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Increased exposure for executives as SEC approves clawback rule

New clawback-related rules pose challenges, and it is important for companies to consult with a qualified advisor to identify ways to protect their business against this risk.

US publicly-listed companies will need to implement new compensation recovery policies by December 1, 2023. These policies need to comply with the rules outlined in Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. These rules pertain to the recovery of erroneously awarded executive compensation. They apply to virtually all public companies listed on a US exchange and may impact a wide range of executives.

The new rules will come into effect on October 2, 2023, after the Securities and Exchange Commission (SEC) approved the proposed listing standards by the New York Stock Exchange (NYSE) and Nasdaq Stock Market (Nasdaq). Companies will then have 60 days thereafter to adopt Dodd-Frank compliant policies.

Under those policies, listed companies must seek to recover erroneously awarded incentive-based compensation received by covered executives on or after the effective date, with few exceptions. Companies must file their clawback policy as a 10-K exhibit.

6 clawback details to consider

The SEC’s new rules are part of a broader regulatory push towards personal accountability and investor protection. The potential for a compensation clawback is another peril for executives, who are already facing a myriad of risks. 

There are a number of fundamental elements of the clawback rules that companies and their executives should keep in mind, including:  

  • The rules apply to virtually all companies listed on the NYSE and Nasdaq exchanges.
  • The SEC regulations include what are referred to as “Little r” restatements as well as “Big R” restatements.  A so-called “Big R” restatement requires a company to file an 8-K form and amend its SEC filings to restate a previously issued financial statement. Since these filings are typically significant, they may impact the company’s share price. By contrast, a “Little r” restatement corrects prior financial metrics only in the current period, even if the error may not have been material at the time of the earlier filing.
  • The Dodd-Frank rule encompasses a wide range of “executive officers” and is therefore much broader than the clawback provisions of Section 304 of Sarbanes-Oxley, which only applied to CEOs and CFOs. In contrast, according to the SEC, The Dodd-Frank rule applies to current and former “officers with an important role in financial reporting”, including an issuer’s president; principal financial officer; principal accounting officer or controller; any vice president in charge of a principal business unit; and any other officer that performs a policy-making function. These include non-US officers.
  • Importantly, the final rule requires, with minimal exceptions, that companies recover erroneously awarded compensation regardless of whether an individual is at fault, or even has indirect responsibility for the error corrected in the restatement.
  • Not all — if any — executives will need to return compensation every time a company issues a restatement. Under the new rule, the only time that an executive must return compensation is when there is a financial restatement arising from an error impacting a precise financial metric that was tied to the executive’s compensation during the three fiscal years preceding the date of restatement.
  • There are limited circumstances where a company is excused from pursuing recovery, including if so doing would be “impracticable.” Generally, this would mean that the cost of pursuing recovery would outweigh the gain to the company’s shareholders represented by the returned funds.

The new clawback-related rules pose challenges for executives, and it is important for companies to consult with a qualified advisor to identify ways to protect their business against this risk.

This includes insurance solutions for executives who may have to repay compensation. Marsh is currently collaborating with Bermuda insurance carrier partners to finalize a solution that will insure against the risk that an executive must return compensation. 

For more information or to answer questions regarding these regulatory developments and the potential insurance solutions, please contact your Marsh representative. 

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Sarah Carr

Sarah Carr

Managing Director, Bowring Marsh (Bermuda) Ltd.

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CaroleLynn L. Proferes

US FINPRO Product and Industry Leader

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Matthew T. McLellan

D&O Product Leader

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