Notice2023-12757
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 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
June 15, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 115 (Thursday, June 15, 2023)</title>
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[Federal Register Volume 88, Number 115 (Thursday, June 15, 2023)]
[Notices]
[Pages 39295-39300]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-12757]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97687; File No. SR-NASDAQ-2023-005]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To
Establish Listing Standards Related to Recovery of Erroneously Awarded
Executive Compensation
June 9, 2023.
I. Introduction
On February 22, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt Nasdaq Rule 5608 to establish listing
standards related to recovery of erroneously awarded executive
compensation as required by Rule 10D-1 under the Act (``Rule 10D-1'').
The proposed rule change was published for comment in the Federal
Register on March 13, 2023.\3\ On April 24, 2023, the Commission
extended the time period within which to approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to approve or disapprove the proposed rule
change.\4\ On June 6, 2023, the Exchange filed partial Amendment No. 1
to the proposed rule change.\5\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as modified by
Amendment No. 1, from interested persons and is approving the proposed
rule change, as modified by Amendment No. 1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 97060 (March 7,
2023), 88 FR 15500 (``Notice''). Comments received on the proposed
rule change are available at: <a href="https://www.sec.gov/comments/sr-nasdaq-2023-005/srnasdaq2023005.htm">https://www.sec.gov/comments/sr-nasdaq-2023-005/srnasdaq2023005.htm</a>.
\4\ See Securities Exchange Act Release No. 97353, 88 FR 26369
(April 28, 2023).
\5\ Amendment No. 1 is available on the Commission's website at
<a href="https://www.sec.gov/comments/sr-nasdaq-2023-005/srnasdaq2023005-200459-401302.pdf">https://www.sec.gov/comments/sr-nasdaq-2023-005/srnasdaq2023005-200459-401302.pdf</a>. In Amendment No. 1, the Exchange proposes to
amend Rule 5608(e) to (i) provide that the effective date of Rule
5608 would be October 2, 2023; and (ii) clarify, consistent with the
requirements of Rule 10D-1 and the rule language as originally
proposed, that each company is required to comply with its recovery
policy for all incentive-based compensation received (as such term
is defined in proposed Rule 5608(d)) by executive officers on or
after October 2, 2023.
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II. Background and Description of the Proposal, as Modified by
Amendment No. 1
On October 26, 2022, the Commission adopted final Rule 10D-1 \6\ 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 Act. Section 10D of the Act requires the Commission to adopt rules
directing the national securities exchanges to prohibit the listing of
any security of an issuer that is not in compliance with the
requirements of Section 10D of the Act. Rule 10D-1 requires national
securities exchanges that list securities to establish listing
standards that require each issuer to adopt and comply with a written
executive compensation recovery policy and to provide the disclosures
required by Rule 10D-1 and in the applicable Commission filings.\7\
Under Rule 10D-1, listed companies must recover from current and former
executive officers incentive-based compensation received during the
three completed fiscal years preceding the date on which the issuer is
required to prepare an accounting restatement.
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\6\ 17 CFR 240.10D-1.
\7\ See Securities Exchange Act Release No. 96159, 87 FR 73076
(November 28, 2022) (``Adopting Release''). Rule 10D-1 requires such
exchange listing rules to be effective no later than one year after
November 28, 2022. Rule 10D-1 further requires that each listed
issuer: (i) adopt the required recovery policy no later than 60 days
following the effective date of the listing standard; (ii) comply
with the recovery policy for all incentive-based compensation
received by executive officers on or after the effective date of the
applicable listing standard; and (iii) provide the required
disclosures on or after the effective date of the listing standard.
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As required by Rule 10D-1, Nasdaq proposed to adopt Nasdaq Rule
5608
[[Page 39296]]
entitled ``Recovery of Erroneously Awarded Compensation.'' Proposed
Nasdaq Rule 5608 (the ``Rule'') mirrors the text of Rule 10D-1.
Specifically, proposed Nasdaq Rule 5608(a) would require companies \8\
to adopt a compensation recovery policy, comply with that policy, and
provide the compensation recovery policy disclosures required by the
Rule and in the applicable Commission filings.
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\8\ For purposes of this order, ``companies'' or ``company''
refers to the issuer of a security listed or an issuer who is
applying to list on Nasdaq. See, e.g., Nasdaq Rule 5005(a)(6).
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Proposed Nasdaq Rule 5608(b)(1) would require that each company
adopt and comply with a written policy providing that the company will
recover reasonably promptly the amount of erroneously awarded
incentive-based compensation in the event that the company is required
to prepare an accounting restatement due to the material noncompliance
of the company with any financial reporting requirement under the
securities laws, including any required accounting restatement to
correct 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.
The company's recovery policy must apply to all incentive-based
compensation received by a person: (A) after beginning service as an
executive officer; (B) who served as an executive officer at any time
during the performance period for that incentive-based compensation;
(C) while the company has a class of securities listed on a national
securities exchange or a national securities association; and (D)
during the three completed fiscal years immediately preceding the date
that the company is required to prepare an accounting restatement as
described in paragraph (b)(1) of the Rule.\9\ A company's obligation to
recover erroneously awarded compensation is not dependent on if or when
the restated financial statements are filed.
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\9\ See proposed Rule 5608(b)(1)(i). In addition to these last
three completed fiscal years, the recovery policy must apply to any
transition period (that results from a change in the company's
fiscal year) within or immediately following those three completed
fiscal years. However, a transition period between the last day of
the company's previous fiscal year end and the first day of its new
fiscal year that comprises a period of nine to 12 months would be
deemed a completed fiscal year.
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For purposes of determining the relevant recovery period, the date
that a company is required to prepare an accounting restatement as
described in paragraph (b)(1) of the Rule is the earlier to occur of:
(A) the date the company's board of directors, a committee of the board
of directors, or the officer or officers of the company authorized to
take such action if board action is not required, concludes, or
reasonably should have concluded, that the company is required to
prepare an accounting restatement as described in paragraph (b)(1) of
this Rule; or (B) the date a court, regulator, or other legally
authorized body directs the company to prepare an accounting
restatement as described in paragraph (b)(1) of the Rule.\10\
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\10\ See proposed Rule 5608(b)(1)(ii).
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The amount of incentive-based compensation that must be subject to
the company's recovery policy (``erroneously awarded compensation'') is
the amount of incentive-based compensation received that exceeds the
amount of incentive-based compensation that otherwise would have been
received had it been determined based on the restated amounts, and must
be computed without regard to any taxes paid. For incentive-based
compensation based on stock price or total shareholder return, where
the amount of erroneously awarded compensation is not subject to
mathematical recalculation directly from the information in an
accounting restatement, the amount must be based on a reasonable
estimate of the effect of the accounting restatement on the stock price
or total shareholder return upon which the incentive-based compensation
was received, and the company must maintain documentation of the
determination of that reasonable estimate and provide such
documentation to Nasdaq.\11\
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\11\ See proposed Rule 5608(b)(1)(iii).
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The company must recover erroneously awarded compensation in
compliance with its recovery policy except to the extent that one of
the conditions set forth below is met, and the company's Compensation
Committee, or in the absence of such a committee, a majority of the
independent directors serving on the board, has made a determination
that recovery would be impracticable.
<bullet> The direct expense paid to a third party to assist in
enforcing the policy would exceed the amount to be recovered. Before
concluding that it would be impracticable to recover any amount of
erroneously awarded compensation based on expense of enforcement, the
company must make a reasonable attempt to recover such erroneously
awarded compensation, document such reasonable attempt(s) to recover,
and provide that documentation to Nasdaq.
<bullet> Recovery would violate home country law where that law was
adopted prior to November 28, 2022. Before concluding that it would be
impracticable to recover any amount of erroneously awarded compensation
based on violation of home country law, the company must obtain an
opinion of home country counsel, acceptable to Nasdaq, that recovery
would result in such a violation, and must provide such opinion to
Nasdaq.
<bullet> Recovery would likely cause an otherwise tax-qualified
retirement plan, under which benefits are broadly available to
employees of the registrant, to fail to meet the requirements of 26
U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.\12\
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\12\ See proposed Rule 5608(b)(1)(iv).
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The company is prohibited from indemnifying any executive officer
or former executive officer against the loss of erroneously awarded
compensation.\13\
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\13\ See proposed Rule 5608(b)(1)(v).
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Proposed Nasdaq Rule 5608(b)(2) would require that each company
file all disclosures with respect to such recovery policy in accordance
with the requirements of the federal securities laws, including the
disclosure required by the applicable Commission filings.
Proposed Nasdaq Rule 5608(c) would provide that the requirements of
the Rule do not apply to the listing of: (1) any security issued by a
unit investment trust, as defined in 15 U.S.C. 80a-4(2); and (2) 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 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.
Proposed Nasdaq Rule 5608(d) would provide that, unless the context
otherwise requires, the following definitions apply for purposes of the
Rule (and only for purposes of Rule 5608):
<bullet> Executive Officer. An executive officer is the company's
president, principal financial officer, principal accounting officer
(or if there is no such accounting officer, the controller), any vice-
president of the company 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
[[Page 39297]]
any other person who performs similar policy-making functions for the
company. Executive officers of the company's parent(s) or subsidiaries
are deemed executive officers of the company if they perform such
policy making functions for the company. In addition, when the company
is a limited partnership, officers or employees of the general
partner(s) who perform policy-making functions for the limited
partnership are deemed officers of the limited partnership. When the
company is a trust, officers, or employees of the trustee(s) who
perform policy-making functions for the trust are deemed officers of
the trust. Policy-making function is not intended to include policy-
making functions that are not significant. Identification of an
executive officer for purposes of the Rule would include at a minimum
executive officers identified pursuant to 17 CFR 229.401(b).
<bullet> Financial Reporting Measures. Financial reporting measures
are measures that are determined and presented in accordance with the
accounting principles used in preparing the company's financial
statements, and any measures that are derived wholly or in part from
such measures. Stock price and total shareholder return are also
financial reporting measures. A financial reporting measure need not be
presented within the financial statements or included in a filing with
the Commission.
<bullet> Incentive-Based Compensation. Incentive-based compensation
is any compensation that is granted, earned, or vested based wholly or
in part upon the attainment of a financial reporting measure.
<bullet> Received. Incentive-based compensation is deemed received
in the company's fiscal period during which the financial reporting
measure specified in the incentive-based compensation award is
attained, even if the payment or grant of the incentive-based
compensation occurs after the end of that period.
Proposed Nasdaq Rule 5608(e) would provide that the effective date
of the Rule (``effective date'') is October 2, 2023, and that each
company is required to (i) adopt a policy governing the recovery of
erroneously awarded compensation as required by the Rule no later than
60 days following October 2, 2023; (ii) comply with its recovery policy
for all incentive-based compensation received (as such term is defined
in Rule 5608(d)) by executive officers on or after October 2, 2023; and
(iii) provide the disclosures required by the Rule and in the
applicable Commission filings on or after October 2, 2023.\14\ Proposed
Nasdaq Rule 5605(e) also states that notwithstanding the look-back
requirement in proposed Rule 5608(b)(1)(i)(D), a company is only
required to apply the recovery policy to incentive-based compensation
received on or after October 2, 2023.\15\
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\14\ See Amendment No. 1, supra note 5. In support of proposing
an effective date of October 2, 2023, the Exchange states it
believes this is consistent with Section 10D ``and the goal of
implementing the proposed rule promptly while also being consistent
with the expectations of listed issuer that the proposed rules would
take effect a year after the adoption of SEC Rule 10D-1 based on the
issuers' understanding of a statement made . . . in the Listing
Standards Release.'' See id.
\15\ As described above, a Nasdaq listed company would have to
comply with its recovery policy for all incentive-based compensation
received by executive officers on or after the effective date of the
applicable listing standard (i.e. Nasdaq Rule 5608). Incentive-based
compensation that is the subject of a compensation contract or
arrangement that existed prior to the effective date of Rule 10D-1
would still be subject to recovery under the Exchange's rule if such
compensation was received on or after the effective date of Rule
5608, as required by Rule 10D-1. See Adopting Release, supra note 6,
and also definitions of ``incentive based compensation'' and
``received'' in proposed Nasdaq Rule 5608(d).
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Nasdaq also proposes additional clarifying changes to Nasdaq Rule
5210 (Prerequisites for Applying to List on the Nasdaq Stock Market),
Nasdaq Rule 5701 (Preamble to the Listing Requirements to Other
Securities) and Nasdaq Rule 5702 governing listing requirements for
debt securities to make clear the application of proposed Nasdaq Rule
5608 under these provisions.\16\
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\16\ Nasdaq states that the change to Nasdaq Rule 5210 will
clarify that any company newly listing on Nasdaq must comply with
these requirements. The proposed amendments to Nasdaq Rules 5701 and
5702 make clear that proposed Nasdaq Rule 5608 would apply, except
to the extent exempted as set forth above. See supra discussion of
proposed Rule 5608(c).
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Nasdaq states that the new requirements described above 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.\17\
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\17\ See Notice, supra note 3, 88 FR at 15502.
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As described above, Rule 10D-1 requires national securities
exchanges to prohibit the initial or continued listing of any security
of an issuer not in compliance with its rules adopted to comply with
Rule 10D-1. Nasdaq proposes therefore 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 its recovery
policy. Nasdaq states that the administrative process for a company
that fails to comply with proposed Nasdaq Rule 5608 will follow the
established pattern used for similar corporate governance
deficiencies.\18\ Specifically, Nasdaq proposes to amend Nasdaq Rule
5810(c)(2)(A)(iii) to provide that a company that fails to comply with
proposed Nasdaq Rule 5608 may submit to Nasdaq Staff \19\ a plan to
regain compliance and, consistent with its process for similar
corporate governance deficiencies, Nasdaq Staff may provide the issuer
up to 180 days to cure the deficiency.\20\ Nasdaq Rule 5810(c)(2)(B)
further provides that notifications of deficiencies that allow for
submission of a compliance plan may also result, after review of the
compliance plan, in issuance of a Staff Delisting Determination or a
Public Reprimand Letter. However, Nasdaq proposes to amend Nasdaq Rules
5810(c)(4), 5815(c)(1)(D), 5820(d)(1) and 5825(d) to provide that a
Public Reprimand Letter may not be issued for violations of a listing
standard required by Rule 10D-1 or upon appeal of such violations.\21\
If Nasdaq Staff provides the issuer with a period to cure the
deficiency, and if the company does not regain compliance within the
time period provided, Nasdaq Staff would be required to issue a Staff
Delisting Determination,\22\ which the issuer could appeal to the
Hearings Panel, as provided in Nasdaq Rule 5815. The Hearings Panel
could allow the issuer up to an additional 180 days to cure the
deficiency.\23\
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\18\ See id. See also Nasdaq Rule 5805(c)(2)(B).
\19\ Nasdaq Rule 5805(g) defines the term ``Staff'' as employees
of the Listing Qualifications Department (the department of Nasdaq
responsible for evaluating company compliance with quantitative and
qualitative listing standards and determining eligibility for
initial and continued listing of a company's securities). See also
Nasdaq Rule 5805(h).
\20\ See Notice, supra note 3, 88 FR at 15502. See also Nasdaq
Rule 5805(c)(2)(B).
\21\ Nasdaq also proposes to amend the definition of ``Public
Reprimand Letter'' in 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. Under the existing definition in
Rule 5805(j), Public Reprimand Letters can be issued for violations
of Nasdaq corporate governance or notification listing standards
except for violations of a listing standard required by Rule 10A-3
of the Act.
\22\ See Nasdaq Rule 5805(c)(2)(E).
\23\ See Nasdaq Rule 5815(c).
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national
[[Page 39298]]
securities exchange.\24\ In particular, the Commission finds that the
proposed rule change is consistent with the requirements of Section
6(b) of the Act.\25\ Specifically, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\26\
which requires, among other things, that the rules of a national
securities exchange be designed to prevent fraudulent and manipulative
acts and practices, 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, and are not designed to permit
unfair discrimination between customers, issuers, brokers, or dealers.
In addition, the Commission finds that the proposed rule change is
consistent with Section 6(b)(7) of the Act,\27\ which requires, among
other things, that the rules of a national securities exchange provide
a fair procedure for the prohibition or limitation by the exchange of
any person with respect to access to services offered by the exchange.
The proposed rule change, as modified by Amendment No. 1, is also
consistent with Section 10D of the Act \28\ and Rule 10D-1 thereunder,
as further described below.\29\
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\24\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
\27\ 15 U.S.C. 78(b)(7).
\28\ 15 U.S.C. 78j-4.
\29\ 17 CFR 240.10D-1.
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The development and enforcement of meaningful listing standards for
a national securities exchange is of substantial importance to
financial markets and the investing public. Meaningful listing
standards are especially important given investor expectations
regarding the nature of companies that have achieved an exchange
listing for their securities, and the role of an exchange in overseeing
its market and assuring compliance with its listing standards.\30\ The
corporate governance standards embodied in the listing rules of
national securities exchanges, in particular, play an important role in
assuring that companies listed for trading on the exchanges' markets
observe good governance practices, including a fair approach and
greater accountability for the recovery of erroneously awarded
compensation.\31\
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\30\ See, e.g., Securities Exchange Release Nos. 65708 (November
8, 2011), 76 FR 70799 70802 (November 15, 2011) (SR-NASDAQ-2011-
073); 63607 (December 23, 2010), 75 FR 82420, 82422 (December 30,
2010) (SR-NASDAQ-2010-137); 57785 (May 6, 2008), 73 FR 27597, 27599
(May 13, 2008) (SR-NYSE-2008-17); and 93256 (October 4, 2021), 86 FR
56338 (October 8, 2021) (SR-NASDAQ-2021-007).
\31\ See, e.g., Securities Exchange Release No. 68639 (January
11, 2013), 78 FR 4570, 4579 (January 22, 2013) (SR-NYSE-2012-49)
(stating, in connection with the modification of exchange rules for
compensation committees of listed issuers to comply with Rule 10C-1
of the Act, that corporate governance listing standards ``play an
important role in assuring that companies listed for trading on the
exchanges' markets observe good governance practices, including a
reasoned, fair, and impartial approach for determining the
compensation of corporate executives'' and stating that the proposal
would foster ``greater transparency, accountability and
objectivity'' in oversight of compensation practices).
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In enacting Section 10D of the Act,\32\ Congress resolved to
require national securities exchanges to establish listing standards to
require listed issuers to develop and comply with a policy to recover
incentive-based compensation erroneously awarded on the basis of
financial information that requires an accounting restatement.\33\ In
October 2022, as required by this legislation, the Commission adopted
Rule 10D-1 under the Act, which directs the national securities
exchanges to establish listing standards that require issuers to: (i)
develop and comply with 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 (ii) disclose those compensation recovery policies in
accordance with Commission rules. In response, the Exchange has filed
the proposed rule change, which includes rules intended to comply with
the requirements of Rule 10D-1.
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\32\ Public Law 111-203, sec. 954, 124 Stat. 1376, 1904 (2010)
(codified at 15 U.S.C. 78j-4).
\33\ 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 it is ``unfair to shareholders for corporations
to allow executive officers to retain compensation that they were
awarded erroneously.'' 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. See also Adopting
Release, supra note 7, 87 FR at 73077 (citing to the Senate Report)
(``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.''').
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The Exchange's proposed Rule 5608 incorporates the requirements of
Rule 10D-1. The Commission believes that the Exchange's proposal will
foster greater fairness, accountability, and transparency to
shareholders of listed issuers by advancing the recovery of incentive-
based compensation that was erroneously awarded on the basis of
financial information that requires an accounting restatement,
consistent with Section 10D of the Act \34\ and Rule 10D-1
thereunder,\35\ and will therefore further the protection of investors
consistent with Section 6(b)(5) of the Act.\36\ In addition, as the
Commission stated in the Adopting Release, the recovery requirements
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 can further discourage
such behavior.\37\ The Commission believes that these benefits of the
Exchange's new rules on the recovery of erroneously awarded
compensation will protect investors and the public interest as required
under Section 6(b)(5) of the Act.
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\34\ 15 U.S.C. 78j-4.
\35\ 17 CFR 240.10D-1.
\36\ 15 U.S.C. 78f(b)(5).
\37\ See Adopting Release, supra note 7, 87 FR at 73077. See
also Notice, supra note 3, 88 FR at 15502, agreeing with the
Commission's statement on the benefits of the recovery policy.
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Rule 10D-1 and proposed Rule 5608 require that a listed issuer
recover the amount of erroneously awarded incentive-based compensation
``reasonably promptly.'' One commenter requested Nasdaq include
guidance in its proposed listing standards regarding what the exchange
will consider in evaluating whether an issuer is pursuing recovery
``reasonably promptly'' under its policy and provided a non-exclusive
list of factors the Exchange could consider and set forth in its
rules.\38\ As discussed above, Nasdaq's proposed rule mirrors the
language in Rule 10D-1 and such guidance is not included in the rule
text of Rule 10D-1. The Adopting Release stated that whether an issuer
is acting reasonably promptly ``will depend on the particular facts and
circumstances applicable to that issuer'' and ``the final rules do not
restrict exchanges from adopting more prescriptive approaches to the
timing
[[Page 39299]]
and method of recovery under their rules in compliance with Section
19(b) of the Exchange Act . . .'' \39\ Rule 10D-1 also does not compel
the exchanges to adopt a more prescriptive approach to the timing and
method of recovery. In its Notice, Nasdaq stated that ``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'' and that
``[i]n 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.'' \40\ The Commission
believes this guidance provided by the Exchange is consistent with the
Commission's statements regarding when an issuer is acting ``reasonably
promptly'' as expressed in the Adopting Release, with Rule 10D-1 and
with the Act.\41\
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\38\ See Letter to Vanessa Countryman, Secretary, Commission,
from Wilson Sonsini Goodrich & Rosati, dated April 4, 2024 [sic]
(``Wilson Sonsini Letter''), at 4.
\39\ See Adopting Release, supra note 7, 87 FR at 73104. For
example, the Commission stated that after the exchanges have
observed issuer performance they can use any resulting data to
assess the need for further guidelines to ensure prompt and
effective recovery. See id.
\40\ See Notice, supra note 3, 88 FR at 15502.
\41\ See Adopting Release, supra note 7, 87 FR 73104.
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Rule 10D-1 requires issuers subject to the listing standards to
adopt a recovery policy no later than 60 days following the date on
which the applicable listing standards become effective and to comply
with their recovery policy, and provide the required disclosures, on or
after the effective date. The Commission received comment letters
requesting the Commission not approve the proposal before November 28,
2023, citing burdens to issuers, including with respect to assessing
the impact of the new listing standards on their existing executive
compensation programs, developing and implementing compliant policies,
and obtaining board (and in some cases shareholder) approval.\42\
Commenters stated that listed issuers anticipated an effective date of
November 28, 2023 based on the language in Rule 10D-1 requiring that
the new listing standards become effective by no later than one year
following the publication of the final rules in the Federal
Register.\43\ One commenter stated that the Adopting Release stated
that ``issuers will have more than a year from the date the final rules
are published in the Federal Register to prepare and adopt compliant
recovery policies.'' \44\ The Commission also received comment letters
from individual investors that requested the Commission quickly
implement the proposal.\45\ The Exchange, in Amendment No. 1, is
proposing that the effective date of Rule 5608 be October 2, 2023.\46\
The Exchange believes that setting this date as the effective date will
ensure that issuers have more than a year from the date Rule 10D-1 was
published in the Federal Register to adopt recovery policies.\47\ This
is consistent with language in Rule 10D-1 and the Adopting Release,
while also ensuring prompt implementation of this proposed rule.
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\42\ See, e.g., Wilson Sonsini Letter at 5; Letter to Vanessa
Countryman, Secretary, Commission, from Davis Polk Wardwell LLP et
al., submitted on behalf of 39 law firms, dated April 3, 2023
(``Davis Polk Letter''); Letter to Vanessa Countryman, Secretary,
Commission, from C. Edward Allen, Vice President, Policy & Advocacy,
and Christina Maguire, President & CEO, Society for Corporate
Governance, dated April 3, 2023 (``Society Letter''); Letter to
Vanessa Countryman, Secretary, Commission, from American Securities
Association, Business Roundtable, Center On Executive Compensation,
National Association of Manufacturers, and U.S. Chamber of Commerce,
dated April 3, 2023 (``ASA Letter'').
\43\ See, e.g., Society Letter at 1; ASA Letter at 2.
\44\ See Davis Polk Letter at 1 n.1 (citing to Adopting Release,
supra note 7, 87 FR at 73111).
\45\ See, e.g., Letters from Clarissa McLaughlin, dated May 15,
2023; Deborah Temple, dated May 15, 2023; John Leonard, dated May
13, 2023.
\46\ See Amendment No. 1, supra note 5, amending proposed Nasdaq
Rule 5608(e).
\47\ Listed issuers will need to have their recovery policy in
place no later than 60 days following the effective date of October
2, 2023, which would be more than a year after publication of Rule
10D-1 in the Federal Register. Listed issuers will also have to
comply with their recovery policy for all incentive-based
compensation received by executive officers on or after the
effective date of October 2, 2023, and provide the required
disclosures in the applicable Commission filings on or after the
effective date of October 2, 2023. See Adopting Release, supra note
6, and also definitions of ``incentive based compensation'' and
``received'' in proposed Nasdaq Rule 5608(d). See also supra note 15
and accompanying text.
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With respect to a listed issuer that fails to comply with proposed
Rule 5608, the Exchange has proposed to apply its current procedures
applicable to companies with similar corporate governance deficiencies
in addition to prohibiting the use of a Public Reprimand Letter for
violations of a listing standard required by Rule 10D-1.\48\ The
Commission believes that these procedures for listed issuers out of
compliance with proposed Nasdaq Rule 5608, which are consistent with
the procedures for similar corporate governance deficiencies,
adequately meet the mandate of Rule 10D-1 and are consistent with
investor protection and the public interest, since they give a listed
issuer a reasonable time period to cure non-compliance with these
important requirements before the listed issuer will be delisted while
helping to ensure that listed issuers that are non-compliant will not
remain listed for an inappropriate amount of time.\49\ Additionally,
the proposed delisting process, including the cure period and the right
to appeal a delisting determination to the Exchange's Hearing Panel, is
consistent with Section 6(b)(7) of the Act in that it provides a fair
procedure for the review of delisting determinations based on
violations of the Exchange's rules for recovering erroneous
compensation.
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\48\ See supra notes 18-23 and accompanying text.
\49\ One commenter states its agreement that issuers should be
given an opportunity to submit a plan of compliance and to cure
noncompliance in good faith and states that Nasdaq's proposal
``strikes the right balance'' in deterring issuers from violating
the proposed listing standards without unnecessarily harming
shareholders. See Wilson Sonsini Letter, at 3. Another commenter
that was generally supportive of Nasdaq's proposal states that
Nasdaq's proposed delisting process involves the use of Listing
Qualifications Panels and a Listing and Hearing Review Council with
investor representatives. See Letter to Vanessa Countryman,
Secretary, Commission, from Jeffrey P. Mahoney, General Counsel,
Council of Institutional Investors, dated April 3, 2023, at 4 n.13.
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether the proposed rule change, as modified by
Amendment No. 1, is consistent with the Exchange Act. Comments may be
submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#3b494e575e16585456565e554f487b485e58155c544d"><span class="__cf_email__" data-cfemail="dcaea9b0b9f1bfb3b1b1b9b2a8af9cafb9bff2bbb3aa">[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 (https://www.sec.gov/
[[Page 39300]]
rules/sro.shtml). 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 a.m. and 3 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. Do
not include personal identifiable information in submissions; you
should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-NASDAQ-2023-005, and
should be submitted on or before July 6, 2023.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. In Amendment No. 1, the Exchange amended
proposed Rule 5608(e) to (i) provide that the effective date of Rule
5608 would be October 2, 2023; and (ii) clarify, consistent with the
requirements of Rule 10D-1 and the rule language as originally
proposed, that each company is required to comply with its recovery
policy for all incentive-based compensation received (as such term is
defined in proposed Rule 5608(d)) by executive officers on or after
October 2, 2023.\50\ The changes in Amendment No. 1 provide greater
clarity to the proposal. The change to the effective date of the
listing standards is consistent with Rule 10D-1 and language in the
Adopting Release and is responsive to comments stating that listed
issuers anticipated an effective date of November 28, 2023. The
additional clarification to Rule 5608(e) will ensure that the
requirements of that Rule conform to the requirements of Rule 10D-1.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Exchange Act,\51\ to approve the proposed rule change,
as modified by Amendment No. 1, on an accelerated basis.
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\50\ See Amendment No. 1, supra note 5.
\51\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\52\ that the proposed rule change (SR-NASDAQ-2023-005), as
modified by Amendment No. 1, be, and hereby is, approved on an
accelerated basis.
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\52\ 15 U.S.C. 78s(b)(2).
\53\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-12757 Filed 6-14-23; 8:45 am]
BILLING CODE 8011-01-P
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