Tag: financial restatements

SEC adopts final rules on compensation clawbacks in the event of financial restatements—“Big R” and “little r” [UPDATED]

[This post revises and updates my earlier post primarily to reflect in greater detail the contents of the adopting release. For a discussion of the comments and criticisms of the SEC Commissioners at the open meeting at which the rules were adopted, see my earlier post.]

At an open meeting last week, the SEC adopted, by a vote of—surprise—3 to 2, rules to implement Section 954 of Dodd-Frank, the clawback provision. Clawback rules were initially proposed by the SEC back in 2015, but were relegated to the long-term agenda, until they suddenly reemerged on the SEC’s short-term agenda in 2021 (see this PubCo post) with a target date for a re-proposal of April 2022. Instead of a re-proposal, however, a year ago, the SEC simply posted a notice announcing that it was re-opening the comment period and posing a number of questions for public comment. (See this PubCo post.) One possible change suggested by the SEC’s questions was a potential expansion of the concept of “restatement” to include not only “reissuance,” or “Big R,” restatements (which involve a material error and an 8-K), but also “revision” or “little r” restatements. Then, in June of this year, DERA issued a new staff memorandum addressing in part the restatement question, which led the SEC to once again re-open the comment period. Finally, the SEC concluded that, after more than seven years, the proposal had marinated long enough. Time to serve it up. The new rules direct 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 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. Commissioners Hester Peirce and Mark Uyeda dissented, contending that, among other problems, the rule was too broad and too prescriptive. According to SEC Chair Gary Gensler, the key word here is “erroneously,” that is, the rule requires recovery of compensation to which the officers were never entitled in the first place. In his statement at the meeting, Gensler indicated that he believes “that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors….Through today’s action and working with the exchanges, we have the opportunity to fulfill Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials.”

SEC adopts final rules on compensation clawbacks in the event of financial restatements—“Big R” and “little r”

You might remember back to 2015 when the SEC initially proposed rules to implement Section 954 of Dodd-Frank, the clawback provision. The SEC did not then consider adoption of the proposal in the ordinary course, instead relegating it to the long-term agenda, where it was never heard from again. Until, that is, the topic found a spot on the SEC’s short-term agenda in 2021 (see this PubCo post) with a target date for a re-proposal of April 2022. Instead of a re-proposal, however, a year ago, the SEC simply posted a notice announcing that it was re-opening the comment period and posing a number of questions for public comment.  (See this PubCo post.) One possible change suggested by the SEC’s questions was a potential expansion of the concept of “restatement” to include not only “reissuance,” or “Big R,” restatements (which involve a material error and an 8-K), but also “revision” or “little r” restatements. Then, in June of this year, DERA issued a new staff memorandum addressing in part the restatement question, which led the SEC to once again re-open the comment period.  Finally, the SEC has concluded that, after more than seven years, the proposal has marinated long enough. Time to serve it up. Accordingly, at an open meeting yesterday, the SEC adopted, by a vote of—surprise!—three to two, new rules that direct 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 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. Commissioners Hester Peirce and Mark Uyeda dissented, contending that, among other problems, the rule was too broad and too prescriptive. According to SEC Chair Gary Gensler, the key word here is “erroneously,” that is, the rule requires recovery of compensation to which the officers were never entitled in the first place. In his statement at the meeting, Gensler indicated that he believes “that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors….Through today’s action and working with the exchanges, we have the opportunity to fulfill Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials.”