addition, 17 CFR 240.10D-1(b)(1)(iii)(B)
(``Rule 10D-1(b)(1)(iii)(B)'') requires the issuer to maintain
documentation of the determination of that reasonable estimate and
provide such documentation to the exchange or association as
proposed. In a modification from the proposal, 17 CFR
229.402(w)(1)(i)(C) additionally requires disclosure of the
estimates that were used in determining the erroneously awarded
compensation attributable to an accounting restatement and an
explanation of the methodology used to estimate the effect on stock
price or TSR, if the financial reporting measure related to a stock
price or TSR metric, to better explain how the issuer established
its estimates. See Section II.D.3.
\192\ We acknowledge that implementation of a safe harbor could
further mitigate potential concerns about the difficulties and costs
of calculating recovery amounts. As discussed in more detail in
Section II.B.3.a.iii, we believe that permitting reasonable
estimates will sufficiently mitigate these potential difficulties.
\193\ See discussion infra at note 400.
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The statute further specifies that incentive-based compensation to
which recovery should apply under the recovery policy required by the
listing standard ``includ[es] stock options awarded as compensation.''
Accordingly and as proposed, the definition of ``incentive-based
compensation'' in the final rule includes options and other similar
equity awards whose grant or vesting is based wholly or in part upon
the attainment of financial reporting measures.
Specific examples of ``incentive-based compensation'' include, but
are not limited to:
<bullet> Non-equity incentive plan awards that are earned based
wholly or in part on satisfying a financial reporting measure
performance goal;
<bullet> Bonuses paid from a ``bonus pool,'' the size of which is
determined based wholly or in part on satisfying a financial reporting
measure performance goal;
<bullet> Other cash awards based on satisfaction of a financial
reporting measure performance goal;
<bullet> Restricted stock, restricted stock units, performance
share units, stock options, and stock appreciation rights (``SARs'')
that are granted or become vested based wholly or in part on satisfying
a financial reporting measure performance goal; and
<bullet> Proceeds received upon the sale of shares acquired through
an incentive plan that were granted or vested based wholly or in part
on satisfying a financial reporting measure performance goal.
Examples of compensation that is not ``incentive-based
compensation'' for this purpose include, but are not limited to:
<bullet> Salaries; \194\
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\194\ To the extent that an executive officer receives a salary
increase earned wholly or in part based on the attainment of a
financial reporting measure performance goal, such a salary increase
is subject to recovery as a non-equity incentive plan award for
purposes of Rule 10D-1.
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<bullet> Bonuses paid solely at the discretion of the compensation
committee or board that are not paid from a ``bonus pool'' that is
determined by satisfying a financial reporting measure performance
goal;
<bullet> Bonuses paid solely upon satisfying one or more subjective
standards (e.g., demonstrated leadership) and/or completion of a
specified employment period;
<bullet> Non-equity incentive plan awards earned solely upon
satisfying one or more strategic measures (e.g., consummating a merger
or divestiture), or operational measures (e.g., opening a specified
number of stores, completion of a project, increase in market share);
and
<bullet> Equity awards for which the grant is not contingent upon
achieving any financial reporting measure performance goal and vesting
is contingent solely upon completion of a specified employment period
and/or attaining one or more nonfinancial reporting measures.\195\
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\195\ This statement responds to commenters' questions and
concerns regarding the treatment of time-based and service-based
equity awards.
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b. When Compensation is ``Received'' and Time Period Covered
Section 10D(b)(2) requires exchanges and associations to adopt
listing standards that require issuers to adopt and comply with
recovery policies that apply to erroneously awarded compensation
received ``during the three-year period preceding the date on which the
issuer is required to prepare an accounting restatement'' but does not
otherwise specify how this three-year look-back period should be
measured or specify when an executive officer should be deemed to have
received incentive-based compensation for the recovery policy required
under the applicable listing standards.
i. Proposed Amendments
The Commission proposed that incentive-based compensation would be
deemed ``received'' for purposes of triggering a recovery policy in the
fiscal period during which the financial reporting measure specified in
the incentive-based compensation award is attained, even if the payment
or grant occurs after the end of that period. As proposed, incentive-
based compensation would be subject to the issuer's recovery policy to
the extent that it is received while the issuer has a class of
securities listed on an exchange or an association.
[[Page 73095]]
The Commission further proposed that the three-year look-back
period for the recovery policy required by the listing standards would
be the three completed fiscal years immediately preceding the date the
issuer is required to prepare an accounting restatement. Where an
issuer has changed its fiscal year end during the three-year look-back
period, the Commission proposed that the issuer must recover any excess
incentive-based compensation received during the transition period
occurring during, or immediately following, that three-year period in
addition to any excess incentive-based compensation received during the
three-year look-back period (i.e., a total of four periods).
ii. Comments
We received limited comment regarding clarification of when
compensation is received and establishing the time period to be covered
by the listing standard. Some commenters supported the proposed
definition of when compensation is deemed ``received.'' \196\ In
contrast, one commenter suggested that the proposed definition was
overly broad.\197\
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\196\ See comment letters from ABA 1 (noting the proposal is
consistent with Item 402 reporting requirements and how most issuers
view the receipt of incentive-based compensation); Better Markets 1;
CFA Institute 1; and CEC 1 (suggesting the time gap between when the
award's financial metric is achieved and the date the executive
obtains control over the award may allow an issuer to seek recovery
by cancelling the affected portion of the award). However, two of
these commenters were split on the proposal to limit recovery only
to the extent that compensation was received while the issuer has a
class of securities listed on an exchange, with one in favor (ABA 1)
and one opposed (Better Markets 1).
\197\ See comment letter from NACD (noting that just because a
reward is granted, earned, or vests does not mean that it is
actually received).
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One commenter expressly supported the three-year period as a
reasonable period of time,\198\ another recommended issuer discretion
to select the appropriate time period,\199\ and a third noted that
accounting restatements may take place a considerable time after
erroneous payments were made, and recommended that the look-back period
should be extended to at least five years.\200\ In addition, while one
commenter expressly supported the proposed use of fiscal years as
consistent with the statutory language and minimizing the potential for
confusion,\201\ another suggested that existing issuer recovery
policies do not use the term ``fiscal year.'' \202\
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\198\ See comment letter from CFA Institute 1.
\199\ See comment letter from NACD.
\200\ See comment letter from As You Sow 1.
\201\ See comment letter from CEC 1.
\202\ See comment letter from Bishop.
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iii. Final Amendments
After considering the views of commenters, we are adopting the
rules relating to when compensation is ``received'' and the time period
covered substantially as proposed.\203\ Incentive-based compensation
will be deemed received for purposes of the recovery policy under
Section 10D in the fiscal period \204\ during which the financial
reporting measure specified in the incentive-based compensation award
is attained, even if the payment or grant occurs after the end of that
period.\205\ Under the rules, incentive-based compensation is subject
to the issuer's recovery policy to the extent that it is received while
the issuer has a class of securities listed on an exchange or an
association.\206\ Further, the time period covered for the recovery
policy will be the three completed fiscal years immediately preceding
the date the issuer is required to prepare an accounting
restatement.\207\
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\203\ See Rule 10D-1(b)(1)(i). In a nonsubstantive modification
from the proposal, we are no longer including ``(f)or purposes of
Section 10D'' in the definition of ``received'' in Rule 10D-1(d) as
the introductory portion of Rule 10D-1(d) makes clear that the
definitions are for purposes of the section. We additionally
simplified the language in Rule 10D-1(b)(1)(i)(B) to clarify the
meaning of transition period for purposes of the rule without
defining the term.
\204\ Including a transition period for a change in fiscal year,
if applicable.
\205\ See Rule 10D-1(d).
\206\ See 17 CFR 240.10D-1(b)(1)(i)(A). After considering
comments, we continue to believe that the statute calls for recovery
limited to compensation that is received while the issuer has a
class of securities listed on an exchange or an association. We note
that an award of incentive-based compensation granted to an
executive officer before the issuer lists a class of securities will
be subject to the recovery policy, so long as the incentive-based
compensation was received by the executive officer while the issuer
had a class of listed securities. Incentive-based compensation
received by an executive officer before the issuer's securities
become listed is not required to be subject to the recovery policy.
\207\ Including a transition period for a change in fiscal year,
if applicable. See Rule 10D-1(b)(1)(i)(B).
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The date of receipt of the compensation depends upon the terms of
the award. For example,
<bullet> If the grant of an award is based, either wholly or in
part, on satisfaction of a financial reporting measure performance
goal, the award would be deemed received in the fiscal period when that
measure was satisfied;
<bullet> If an equity award vests only upon satisfaction of a
financial reporting measure performance condition, the award would be
deemed received in the fiscal period when it vests; \208\
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\208\ See infra notes 210 and 211.
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<bullet> A non-equity incentive plan award would be deemed received
in the fiscal year that the executive officer earns the award based on
satisfaction of the relevant financial reporting measure performance
goal, rather than a subsequent date on which the award was paid; \209\
and
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\209\ This would be the same fiscal year for which the non-
equity incentive plan award earnings are reported in the Summary
Compensation Table, based on Instruction 1 to 17 CFR
229.402(c)(2)(vii), which provides: ``If the relevant performance
measure is satisfied during the fiscal year (including for a single
year in a plan with a multi-year performance measure), the earnings
are reportable for that fiscal year, even if not payable until a
later date, and are not reportable again in the fiscal year when
amounts are paid to the named executive officer.''
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<bullet> A cash award earned upon satisfaction of a financial
reporting measure performance goal would be deemed received in the
fiscal period when that measure is satisfied.
We further note that a particular award may be subject to multiple
conditions and that an executive officer need not satisfy all
conditions to an award for the incentive-based compensation to be
deemed received for purposes of triggering the recovery policy. In
light of Section 10D's purpose to require listed issuers to recover
compensation that ``the executive would not have received if the
accounting was done properly,'' we believe that the executive officer
``receives'' the compensation for purposes of a recovery policy when
the relevant financial reporting measure performance goal is attained,
even if the executive officer has established only a contingent right
to payment at that time.\210\ Ministerial acts or other conditions
necessary to effect issuance or payment, such as calculating the amount
earned or
[[Page 73096]]
obtaining the board of directors' approval of payment, do not affect
the determination of the date received.\211\
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\210\ We disagree with the commenter that suggested the proposed
definition was overly broad. We believe this definition is
appropriate for the recovery policy to capture the appropriate
amounts of compensation subject to recovery. For example, an issuer
could grant an executive officer restricted stock units in which the
number of units earned is determined at the end of the three-year
incentive-based performance period (2020-2022), but the award is
subject to service-based vesting for two more years (2023-2024).
Although the executive officer does not have a non-forfeitable
interest in the units before expiration of the subsequent two-year
service-based vesting period, the number of shares in which the
units ultimately will be paid will be established at the end of the
three-year performance period which is when the relevant financial
reporting measure performance goal is attained. If the issuer's
board of directors concludes in 2023 that the issuer will restate
previously issued financial statements for 2020 through 2022 (the
three-year performance period), the recovery policy should apply to
reduce the number of units ultimately payable in stock, even though
the executive officer has not yet satisfied the two-year service-
based vesting condition to payment. To the extent that an executive
officer fails to then meet the service vesting period and never
actually receives the compensation, the compensation forgone as a
result of the failure to meet the vesting period would be the
reduced compensation as a result of the recovery policy.
\211\ For example, as stated above, an equity award granted upon
attainment of a financial reporting measure would be deemed received
in the fiscal year that the relevant financial reporting measure
performance goal was satisfied, rather than a subsequent date on
which the award was issued. The fiscal year in which an incentive-
based equity award is deemed received in some cases may be a fiscal
year preceding the fiscal year in which the ASC Topic 718 grant date
occurs and for which it is reported in the Summary Compensation
Table and Grants of Plan-Based Awards Table because our requirements
for reporting equity awards in the Summary Compensation Table do not
utilize a ``performance year'' standard. See Proxy Disclosure
Enhancements, Release No. 33-9089 (Dec. 16, 2009) [74 FR 68334].
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The three-year look-back period for the recovery policy will
comprise the three completed fiscal years immediately preceding the
date the issuer is required to prepare an accounting restatement for a
given reporting period.\212\ We recognize that some commenters
recommended different lengths of time for the look-back period;
however, the final rules are consistent with the statute, which
explicitly contemplates a three-year look-back.\213\ Basing the look-
back period on fiscal years, rather than a preceding 36-month period,
is consistent with the statutory language and issuers' general practice
of making compensation decisions and awards on a fiscal year
basis.\214\ As an example, if a calendar year issuer concludes in
November 2024 that a restatement of previously issued financial
statements is required and files the restated financial statements in
January 2025, the recovery policy would apply to compensation received
in 2021, 2022, and 2023. The three-year look-back period is not meant
to alter the reporting periods for which an accounting restatement is
required or for which restated financial statements are to be filed
with the Commission. Moreover, an issuer will not be able to delay or
relieve itself from the obligation to recover erroneously awarded
incentive-based compensation by delaying or failing to file restated
financial statements.\215\ In situations where an issuer has changed
its fiscal year end during the three-year look-back period, the issuer
must recover any excess incentive-based compensation received during
the transition period occurring during, or immediately following, that
three-year period in addition to any excess incentive-based
compensation received during the three-year look-back period (i.e., a
total of four periods).\216\
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\212\ See Rule 10D-1(b)(1)(i)(B).
\213\ See discussion in Section II.B.2 regarding the date an
issuer is required to prepare an accounting restatement for purposes
of Rule 10D-1.
\214\ While we recognize, as one commenter noted, that some
recovery policies may not use fiscal years, we have determined to
use that term because the term is well understood and consistent
with the statutory language.
\215\ See Rule 10D-1(b)(1)(i)(B).
\216\ Id. A transition period refers to the period between the
closing date of the issuer's previous fiscal year end and the
opening date of its new fiscal year. 17 CFR 240.13a-10 and 17 CFR
240.15d-10. For example, if in late 2021, an issuer changes its
fiscal closing date from June 30 to Dec. 31, it would subsequently
report on the transition period from July 1, 2021 to Dec. 31, 2021.
If the issuer's board of directors concludes in May 2023 that it is
required to restate previously issued financial statements, the
look-back period would consist of the year ended June 30, 2020, the
year ended June 30, 2021, the period from July 1, 2021 to Dec. 31,
2021, and the year ended Dec. 31, 2022. However, consistent with 17
CFR 210.3-06(a), a transition period of nine to 12 months would be
considered a full year in applying the three-year look-back period
requirement.
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3. Recovery Process
a. Calculation of Erroneously Awarded Compensation
Section 10D(2)(b) requires exchanges and associations to adopt
listing standards that require issuers to adopt and comply with
recovery policies that apply to the amount of incentive-based
compensation received ``in excess of what would have been paid to the
executive officer under the accounting restatement.''
i. Proposed Amendments
The Commission proposed to define the amount of incentive-based
compensation that must be subject to the issuer's recovery policy
(``erroneously awarded compensation'') as ``the amount of incentive-
based compensation received by the executive officer or former
executive officer that exceeds the amount of incentive-based
compensation that otherwise would have been received had it been
determined based on the accounting restatement.'' \217\ For incentive-
based compensation that is based on stock price or TSR, where the
amount of erroneously awarded compensation is not subject to
mathematical recalculation directly from the information in an
accounting restatement, the Commission proposed that the erroneously
awarded compensation amount may be determined based on a reasonable
estimate of the effect of the accounting restatement on the applicable
measure and that the issuer shall maintain documentation of that
reasonable estimate and provide it to the exchange. The Commission
further proposed that the erroneously awarded compensation would be
calculated on a pre-tax basis.\218\
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\217\ See Proposed Rule 10D-1(b)(1)(iii).
\218\ Id. (providing that the erroneously awarded compensation
must be computed without regard to any taxes paid by the executive
officer). Under the proposal, the erroneously awarded compensation
would be determined based on the full amount of incentive-based
compensation received by the executive officer, rather than the
amount remaining after the officer satisfies the officer's personal
income tax obligation on it.
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Additionally, in the Proposing Release, the Commission provided
guidance relating to the amount to be recovered when discretion was
exercised in the original grant and stated that Rule 10D-1 would not
permit issuers' boards of directors to pursue differential recovery
among executive officers, including in ``pool plans,'' \219\ where the
board may have exercised discretion as to individual grants in
allocating the bonus pool.
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\219\ ``Pool plans'' are plans in which the size of the
available bonus pool is determined based wholly or in part on
satisfying a financial reporting measure performance goal, but
specific amounts granted from the pool to individual executive
officers are based on discretion.
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ii. Comments
We received
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