NYSE and Nasdaq propose compensation clawback requirements

Proposed listing rules track Rule 10D-1 and will become effective on the date of SEC approval

As directed by Rule 10D-1 under the U.S. Securities Exchange Act of 1934 (“Rule 10D-1”), the NYSE and Nasdaq (together, the “Exchanges”) have proposed listing rules requiring listed companies to adopt compensation clawback policies and make certain disclosures regarding clawbacks (the “Proposals”). 

The key takeaways from the Proposals are:

  • Their requirements are substantially identical to those mandated by Rule 10D-1.
  • The Exchanges generally chose not to impose stricter requirements than set out in Rule 10D-1, including regarding the timing and manner of recovery.
  • In the event an issuer fails to claw back compensation as required by its policy, trading in the shares of NYSE-listed issuers would immediately be suspended and delisted procedures commenced, while Nasdaq proposes a standard cure period before delisting.
  • The latest effective date for NYSE- and Nasdaq-listed issuers to have compliant clawback policies in place is January 27, 2024, but the effective date could be earlier if the SEC approves the Proposals quickly.

As discussed in our earlier client briefing, last year the SEC issued Rule 10D-1, which directs the Exchanges to propose listing standards requiring listed companies to adopt and disclose policies to recover incentive-based compensation awarded to executive officers on the basis of materially misreported financial information requiring an accounting restatement, even where there is no misconduct. Rule 10D-1 also requires that the standards include disclosure requirements related to clawbacks.

The NYSE has proposed new Section 303A.14 of the NYSE Listed Company Manual, and Nasdaq has proposed new Listing Rule 5608 to comply with Rule 10D-1. The Proposals conform closely to the SEC’s rule, which had provided the Exchanges with little discretion in their rulemaking on the subject. Please see here for our comparison of the Proposals to Rule 10D-1. 

One of the few areas in which the SEC did not restrict the Exchanges from adopting a more prescriptive approach was in determining the timing and method of recovery under clawback policies. However, in their Proposals, both Exchanges closely tracked the SEC’s guidance in the Rule 10D-1 adopting release, stating that whether issuers recover compensation "reasonably promptly" would be determined on a "holistic basis" with consideration given to whether an issuer is pursuing an appropriate balance of cost and speed and whether it is securing recovery through appropriate means based on the particular facts and circumstances of the executive officer owing a recoverable amount.

The Exchanges have not yet set a specific date by which listed companies must adopt compliant clawback policies (the “Compliance Date”), but the latest possible Compliance Date permitted by Rule 10D-1 is January 27, 2024. 

The Proposals will become effective when approved, which can be no later than November 28, 2023, with companies required to adopt compliant clawback policies within 60 days of the effective date. If the SEC approves the Proposals earlier than November 28, 2023, the Compliance Date will be earlier than January 27, 2024. There is a 21-day comment period for each Proposal, which will begin on the date they are published in the Federal Register. The SEC could approve the Proposals quickly after the comment periods end but could also designate further time to review them.

Issuers must also begin making the required disclosures (as described further in our earlier client briefing) in annual reports, and proxy and information statements filed on or after the effective date of the listing rules.  

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Underscoring the importance of compensation clawback policies to the U.S. government’s approach to corporate wrongdoing, the U.S. Department of Justice (‘DOJ”) has also just announced a new pilot program that will require every corporate resolution involving the DOJ’s Criminal Division to include a requirement that the resolving company develop compliance-promoting criteria within its compensation and bonus system. The DOJ will also provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers.

We are working with a number of our clients on the drafting of clawback policies, and we invite you to reach out to your regular Linklaters contact if you would like to discuss approaches and options. 

We will continue to monitor developments in this area and welcome any queries you may have.