Notice2023-05040
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Establish Listing Standards Related to Recovery of Erroneously Awarded Executive Compensation
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 13, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 48 (Monday, March 13, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 48 (Monday, March 13, 2023)]
[Notices]
[Pages 15500-15503]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-05040]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97060; File No. SR-NASDAQ-2023-005]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Establish Listing Standards
Related to Recovery of Erroneously Awarded Executive Compensation
March 7, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 22, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to establish listing standards related to
recovery of erroneously awarded executive compensation as required by
SEC Rule 10D-1.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/nasdaq/rules">https://listingcenter.nasdaq.com/rulebook/nasdaq/rules</a>, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Wall Street Reform and Consumer Protection Act of 2010 (the
``Dodd-Frank Act'') added Section 10D to the Securities Exchange Act of
1934.\3\ In October 2022, the SEC adopted final Rule 10D-1 \4\
instructing national securities exchanges to establish specific listing
standards that require each issuer to adopt and comply with a written
executive compensation recovery policy.\5\ Under Rule 10D-1, listed
companies must recover from current and former executive officers
incentive-based compensation received during the three fiscal years
preceding the date on which the issuer is required to prepare an
accounting restatement to correct a material error. As required by Rule
10D-1 and the Listing Standards Release, Nasdaq proposes to adopt
Listing Rule 5608 (the ``Rule''), titled, recovery of erroneously
awarded compensation.
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78j-4.
\4\ 17 CFR 240.10D-1.
\5\ Securities Exchange Act Release No. 96159 (October 26,
2022), 87 FR 73076 (November 28, 2022)(``Listing Standards
Release'').
---------------------------------------------------------------------------
Proposed Listing Rule 5608(a) would introduce the requirements of
the Rule in accordance with the Listing Standards Release. Nasdaq also
proposes to adopt Listing Rule 5608(b), which sets forth the
substantive requirements of Rule 10D-1(b), and Listing Rule 5608(d),
which sets forth the defined terms applicable to the Rule. As provided
in Rule 10D-1, Nasdaq proposes to define the term ``executive officer''
to include the issuer's president, principal financial officer,
principal accounting officer, any vice-president in charge of a
principal business unit, division or function and any other person
(including executive officers of a parent or subsidiary) who performs
similar policy-making functions for the issuer. The term ``policy-
making function'' is not intended to include policy-making functions
that are not significant.
The recovery of erroneously awarded compensation is required on a
``no fault'' basis, without regard to whether any misconduct occurred
or an executive officer's responsibility for the erroneous financial
statements. A restatement due to material non-compliance with any
financial reporting requirement under the securities laws triggers
application of the recovery policy. As explained in the Listing
[[Page 15501]]
Standards Release, the determination regarding materiality of an error
should be based on facts and circumstances and existing judicial and
administrative interpretations. The proposed Rule requires recovery for
restatements that correct errors that are material to previously issued
financial statements (commonly referred to as ``Big R'' restatements),
as well as for restatements that correct errors that are not material
to previously issued financial statements but would 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 (commonly referred to as ``little r'' restatement).
Under the proposed Rule, listed companies will be required to
recover the amount of incentive-based compensation received by an
executive officer that exceeds the amount the executive officer would
have received had the incentive-based compensation been determined
based on the accounting restatement. Incentive-based compensation is
deemed received \6\ in the fiscal period during which the financial
reporting measure specified in the incentive-based compensation award
is attained, even if the grant or payment of the incentive-based
compensation occurs after the end of that period. For incentive-based
compensation based on stock price or total shareholder return,
companies can use a reasonable estimate of the effect of the
restatement on the applicable measure to determine the amount to be
recovered.
---------------------------------------------------------------------------
\6\ Nasdaq proposes to define the term ``received'' as provided
in Rule 10D-1.
---------------------------------------------------------------------------
As provided in Rule 10D-1, Nasdaq proposes to define the term
``Incentive-based compensation'' to mean any compensation that is
granted, earned or vested based wholly or in part upon the attainment
of any financial reporting measure. The term ``financial reporting
measures'' is defined as measures that are determined and presented in
accordance with the accounting principles used in an issuer's financial
statements, and any measures that are derived wholly or in part from
such measures, as well as an issuer's stock price and total shareholder
return. Equity awards that vest exclusively upon completion of a
specified employment period, without any performance condition, and
bonus awards that are discretionary or based on subjective goals or
goals unrelated to financial reporting measures, do not constitute
incentive-based compensation.\7\ Incentive-based compensation received
by an executive officer before the issuer had a class of securities
listed on a national securities exchange or a national securities
association would not be subject to the compensation recovery policy.
---------------------------------------------------------------------------
\7\ See the Listing Standards Release, at 73094.
---------------------------------------------------------------------------
As also provided in Rule 10D-1, Nasdaq proposes to set forth the
circumstances where listed companies would have limited discretion not
to recover the excess incentive-based compensation. Specifically,
Nasdaq proposes to provide that a company is required to recover
compensation in compliance with its recovery policy, except to the
extent that pursuit of recovery would be impracticable because: (1) the
direct expense paid to a third party to assist in enforcing the policy
would exceed the amount to be recovered, (2) recovery would violate
home country law, where that law was adopted prior to November 28,
2022, based on an opinion of counsel acceptable to Nasdaq or (3)
recovery would cause a broad-based retirement plan to fail to meet the
tax-qualification requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C.
411(a) and regulations thereunder. Before concluding that pursuit is
impracticable, a company must first make a reasonable attempt to
recover the incentive-based compensation and provide that documentation
to Nasdaq. The listed company's board is required to apply on a ``no
fault'' basis any recovery policy consistently to executive officers
and a listed company is prohibited from indemnifying any current or
former executive officer for recovered compensation.
As provided in Rule 10D-1, Nasdaq proposes to require each listed
company to file all disclosures with respect to its erroneously awarded
executive compensation recovery policy in accordance with the
requirements of the Federal securities laws, including the disclosure
required by the applicable Commission filings. As explained in the
Listing Standards Release, each listed company is required to file its
compensation recovery policy as an exhibit to its Exchange Act annual
report. In addition, the Commission's rules require disclosure pursuant
to Item 402 of Regulation S-K of the following items, among others, if,
during the prior fiscal year, either a triggering restatement occurred
or any balance of excess incentive-based compensation was outstanding:
<bullet> The date on which the listed issuer was required to
prepare an accounting restatement and the aggregate dollar amount of
erroneously awarded compensation attributable to such accounting
restatement (including an analysis of how the recoverable amount was
calculated) or, if the amount has not yet been determined, an
explanation of the reasons and disclosure of the amount and related
disclosures in the next filing that is subject to Item 402 of
Regulation S-K;
<bullet> The aggregate dollar amount of erroneously awarded
compensation that remains outstanding at the end of its last completed
fiscal year;
<bullet> If the financial reporting measure related to a stock
price or total shareholder return metric, the estimates used to
determine the amount of erroneously awarded compensation attributable
to such accounting restatement and an explanation of the methodology
used for such estimates;
<bullet> If recovery would be impracticable pursuant to Rule 10D-
1(b)(1)(iv), for each current and former named executive officer and
for all other current and former executive officers as a group,
disclose the amount of recovery forgone and a brief description of the
reason the listed registrant decided in each case not to pursue
recovery; and
<bullet> For each current and former named executive officer,
disclose the amount of erroneously awarded compensation still owed that
had been outstanding for 180 days or longer since the date the issuer
determined the amount owed.
The additional disclosure requirements apply immediately following
the effective date of the applicable listing standards.
Covered Companies
As provided in Rule 10D-1, Nasdaq proposes to apply the proposed
listing standards related to recovery of erroneously awarded executive
compensation to all listed companies (including but not limited to,
foreign private issuers, emerging growth companies, smaller reporting
companies, controlled companies and issuers of listed debt whose stock
is not also listed) except for certain registered investment companies
to the extent they do not provide incentive-based compensation to their
employees. As provided in Rule 10D-1, Nasdaq proposes to adopt Listing
Rule 5608(c) to provide certain exemptions from the requirements
related to recovery of erroneously awarded executive compensation.
Specifically Rule 5608(c) will exempt any security issued by a unit
investment trust, as defined in 15 U.S.C. 80a-4(2); and any security
issued by a management company, as defined in 15 U.S.C. 80a-4(3), that
is registered under section 8 of the Investment
[[Page 15502]]
Company Act of 1940 (15 U.S.C. 80a-8), if such management company has
not awarded incentive-based compensation to any executive officer of
the 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 listing of the company.
For clarity, Nasdaq proposes to amend Listing Rule 5210 to indicate
that any company newly listing on Nasdaq must comply with the
requirements of proposed Listing Rule 5608 (Recovery of Erroneously
Awarded Compensation). Nasdaq also proposes to similarly amend Listing
Rule 5701 governing listing requirements for ``other securities,'' and
Listing Rule 5702 governing listing requirements for ``debt
securities.''
Compliance With Compensation Recovery Policy
As described above, Nasdaq proposes to require that a company will
be subject to delisting if it does not adopt a compensation recovery
policy that complies with the applicable listing standard, disclose the
policy in accordance with Commission rules or comply with the policy's
recovery provisions. Rule 10D-1 requires that a listed company recover
the amount of erroneously awarded incentive-based compensation
reasonably promptly,\8\ but does not specify the time by which the
issuer must complete the recovery of excess incentive-based
compensation; rather, Nasdaq would determine whether the steps an
issuer is taking constitute compliance with its compensation recovery
policy. The issuer's obligation to recover erroneously awarded
incentive-based compensation reasonably promptly will be assessed on a
holistic basis with respect to each such accounting restatement
prepared by the issuer. In evaluating whether an issuer is recovering
erroneously awarded incentive-based compensation reasonably promptly,
the Exchange will consider whether the issuer is pursuing an
appropriate balance of cost and speed in determining the appropriate
means to seek recovery, and whether the issuer is securing recovery
through means that are appropriate based on the particular facts and
circumstances of each executive officer that owes a recoverable amount.
---------------------------------------------------------------------------
\8\ In that regard, the Commission stated that it ``recognize[s]
that what is reasonable may depend on the additional cost incident
to recovery efforts. [The Commission] expect[s] that issuers and
their directors and officers, in the exercise of their fiduciary
duty to safeguard the assets of the issuer (including the time value
of any potentially recoverable compensation), will pursue the most
appropriate balance of cost and speed in determining the appropriate
means to seek recovery.'' The Listing Standards Release, at 73104.
---------------------------------------------------------------------------
Nasdaq proposes to amend Listing Rule 5810(c)(2)(A)(iii) to provide
that a company that failed to comply with proposed Listing Rule 5608 is
required to submit to Nasdaq Staff a plan to regain compliance. The
administrative process for such deficiencies will follow the
established pattern used for similar corporate governance deficiencies,
and would allow Nasdaq Staff to provide the issuer up to 180 days to
cure the deficiency. Thereafter, Nasdaq Staff would be required to
issue a delisting letter,\9\ which the issuer could appeal to the
Hearings Panel, as provided in Listing Rule 5815. The Hearings Panel
could allow the issuer up to an additional 180 days to cure the
deficiency.
---------------------------------------------------------------------------
\9\ Listing Rule 5810 provides that notifications of
deficiencies that allow for submission of a compliance plan may
result, after review of the compliance plan, in issuance of a Staff
Delisting Determination or a Public Reprimand Letter. However Nasdaq
believes that issuance of a Public Reprimand Letter is inconsistent
with the provisions of Rule 10D-1 and, therefore, proposes to amend
Listing Rule 5805(j) to provide that a Public Reprimand Letter may
not be issued for violations of a listing standard required by Rule
10D-1. Nasdaq also proposes to modify Listing Rules 5810-5825
accordingly.
---------------------------------------------------------------------------
Implementation and Transition
As provided in Rule 10D-1, Nasdaq proposes to require that each
Company is required to (i) adopt a policy governing the recovery of
erroneously awarded compensation as required by this rule no later than
60 days following the effective date of this rule, and (ii) provide the
disclosures required by this rule and in the applicable Commission
filings on or after the effective date of this rule. Notwithstanding
the look-back requirement in Rule 5608(b)(1)(i)(D), as provided in the
Listing Standards Release, Nasdaq proposes to provide that a company is
only required to apply the recovery policy to incentive-based
compensation received on or after the effective date of this rule.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\10\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\11\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As required by the Dodd-Frank Act and Rule 10D-1, Nasdaq is
proposing amendments to its listing rules relating to recovery of
erroneously awarded executive compensation. These proposals are,
generally, required by SEC Rule 10D-1. Nasdaq believes that these
proposals protect investors and the public interest by requiring
companies, with certain exemptions, that, in the event the company is
required to prepare an accounting restatement, the company will recover
reasonably promptly erroneously awarded incentive-based compensation
paid to its current or former executive officers based on any misstated
financial reporting measure. Nasdaq also believes that these new
requirements will help facilitate effective oversight of executive
compensation and promote accountability to investors by not allowing
executive officers to retain compensation that they were awarded
erroneously. Finally, Nasdaq agrees with the Commission that 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
the Commission expects will further discourage such behavior.\12\
---------------------------------------------------------------------------
\12\ See the Listing Standards Release, at 73077.
---------------------------------------------------------------------------
Nasdaq believes that the proposal to amend Listing Rule
5810(c)(2)(A)(iii) to provide that a company that failed to comply with
proposed Listing Rule 5608 is required to submit to Nasdaq Staff a plan
to regain compliance and be subject to the appeal process described
above, is consistent with the investor protection objectives of Section
6(b)(5) of the Act \13\ because the administrative process for such
deficiencies will follow the established pattern used for similar
corporate governance deficiencies and Nasdaq has developed expertise
administering this process.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposed amendments would
not impose any burden on competition, not necessary or appropriate in
furtherance of the purposes of the Act, because the proposed listing
standards will apply to all listed companies, except in limited
circumstances described above, as required by the Dodd-Frank Act and
the SEC Rule 10D-1.
[[Page 15503]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6715120b024a04080a0a020913142714020449000811"><span class="__cf_email__" data-cfemail="691b1c050c440a0604040c071d1a291a0c0a470e061f">[email protected]</span></a>. Please include
File Number SR-NASDAQ-2023-005 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2023-005. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2023-005, and should be submitted
on or before April 3, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05040 Filed 3-10-23; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on March 13, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.