NYSE and Nasdaq Give Companies More Time to Approve Rule 10D-1 Clawback Policy: What to Do Next

June 9, 2023

Click for pdf

This week, both the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq, and together with NYSE the Exchanges) filed amendments with the Securities and Exchange Commission (SEC) to provide a delayed effective date for the Exchanges proposed listing standards requiring listed companies to implement chargeback policies, as mandated by Rule 10D-1 under the Securities and Exchange Act of 1934. Specifically, the Exchanges are proposing that their new listing standards take effect on October 2, 2023. If the listing standards be approved by the SEC will have companies until December 1, 2023 (60 days after the Effective Date) to establish a chargeback policy that meets the new listing standards (Rule 10D-1 Policy), and the policy should apply to any incentive payment (as defined in Rule 10D-1) received on or after October 2, 2023 The NYSE’s amended proposal is available hereNasdaqs is available hereand our client alert on the SEC’s adoption of Rule10D-1 is available here.

The long-anticipated delayed effective dates are consistent with the SEC’s statement when it passed Rule10D-1 in October 2022 that it expected companies to have more than a year from the date the final rules are posted in the Federal Register have been published to prepare and adopt in accordance with recovery policies. We expect the SEC to largely approve the listing standards in the form now proposed, with an effective date of October 2, 2023. The delayed effective dates ensure that companies have sufficient time to create, amend and implement Rule10D-1 policies. Companies should take the following into account:

What form should the policy take and should it be integrated with any existing clawback policy?

Listing standards require companies to adopt a written policy. Companies that have an existing chargeback policy should determine whether to apply a standalone Rule10D-1 policy or integrate that policy with their existing chargeback policy. Faced with the prospect of an early go-live date for stock market standards, some companies tended toward adopting stand-alone policies, but either approach is acceptable, and with more time to create and review compliant policies , we expect both approaches to be common. Factors to consider in making that decision include whether the existing policy applies in contexts other than financial restatements and whether the existing policy applies to employees who are not executive officers as defined in Rule 10D-1, as well as more nuanced considerations such as how the latest back applies, how recoverables are calculated and what benefits are covered by the policy. Even if a standalone Rule10D-1 policy is adopted, companies should evaluate whether and, if so, how an existing policy will be changed to comply with the provisions of the Rule10D-1 policy, including any transitional provisions to make the existing apply the policy to compensation received before the effective date of the Rule10D-1 policy. Some companies may want to reconsider the shape of their policies, especially if current policies are enshrined in corporate governance guidelines or other documents, and should consider whether they plan to voluntarily file a different chargeback policy with the SEC when they are required to to their Rule 10D-1 policy as an appendix to their annual reports (as discussed below).

Who must approve the policy?

None of the exchanges specify what business actions should be taken or by whom a Rule10D-1 policy should be adopted. For many companies, authority will rest with the board’s remuneration committee, either through explicit wording in the committee’s charter or through a more general assignment of responsibility to the committee for overseeing executive compensation. However, some companies may decide that the matter is better handled by another board committee or, after reviewing the appropriate language of the committee charters, may determine that the full board must approve the Rule10D-1 policy. approve or ratify. Companies may also consider their historical practice when addressing similar situations, for example, where companies have implemented hedging policies to meet the disclosure requirements of RegulationS-K Item 407(i).

How is the policy implemented?

The listing standards require that companies not only adopt the Rule10D-1 policy, but also adhere to that policy. Companies may face delisting and other potential legal risks if they do not recover the incentive payment within a reasonable timeframe as provided for in their Rule10D-1 policy. Accordingly, companies should consider how they will enforce their policies if and when necessary. We expect companies to rely on terms in incentive compensation plans, terms in award agreements under those plans, and/or stand-alone commitments in which executives agree to be bound by and adhere to a company’s chargeback policy. Regardless of the context, more specificity and explicit written acceptance/signatures by covered executives can improve enforceability. At the same time, given the scope of arrangements to which the Rule10D-1 Policy could apply (Rule10D-1 defines incentive-based compensation as any compensation awarded, earned or vested, based in whole or in part on the achievement of a measure such as that term is defined in Rule 10D-1), it may be helpful to broadly apply provisions that are relied upon to enforce the policy of Rule 10D-1 to any compensation arrangement covered by Rule 10D-1. Because the Rule10D-1 policy must apply to any incentive-based compensation received on or after October 2, 2023, where the definition of received generally refers to when the applicable financial reporting metric has been met, a Rule10D- 1 policy applicable to incentive awards awarded prior to October 2. Thus, it may be helpful to provide express acknowledgment by the executive that the Rule10D-1 policy applies to prior grants. Some companies may also seek to document that compensation can be recovered from amounts that would otherwise be or become due to a current or former executive, including by offsetting amounts due under non-qualified deferred compensation plans.

How is the policy implemented?

As noted above, Rule 10D-1 policies will broadly apply to compensation-based compensation that is based in whole or in part on a financial reporting metric, which is itself broadly defined and includes measures that are, in whole or in part, determined or derived from accounting measures or based on share price or total shareholder return. Under Rule10D-1 and the listing standards, if a company experiences a reformulation that triggers the applicability of the company’s Rule10D-1 policy, the company will be required to document certain determinations and provide such documentation to the applicable Exchange. Companies should therefore carefully examine all compensation plans in which executive officers participate to determine which are based on a financial reporting metric. It will be helpful in the administration of Rule10D-1 policies for companies to clearly document the extent to which their executive compensation plans include or do not include a financial reporting metric and, going forward, to clearly document the extent to which financial reporting measures affect compensation . determinations of commissions regarding the form or amount of compensation awarded, earned, vested or otherwise provided to executive officers.

Does approval of the policy lead to disclosure?

Businesses must submit their Rule 10D-1 policy as an exhibit to their Form10-K. Compliance with the disclosure requirements is required in the first annual report to be filed after October 2, 2023, the effective date of the new listing standards, although the SEC has also stated that it does not expect the disclosure requirement to be met until companies are required to have a policy in place adopted under the applicable listing standard. Companies should carefully evaluate whether adopting a Rule10D-1 policy, whether changes to existing incentive compensation plans or agreements that implement the policy, constitute material new compensation arrangements or material changes or changes that require public disclosure. However, we believe that in most cases these actions will not result in a Form8-K filing under item 5.02(e), both because the actions relate to a conditional potential adjustment of amounts payable under existing executive compensation plans, and the fact that a Rule10D-1 policy is essentially just an extension of the time in which evaluation of performance measures is applied. Additional Form10-K checkboxes and disclosure requirements for power of attorney statements also apply if a company undergoes a review during the year, as discussed in our previous customer alert, so companies must put in place appropriate disclosure controls to enable them to meet these disclosure obligations. to fulfil.

The following attorneys for Gibson Dunn helped draft this warning: Stephen Fackler, Krista Hanvey, Ronald Mueller, Christina Andersen, and Geoff Walter.

Gibson Dunns attorneys are ready to assist you with any questions you may have regarding these matters. For more information on these matters, please contact the Gibson Dunn attorney you usually work with in the Executive Compensation and Employee Benefits of Securities Regulation and Corporate Governance practice groups, or one of the following practice leaders and members:

Executive Compensation and Employee Benefits Group:
Stephen W. Fackler Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, [email protected])
Sean C. Feller Los Angeles (+1 310-551-8746, [email protected])
Krista Hanvey Dallas (+214-698-3425, [email protected])
Christina Andersen New York (+1 212-351-3857, [email protected])

Group Securities Regulation and Corporate Governance:
Elizabeth Ising Washington, DC (+1 202-955-8287, [email protected])
Thomas J. Kim Washington, DC (+1 202-887-3550, [email protected])
Brian J. Lane Washington, DC (+1 202-887-3646, [email protected])
James J. Moloney Orange County (+1 949-451-4343, [email protected])
Ron Mueller Washington, DC (+1 202-955-8671, [email protected])
Michael J. Scanlon Washington, DC (+1 202-887-3668, [email protected])
Michael Titera Orange County (+1 949-451-4365, [email protected])
Lori Zyskowski New York (+1 212-351-2309, [email protected])
Aaron Briggs San Francisco (+1 415-393-8297, [email protected])
Julia Lapitskaya New York (+1 212-351-2354, [email protected])

2023 Gibson, Dunn & Crutcher LLP

Lawyer Advertising: The enclosed materials are prepared for general informational purposes only and are not intended to constitute legal advice. Please note that previous results are no guarantee of a similar result.