On Nov. 28, 2022, the Securities and Exchange Commission (the SEC) published final clawback rules (the final rules) in response to the long-standing requirement under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to increase transparency and disclosure in financial reporting; the final rules were adopted by the SEC on Oct. 26, 2022, and became effective on Jan. 27, 2023.

Ultimately, the final rules will require companies that are listed on the NYSE or NASDAQ to establish, comply with, and disclose a written policy that provides for the recovery, or clawback, by the company of any incentive-based executive compensation that is received by current and former executive officers during the three-year period preceding any requirement to prepare an accounting restatement based on a misstated financial performance measure. Smaller reporting companies, emerging growth companies, foreign private issuers, and controlled companies will not be exempt from compliance with the final rules.

In the near term, new Rule 10D-1 of the Securities Exchange Act of 1934, as amended (the Exchange Act), instructs the NYSE and NASDAQ to revise their listing standards to require listed public companies to establish, adopt, and abide by a written clawback policy mandating the recovery of any excess incentive-based compensation (i.e., compensation that is based upon attaining a specific financial reporting measure) that is received by current or former executive officers in the event that the company needs to prepare an accounting restatement due to material noncompliance with a financial reporting requirement under applicable securities law.