The SEC's Division of Corporation Finance issued a series of new compliance and disclosure interpretations (C&DIs) regarding the recently adopted executive compensation clawback rules.
Update: On January 31, 2023, the Division added Exchange Act Forms CD&I Questions 104.19, 110.09, and 112.04 regarding the check boxes added to the cover pages of Forms 10-K, 20-F, and 40-F. The questions are identical to new Exchange Act Rules CD&I Question 121H.01 discussed below.
On January 27, 2023, the SEC's Division of Corporation Finance (Division) issued a series of new compliance and disclosure interpretations (C&DIs) regarding the recently adopted executive compensation clawback rules.
The final clawback rules, which also became effective on January 27:
Direct the national securities exchanges to establish listing standards requiring companies to adopt and comply with a policy for the recovery of erroneously awarded incentive-based compensation from current and former executive officers (clawback policy).
To provide clarity on the implementation and scope of the clawback and disclosure requirements, the Division added new Exchange Act Rules C&DI Questions 121H.01-04:
Question 121H.01. Under the implementation timeframe adopted by the SEC, securities exchanges have until February 27, 2023 to propose the required listing standards and such standards do not have to become effective until November 28, 2023. Listed companies will then have 60 days to adopt a clawback policy compliant with the effective listing standard. However, the amended rules and forms, including new check boxes on the cover of Forms 10-K, 40-F, and 20-F, are effective now. New Question 121H.01 provides needed clarity that despite the rule and form amendments becoming effective in 2023, the SEC does not expect compliance with the disclosure requirements until companies are required to have a clawback policy under the applicable exchange listing standards.
Questions 121H.02 and 121H.03. New Questions 121H.02 and 121H.03 provide clarification on which persons will be considered named executive officers for purposes of determining whether individualized disclosure is required under Item 6.F of Form 20-F and Item B.(19) of Form 40-F, respectively (the Division also added identical Exchange Act Forms C&DI Questions 110.08 and 112.03).
Question 121H.04. New Question 121H.04 reiterates that the clawback rule is intended to apply broadly. To the extent a compensation plan takes into account incentive-based compensation, companies will be expected to claw back the amount, and earnings accrued on that amount, contributed based on erroneously awarded incentive-based compensation.