As you know, in 2022, 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. Under the rules, the clawback policy had to provide that, in the event the listed issuer was required to prepare an accounting restatement—including not just “reissuance,” or “Big R,” restatements, but also “revision” or “little r” restatements—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. The recovery policy had to apply to incentive compensation received during the three completed fiscal years immediately preceding the date that the company was required to prepare a restatement. (See this PubCo post.) 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. (See this PubCo post.) It’s worth noting here that the first box, which applies to correction of any errors in the financial statements filed, is broader in scope than the second, which applies if the restatements needed a potential clawback analysis, even if no actual recovery was required. Apparently, there hasn’t been much action for the second box. In this article, Bloomberg reports on a study by research firm Nonlinear Analytics LLC, which showed that of “the 205 companies that reported accounting corrections in their annual financial statements so far this year, just 29—less than 15%—said they reviewed the error to see if they needed to force a compensation clawback,” i.e., reported that they performed a potential recovery analysis. And, only two of the companies that performed an analysis ended up clawing back any executive bonuses.
The study found a lot of inconsistency, as relatively similar accounting mistakes were treated differently by different companies; some conducted clawback analyses and concluded that no clawback was required, while many skipped the analysis altogether. Bloomberg reports that, “[o]f the small subset of companies that reported they reviewed their errors, 40% merely checked a new box on the front page of their filing, offering no details about how they weighed the information to figure out if they had to force a payback, the data show.”
The article recognizes, however, that the dearth of clawback analyses and even the inconsistencies do not necessarily signify that companies are ignoring the rules—there are nuances involved in applying the rules, as well as in the timing of compliance. According to one commentator, given the “tight time period between when the rules went into effect in October and when companies must assess their errors,…the pool of accounting mistakes to analyze is small.” Companies with calendar year fiscal years that file their 10-Ks in February or March, often “don’t pay out bonuses until the spring, when they share details about which executives got cash or stock payouts and the value of those awards in documents they file with the SEC. In many cases, companies uncovered errors and accounted for them prior to paying out bonuses. ‘It’s possible that the cash incentive award for 2023 hadn’t been paid out yet, so they caught it in time.’”
Bloomberg reports, however, that in May, a Corp Fin accountant “urged companies to be as transparent as possible in implementing the new rule, warning that they must make a formal assessment even if the accounting error didn’t affect metrics used to calculate executive pay. ‘There might not be any recovery amounts to determine because no incentive-based compensation was received by the executives during the relevant time frame….Regardless, the second checkbox must still be checked as a result of needing to perform that analysis to come to that conclusion.’” Bloomberg also speculated that some omissions to check the second box may reflect confusion about the period the error covered, for example, if the restatement related to accounting errors in years before the rule went into effect. (Under the NYSE listing standard, for example, a company listed on the NYSE 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, even if the compensation was the subject of a compensation contract or arrangement that existed prior to the effective date of Rule 10D-1.)
Bloomberg concludes with quotes from commentators emphasizing the complexity of the issue. The suggestion from commentators: a new CDI or other form of guidance would be very “welcome.”
