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| 8 minutes read

Recent Legal Developments Relating to Compensation Clawbacks

Executive Summary

Executive clawbacks have been the subject of significant recent rule- and policy-making activity, by the U.S. Securities and Exchange Commission (the SEC), the stock exchanges, and the Department of Justice (the DOJ).

Last October, the SEC adopted final executive compensation “clawback” rules (the Final SEC Rules), mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). It subsequently issued Compliance and Disclosure Interpretations under Exchange Act Rules ( | Exchange Act Rules) (CD&Is) providing limited additional guidance on the Final SEC Rules on January 27, 2023. On February 22, 2023, in response to the Final SEC Rules’ instruction for U.S. securities exchanges to propose new listing standards, the New York Stock Exchange (NYSE) and Nasdaq Stock Market LLC (Nasdaq) released their respective proposed listing standards that require most listed companies to adopt and implement a clawback policy providing for the recoupment of excess incentive-based compensation received by current or former executive officers due to certain misstatements of the company’s financial reports, regardless of any actual misconduct (located in Sections 303A.14 Section 802.01F of the NYSE Listed Company Manual and Listing Rules 5608 and the 5800 series for Nasdaq (collectively, the Proposed Exchange Rules)). Significantly, both sets of the Proposed Exchange Rules provide that companies that fail to comply with the new standards may be delisted, although the procedures with respect to non-compliance and delisting differ between the exchanges, as described in the “Enforcement Proceedings” section below. 

On the heels of the issuance of the Proposed Exchange Rules, last week, Deputy Attorney General Lisa Monaco and Assistant Attorney General Kenneth Polite announced the launch of a three-year DOJ pilot program on compensation incentives and clawbacks. Under the “first-ever” program, the DOJ will (1) require corporate criminal resolutions to include a directive that companies implement a compensation system that promotes compliance, and (2) reward companies that attempt in good faith to claw back payments to law-breaking executives and employees—even if those efforts are unsuccessful. Monaco said in making the announcement: “[The DOJ’s] goal is simple: to shift the burden of corporate crime away from shareholders who frequently play no role in the misconduct and onto those who are directly responsible.” 

Proposed Exchange Rules


After the Proposed Exchange Rules are published in the Federal Register, there will be a 21-day public comment period. The applicable listing standards must be effective no later than November 28, 2023, and companies will have 60 days from the effective date of the applicable listing standard to adopt their clawback policy. Therefore, the latest date by which companies will be required to adopt their clawback policies is January 27, 2024.

Clawback Policy Requirements

Although the Proposed Exchange Rules differ in certain respects, both conform closely with the Final SEC Rules, as summarized in our blog post titled “SEC Adopts Final Clawback Rules for Incentive-Based Compensation”, dated November 9, 2022, available here. The Final SEC Rules and the Proposed Exchange Rules provide for the following:

  • Covered Companies — U.S. Listed Companies. The listing standards will cover all companies with securities listed on a U.S. securities exchange with very limited exceptions. Unlike many other compensation-related disclosure regimes, foreign private issuers (FPIs), smaller reporting companies, emerging growth companies or controlled companies are not exempt from these requirements. 
  • Covered Individuals — Current and Former Executive Officers. The clawback policy must apply to any current or former executive officer of the company who served in that capacity at any time during the covered period discussed below. For this purpose, “executive officer” consists of all “officers” as defined under Section 16 of the Securities and Exchange Act of 1934, as amended. 
  • Clawback Trigger — Financial Restatement (“Big R” and “Little R”). Clawback policies must be triggered if the company is required to prepare either:
    • an accounting restatement that corrects an error in prior period financial statements that is material to those financial statements (commonly referred to as a “Big R” restatement), which typically coincides with the issuance of a Form 8-K under Item 4.02 (Non-reliance on Previously Issued Financial Statements); or
    • a revision restatement (commonly referred to as a “little r” restatement) to correct an error that is not material to prior period financial statements but would result in a material misstatement in the current period financial statements if left uncorrected or if the correction were recorded only in the current period. 
  • Covered Compensation — Incentive-Based Compensation Recoverable. Cash and equity incentive compensation, calculated on a pre-tax basis, that is granted, earned or vested based on the achievement of a financial reporting measure and received during the covered period must be subject to clawback to the extent it is in excess of what would have been received if the applicable financial reporting measure had been determined based on the corrected financial restatement. The SEC confirmed in C&DI 121H.04 that the Final SEC Rules are intended to apply broadly to any plan that provides for incentive-based compensation, including long-term disability, life insurance and non-tax qualified supplemental retirement plans and those where amounts are contributed on a notional basis.
  • Covered Period — 3-Year Look-Back. Clawback policies must provide for the recoupment of excess incentive-based compensation received by a covered individual within the three completed fiscal years immediately preceding the earlier of (i) the date the company concludes, or reasonably should have concluded, that the company is required to prepare a restatement; and (ii) the date a court or authorized agency mandates a restatement.

Incentive-based compensation will be deemed to be received upon the attainment of the applicable financial reporting measure, regardless of whether the grant or payment occurs on a later date. 

Any incentive-based compensation received on or after the effective date of the applicable listing standard is subject to recoupment. This includes incentive-based compensation governed by arrangements or contracts in place before the effective date of the applicable listing standard but that is received following the effective date.

  • Limited Discretion. Company boards of directors are required to seek recovery reasonably promptly after the company’s clawback policy is triggered, except in limited circumstances where recovery would be impracticable because of cost, home country laws, or interference with tax qualification of plans. Before concluding that recovery is impracticable, a company must make a “reasonable attempt” to recover the incentive-based compensation.
  • No Indemnification. The Final SEC Rules prohibit companies from indemnifying executives against the losses of recovered amounts. 
  • Increased Disclosure. Companies will be required to file their written clawback policies as an exhibit to their annual reports, and, following any financial restatement, make certain related disclosures in their proxy statement.  

Enforcement Procedures

The Proposed Exchange Rules include procedures for enforcement by the exchanges:

  • NYSE Procedures. If a company fails to adopt a clawback policy by the applicable deadline:
    • It must notify the NYSE in writing within five days of the applicable deadline.
    • The NYSE will send a written notification to the company of the applicable procedures for remedying the deficiency. 
    • The company must contact the NYSE within five days of receiving such notification to discuss the status of the policy.
    • Also, within five days of receiving notification from the NYSE, the company must issue a press release disclosing that it has not adopted a clawback policy, the reason for the delinquency and, if known, the date on which a clawback policy is expected to be adopted. 
    • If the company fails to issue a press release within five days of the date of the notification from the NYSE, the NYSE will issue its own press release disclosing the delinquency.
    • The NYSE may allow a company up to 12 months to cure the delinquency before commencing delisting periods (broken into two six-month cure periods). However, the NYSE may begin delisting procedures under Section 804 at any time if it believes, in its sole discretion, that it is advisable to do so based on all relevant factors.
    • If the NYSE determines that a company has not recovered erroneously awarded compensation reasonably promptly after a clawback obligation is incurred:
      • Trading in all securities of the company will be immediately suspended.
      • The NYSE will immediately commence delisting procedures.  
  • Nasdaq Procedures.If a company fails to adopt a clawback policy by the applicable deadline or to comply with its clawback policy reasonably promptly following the date the clawback is triggered, the company will be subject to Nasdaq’s usual administrative processes and deadlines for similar corporate governance deficiencies:
    • Nasdaq will notify the company of the deficiency.
    • The company may submit a plan to regain compliance within 45 days.
    • Nasdaq may provide the company up to 180 days to cure, and after that period Nasdaq is required to issue a delisting letter.
    • The company could appeal the delisting to the Hearings Panel. The Hearings Panel could allow up to an additional 180 days to cure.

The Proposed Exchange Rules do not define “reasonably promptly” but in accordance with the Final SEC Rule, both provide that the company’s obligation to recover the compensation reasonably promptly will be assessed on a holistic basis with respect to each accounting restatement and the exchange will consider whether the company is appropriately balancing cost and speed and using appropriate means to secure recovery based on the particular facts and circumstances of each executive officer.

DOJ Program

The DOJ’s announcement of a pilot program follows a September 2022 speech in which Monaco previewed the DOJ’s focus on the link between a heathy compliance culture and executive compensation. At the time, she lauded “companies [that] employ clawback provisions, the escrowing of compensation, and other ways to hold financially accountable individuals who contribute to criminal misconduct,” and said that “[c]ompensation systems that clearly and effectively impose financial penalties for misconduct can deter risky behavior and foster a culture of compliance.”

Following Monaco’s September 2022 announcement, the DOJ convened a series of stakeholder meetings with government agencies including the SEC, defense attorneys, and executive compensation experts, to craft the new policy.

As is noted above, the DOJ pilot program has two components. First, when entering into criminal resolutions, companies will be required to implement compliance-related criteria in their compensation and bonus systems, and to report to the DOJ about the implementation of these systems during the term of any resolution. The criteria will be tailored to fit the company’s existing compensation policies, but can include: (1) a prohibition on bonuses for employees who do not satisfy compliance performance requirements; (2) disciplinary measures for employees who violate applicable law and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct and (b) knew of, or were willfully blind to, the misconduct; and (3) incentives for employees who demonstrate full commitment to compliance processes.

Second, the pilot program rewards companies that seek to recoup compensation from those who (a) had supervisory authority over the employee(s) or business area engaged in the misconduct, and (b) knew of, or were willfully blind to, the misconduct. At the outset of the resolution, the company will pay the applicable fine, minus a reserved credit equal to the amount of compensation the company is attempting to claw back. Moreover, the company gets to keep whatever compensation it successfully claws back, thus amounting to a win-win—the DOJ will credit the company for the compensation it attempts to claw back and the company gets to keep whatever it is successful in obtaining. As for those companies that attempt in good faith to claw back compensation, but are ultimately unsuccessful, they are still eligible under the pilot program to receive a fine reduction (up to 25% of the compensation sought).

With this new program, the DOJ follows in the SEC’s footsteps in using compensation clawbacks to incentivize a robust culture of compliance.

Next Steps

Companies are encouraged to discuss the application of the Final SEC Rules and the Proposed Exchange Rules, as well as these recent DOJ announcements, with their boards of directors and management teams, including establishing a timeline and process for preparing clawback policies that are compliant with the applicable securities exchange by the applicable deadline and that would permit pursuing a claw back in accordance with these DOJ announcements, if legally required or otherwise desired by the company. Companies should also begin to explain the rules to the various departments that would be involved in the event an accounting restatement, application of the clawback policy is required, or DOJ enforcement action (likely human resources, legal, finance and investor relations).


sec, nyse, nasdaq, executive compensation, capital markets and securities