Last week, both the NYSE and Nasdaq filed with the SEC amendments delaying until October 2 the effective dates of their proposed listing standards requiring listed issuers to develop and implement clawback policies. On Friday afternoon, the SEC approved the proposed rule changes, as modified by the respective Amendments No. 1, on an accelerated basis. What does that time delay mean for companies? Under the SEC final rules and the proposed listing standards, each listed issuer is required to adopt the mandated clawback policy no later than 60 days following the effective date of the rule. Prior to the amendments, the effective dates were designated by both exchanges as the SEC approval dates, which the SEC had just extended to June 11. (See this PubCo post.) Now, with October 2 as the effective date for both proposals, companies will have until December 1 to put their clawback policies in place.
In November last year, the SEC adopted final rules to implement Section 954 of Dodd-Frank, the clawback provision. The new rules directed the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with clawback policies and to provide disclosure about their policies and implementation. Under the rules, the clawback policy must provide that, in the event the listed issuer is required to prepare an accounting restatement—including a “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.) The final rules required any covered exchanges to file proposed listing standards with the SEC to be effective no later than one year after publication of the final rules in the Federal Register. Nasdaq and the NYSE both filed proposed listing standards in March—largely the same, with some differences, both tracking the SEC requirements closely. Under the final rules and the exchange proposals, listed issuers were required to adopt the mandated clawback policy no later than 60 days following the effective date of the listing standard, which the exchange proposals had originally indicated as the date of SEC approval. (See this PubCo post.) Now, the effective date moves to October 2, giving listed companies until December 1 to implement their policies.
In April, a group of law firms, including Cooley, submitted a comment letter to the SEC requesting that the SEC not approve the adoption and effectiveness of the Listing Standards before November 28, 2023 (the date one year from publication of the final rules in the Federal Register) in order “to give issuers adequate time to develop and adopt a compensation recovery policy, along with the necessary controls and procedures to administer the policy.” Among other things, they cited the statement in the adopting release 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,” as well as the complexity involved in implementing a compliant clawback policy, with each issuer having its own unique challenges. To illustrate, the letter highlighted the issues involved where issuers already have an existing clawback policy, including whether to maintain separate stand-alone policies or to integrate the two policies, and if so, how. In addition, individual agreements or plans may require modification, and controls and procedures will likely be affected. Moreover, the letter contended, the challenges of compliance were compounded by the need for nearly contemporaneous compliance with the SEC’s new 10b5-1 and pay-for-performance rules. The letter seems to have prompted the SEC to provide an extension, but only for 45 days. The letter may, however, have persuaded the exchanges to allow more time, leading to these amendments.
Now, with the amendments approved, the clawback provisions for both exchanges will provide that the effective date of the Rule is October 2, 2023 and that each listed issuer must (i) adopt the clawback policy no later than 60 days following the October 2, 2023, i.e., December 1, 2023; (ii) comply with its recovery policy for all incentive-based compensation received (as that term is defined in applicable rules) by executive officers on or after October 2, 2023; and (iii) provide the required disclosures in the applicable SEC filings required on or after October 2, 2023.
The amendments submitted by both exchanges observe that they believe the delay is appropriate because it “is consistent with the goal of implementing the proposed rule promptly while also being consistent with the expectations of listed issuers 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 by the SEC staff” in the adopting release.
It’s worth noting that, in addition to the change to the effective date, the NYSE amendment also includes a couple of other changes, highlighted in footnote 5. Originally, the cure periods were to be applicable in the event the listed issuer failed to timely adopt a clawback policy. With the amendment, the cure periods will also apply to other incidents of noncompliance with the clawback provisions. Specifically, Section 802.01F of the Listed Company Manual is amended “to provide that in the event of any failure by a listed issuer to comply with any requirement of Section 303A.14 [the clawback rule], the Exchange may at its sole discretion provide such issuer with an initial six-month cure period and an additional six-month cure period.” In addition, the amendment clarifies that all listed issuers listing the following securities are required to comply with the clawback requirements”: “(a) closed-end and open-end funds, (b) passive business organizations, listed derivative or special purpose securities, (c) foreign private issuers, and (d) issuers listing only preferred or debt securities on the NYSE (including securities listed under NYSE Rule 5.2(j)).”
Under the Nasdaq amendment, in addition to changing the effective date to October 2, 2023, the amendment clarifies that each company is required to comply with its recovery policy for all incentive-based compensation received (as that term is defined in the applicable rules) by executive officers on or after October 2, 2023. Nasdaq Rule 5605(e) states that, notwithstanding the look-back requirement in Rule 5608(b)(1)(i)(D), a company is required to apply the recovery policy only to incentive-based compensation received on or after October 2, 2023.
The SEC found that, for both exchanges, the change to the effective date “is responsive to comments stating that listed issuers anticipated an effective date of November 28, 2023.” The SEC also observed that, with regard to Nasdaq, the “additional clarification to Rule 5608(e) will ensure that the requirements of that Rule conform to the requirements of Rule 10D-1.” With regard to the NYSE, the SEC found that the “change to the delisting procedures is responsive to comments recommending NYSE allow a listed issuer to cure any failure to comply with Section 303A.14 before being delisted, rather than only providing a cure period for non-compliance with adoption of a recovery policy, as originally proposed. The cure periods for non-compliance being proposed by NYSE are similar to those that exist under NYSE’s rules for the late filing of annual and quarterly reports that the Commission has previously approved as consistent with the Act. The amended proposal also provides for a cure period for any violations of Section 303A.14 similar to the approach taken by Nasdaq in its proposal to adopt rules to comply with Rule 10D-1.”
