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SEC Adopts New Incentive-Based Compensation "Clawback" Rule

On October 26, 2022, the Securities and Exchange Commission, in a 3-2 vote, adopted a new rule, Exchange Act Rule 10D-1. Rule 10D-1 directs national securities exchanges adopt listing standards to require all issuers establish and enforce policies requiring “clawback” of incentive-based compensation paid to corporate executives when that compensation is based upon the issuer’s meeting misreported financials that later require an accounting restatement.  The SEC has mandated that these clawback policies meet strict conditions set forth in the final Rule 10D-1, further discussed below.

Although under Section 304 of the Sarbanes Oxley Act (“SOX 304”) the SEC has had the ability since 2002 to clawback executive compensation where the restatement was the result of misconduct, the SEC has typically been reticent to use this power (although that has changed in recent years under the Obama and Biden administrations).  However, with the passage of Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd Frank”) in 2010, Congress mandated that the SEC adopt rules that direct national securities exchanges and associations to prohibit listing of securities of an issuer that is not in compliance with Section 10D(b) of the 1934 Act.  Section 10D(b) mandates that each listed issuer develop, implement, and disclose an executive compensation clawback policy. Such policy must provide for recovery of executive incentive-based compensation erroneously awarded through meeting misreported financials that later require restatement. Rule 10D-1 officially enacts these regulations established by Securities Exchange ActSection 10D(b).

SEC Chairman Gary Gensler noted in his release concerning the reopening of comments to proposed Rule 10D-1 that the SEC saw this as an “opportunity to strengthen the transparency and quality of corporate financial statements as well as the accountability of corporate executives to their investors.”[1]  This new rule applies to all public companies listed on any national exchange, and those companies that choose not to adopt new clawback policies and conform to the requirements in Section 10D(b) face delisting from their exchange, as well as potential enforcement actions from the SEC under SOX 304.

  1. Relevant History Since 2010

Under SOX 304, the SEC has the authority to bring enforcement actions against CEOs and CFOs of public companies to recoup incentive-based compensation if the company has to file an accounting restatement “due to material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws.”  The law requires recoupment of the compensation (e.g., any bonus or other incentive-based or equity-based compensation) received during the year following the issuance of the original financial report and any profits realized from the sale of securities of the issuer during that period.  The law requires misconduct but it need not be by the executive targeted for the clawback action.

In 2010, for example, the SEC successfully used SOX 304 against Maynard Jenkins, the former CEO of CSK Auto Corporation.  Although four other executives of the company were charged with civil and criminal wrongdoing in connection with the accounting fraud that occurred at CSK, Mr. Jenkins himself was never personally charged with any wrongdoing.  Nevertheless, he was the target of the SEC’s clawback action.  The case, SEC v. Jenkins, was settled in November 2011 on Mr. Jenkins’ return of $2.8 million of incentive-based compensation.[2]

SOX 304’s misconduct requirement created a cleavage between what qualifies as a “restatement” under the statute and what does not.  Restatements based on misconduct are actionable under SOX 304, but restatements made for other reasons (including errors or mistakes that do not involve intentional wrongdoing by the issuer) are not actionable under SOX 304.  SOX 304 provides a relevant distinction with respect to restatements that is helpful in interpreting the new rules.  First, “little r” restatements are those issued to correct an error that is immaterial to prior period financial statements, but which would result in a material error in current period financial statements if not corrected. Second, “big R” restatements are those issued to correct an error that is material to prior period financial statements.

The new rules were required by Congress in Dodd-Frank.  While Dodd-Frank passed in 2010, the SEC has only now adopted the final rules after several years of delay.  In July 2015, the SEC first proposed rules and rule amendments to implement the clawback policy requirement.  The 2015 version of the proposed rule included several differences from the current rule that was recently adopted.  The 2015 version only would have applied to material restatements, “Big R,” while the applicable rule applies to all restatements, material or not, “Big R” and “little r.”  The SEC proposed this rule in 2015 and accepted comments on it, but never adopted the rule.

In October 2021, the SEC reopened comment based on a new version of the rule.  The SEC received a number of comments expressing concern that clawbacks would apply even when restatements made were not material.  The SEC justified its position to apply clawbacks to both “Big R” and “little r” restatements by stating that “both types of restatements address material noncompliance of the issuer with financial reporting requirements.”[3]

  1. Discussion of Scope of Rule 10D-1

Under new Rule 10D-1, issuers must implement clawback policies to recover incentive-based compensation (i.e., any compensation that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure) that was erroneously awarded to executives. An issuer under the new rule is any company that is listed on a national securities exchange. Notably, smaller reporting companies, emerging growth companies, and foreign private issuers are not exempt. An issuer’s clawback policy applies in circumstances where the issuer is required to prepare an accounting restatement as a result of financial misstatements, regardless of whether the misstatement is material or the result of misconduct.  The issuer’s clawback policy must also apply to restatements made to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (both “Big R” and “little r” restatements). The new rule is noticeably different from SOX 304 because SOX 304 only applies to restatements caused by material noncompliance.  

Under Rule 10D-1, an issuer’s clawback policy must facilitate recovery of incentive-based compensation that was erroneously awarded to current or former executive officers during the three years preceding the date of the required restatement.  The issuer is obligated to recover the amount of incentive-based compensation received in excess of the amount that otherwise would have been paid based on the restated financial measure.  Under the rule, incentive-based compensation includes any compensation granted, earned or vested based on the attainment of a financial reporting measure.

Further, Rule 10D-1 applies to all current and former executive officers of the Company.  The SEC’s definition of “officer” is consistent with the definition used in Exchange Act Rule 16a-1(f) and means an issuer’s “president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president of the issuer in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer” or its subsidiaries.  This is a significant change from SOX 304, which applied only to the CEO and CFO, and only where the restatement resulted from misconduct.

Additionally, Rule 10D-1 presents a different enforcement regime from SOX 304.  Where Rule 10D-1 requires issuers and exchanges to enforce clawback policies, SOX 304 is enforceable only by the SEC.  Under SOX 304 enforcement, the SEC requires a CEO or CFO to reimburse the company.  Rule 10D-1 requires issuers to personally recover incentive-based compensation from their own executives.  Still, Rule 10D-1 does offer some discretion and limited exceptions for impracticability, including circumstances where: (1) the third-party cost of recovering the funds would exceed the funds to be recovered; (2) recovery would violate home country law; and (3) recovery would cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the Internal Revenue Code. 

The SEC also adopted amendments to include new disclosure requirements related to the required clawback policies.  The amendments to Item 402 of Regulation S-K, Form 40-F, and Form 20-F (and for listed funds, Form N-CSR) require a listed issuer to file its clawback policy as an exhibit to its annual report and disclose how it has applied the policy.  If applicable, an issuer must explain the date it was required to prepare an accounting restatement and the aggregate dollar amount of erroneously awarded compensation attributable to the restatement; the aggregate amount outstanding and any outstanding amounts from any current or former executive officer of 180 days or more; and details regarding reliance on the impracticability exceptions.

  1. Effective Date and Enactment Timeline

The rules and amendments take effect January 27, 2023. Exchanges are required to file proposed listing standards by February 27, 2023, and the listing standards must take effect no later than November 28, 2023. Issuers will be required to adopt a clawback policy no later than 60 days following the date on which the applicable listing standards become effective on the exchange. Issuers then must begin to comply with the disclosure requirements in proxy and information statements and the issuer’s annual report filed on or after the date the issuer adopts its clawback policy.

  1. Our Recommendations

We recommend that issuers be prepared to swiftly implement a policy to govern executive clawback once the national exchanges adopt the applicable listing standards mandated by the SEC.  The risks of non-compliance with this new rule are especially high: a company that does not adopt an executive clawback policy in the time required can be delisted from its exchange.

Companies that have already voluntarily adopted executive clawback policies should review the existing policies in light of the final rule and ensure that the policy complies with the SEC’s requirements.  Issuers should review both the scope of the compensation covered under their executive clawback policy and to whom the policy is applied.

All public companies should examine their current policies and reach out to Mintz for any assistance with examining existing policies or crafting new ones that comply with SEC requirements.



[1] Chair Gary Gensler, U.S. Securities and Exchange Commission, “Statement on Rules Regarding Clawbacks of Erroneously Awarded Compensation,” (Oct. 14, 2021)

[2] See SEC v. Jenkins, 718 F. Supp. 2d 1070 (D. Ariz. 2010); see also U.S. Securities and Exchange Commission, “Former CEO to Return $2.8 Million in Bonuses and Stock Profits Received During CSK Auto Accounting Fraud,” (Nov. 15, 2011),

[3] See U.S. Securities and Exchange Commission, Final Rule: Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 33-11126 at 34 (October 26, 2022),

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Patrick is an associate in the litigation practice where he focuses on securities and shareholder litigation, as well as investigations and securities enforcements. He represents clients from early-stage start-ups to publicly-traded companies in numerous industries, including life sciences and biotechnology companies, financial services, consumer products and retail, and clean technology.

Xandy Walsh


Xandy’s practice focuses on corporate and transactional matters, specifically focused on private equity and venture capital transactions, energy and infrastructure projects, and general corporate matters. He works with companies in a range of industries and leverages his prior experience as an energy regulator working with clients in the energy industry.