In October last year, the SEC adopted a new clawback rule, Exchange Act Rule 10D-1, which directed the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with a clawback policy and to provide disclosure about the policy and its implementation. The clawback policy must provide that, in the event the listed issuer is required to prepare an accounting restatement—including not only a “reissuance,” or “Big R,” restatement (which involves a material error and an 8-K), but also a “revision” or “little r” restatement—the issuer must recover the incentive-based compensation that was erroneously paid to its current or former executive officers based on the misstated financial reporting measure. (See this PubCo post.) Now, the Corp Fin staff has issued some new CDIs, summarized below, providing guidance about the timing of the new required disclosure, which officers of foreign private issuers are subject to the disclosure rule and plans subject to the clawback.
New Question 121H.01 (and Exchange Act Forms Form 10-K New Question 104.19, Form 20-F New Question 110.09, and Form 40-F New Question 112.04). The clawback rules added a requirement to include new checkboxes on the cover pages of Form 10-K, Form 20-F and Form 40-F to indicate separately (a) whether the financial statements of the issuer included in the filing reflect correction of errors to previously issued financial statements, and (b) whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the issuer’s executive officers during the relevant recovery period. Although the checkbox requirement became effective January 27, 2023, the listing standards are not required to be effective until November 28, 2023 and subject issuers will not be required to adopt a clawback policy for 60 days following the effective date of the applicable standards. In the adopting release, the SEC made clear that issuers will not be required to comply with the disclosure requirements before they have adopted clawback policies under the applicable exchange listing standard. Accordingly, while the rules and forms will include the checkboxes and other disclosure requirements in 2023, Corp Fin does “not expect issuers to provide such disclosure until they are required to have a recovery policy under the applicable listing standard.” But see this post from thecorporatecounsel.net, which reports that the staff has informally confirmed “that you should include the checkboxes (but don’t need to mark them). If you are concerned that a blank checkbox could be misleading, you could add an explanatory note to the effect that the checkboxes are blank pending adoption of the underlying rules.”
New Question 121H.02 (and Exchange Act Forms Form 20-F New Question 110.08). For the most part, Form 20-F requires compensation and similar information about “senior management,” not “named executive officers.” As defined, “senior management” includes, in general, members of the issuer’s “administrative, supervisory or management bodies.” According to the Form, the “persons covered by the term ‘administrative, supervisory or management bodies’ vary in different countries and, for purposes of complying with the disclosure standards, will be determined by the host country.” The final clawback rules, however, refer to “named executive officers.” If an FPI were required to prepare an accounting restatement that required a clawback under the issuer’s recovery policy, new Item 6.F of Form 20-F would require specific individualized disclosures for the current and former named executive officers and for all other current and former executive officers as a group (for example, if an impracticability exception were used or if, as of the end of the last completed fiscal year, a balance of compensation to be recovered had been outstanding for 180 days). Should FPIs provide disclosure under Item 6.F about NEOs or senior management? According to Corp Fin, if an FPI files on domestic forms and provides executive comp disclosure under Item 402 of Reg S-K, the issuer should provide disclosure for its NEOs as required by Form 20-F; if, instead, an FPI uses Form 20-F, “individualized disclosure is required about members of their administrative, supervisory, or management bodies for whom the issuer otherwise provides individualized compensation disclosure in the filing. “
New Question 121H.03 (and Exchange Act Forms Form 40-F New Question 112.03) Item B.19 of Form 40-F, which relates to clawback disclosure, also requires individualized disclosure for the named executive officers. According to Corp Fin, in response to Item B.19, issuers should provide individualized disclosure about “executive officers for whom the issuer otherwise provides individualized compensation disclosure in the filing.”
New Question 121H.04 In the final rules, in response to commenters that maintained that clawback recovery from tax-qualified retirement plans could violate ERISA anti-alienation rules and result in loss of tax-qualified status for the plan, the SEC included an exception to clawback recovery where “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 applicable law. Incentive compensation, the adopting release continued, contributed to plans limited only to executive officers, SERPs or other nonqualified plans and related benefits would still be subject to recovery. But how far could recovery go? Would it affect, for example, long-term disability or life insurance? Corp Fin confirmed that the rule “is intended to apply broadly. For plans that take into account incentive-based compensation, an issuer would be expected to claw back the amount contributed to the notional account based on erroneously awarded incentive-based compensation and any earnings accrued to date on that notional amount.”
