Statement on Listing Standards for Recovery of Erroneously Awarded Compensation
Oct. 26, 2022
This rulemaking is straightforward and long awaited. It was over a decade ago when Congress mandated that the Commission promulgate rules related to the recovery, by issuers from its executives, of erroneously awarded incentive based compensation.
The rulemaking would require an issuer to have in place a policy for mandatory recovery of compensation based on materially misreported financials. The principle is simple: if an executive was paid too much based upon incorrect accounting, then the executive should not get to keep that money. In such an event, the portion of compensation attributable to that incorrect accounting would be recovered, or “clawed back,” by the issuer.
Other components of the rule would require disclosure to investors of the recovery policy itself, additional disclosures when it has been determined pay should be recovered, and also, in the event there is a restatement of financials but no recovery necessitated, an explanation of why that is the case. Further, the rule would require a check box on the cover of annual reports to provide investors with clear and accessible notice of when there is a correction of an error to previously issued financial statements and whether any such corrections are restatements that trigger a recovery analysis.
Additionally the rulemaking would require recovery policies to be triggered by material errors defined to include both “Big R” and “little r” restatements. As the adopting release notes, “little r” restatements accounted for 76% of all restatements in 2020; and scoping such restatements into the rule is consistent with the relevant legal precedent, statutory language and mandate, accounting literature, provisions of U.S GAAP and IFRS, and staff guidance regarding accounting errors and materiality determinations.
Both the scope and the design of the rule were carefully calibrated to incentivize higher quality financial reporting and to hold executives and issuers alike accountable by returning erroneously awarded incentive based compensation.
Thank you to members of the public who submitted comment letters in connection with this rulemaking. Thank you also to the staff of the Division of Corporation Finance, the Office of the Chief Accountant, the Division of Economic and Risk Analysis, the Office of the General Counsel, and also the staff within Chair Gensler’s office for your hard work.
 Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 33-11126 (October 26, 2022) (the “Adopting Release”) at 1 (citing Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), which added Section 10D to the Securities Exchange Act of 1934.).
 Id at 109-14.
 Id at 109.
 Id at 35 (noting that “restatements that correct errors that are material to previously issued financial statements” are commonly referred to as “Big R” restatements, whereas “restatements that correct errors that are not material to previously issued financial statements, but would result in a material misstatement if (a) the errors were left uncorrected in the current report or (b) the error correction was recognized in the current period” are commonly referred to as “little r” restatements.).
 Id at 36 n.108.
 Id at 27 n.74.
 Dodd-Frank Act Section 954. See also Adopting Release at 34.
 Adopting Release at 34 n.103.
 See id at 27 n. 73, 34 n. 103, & accompanying text.
 See Staff Accounting Bulletin No. 99, Materiality (Aug. 12, 1999) and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (Sept. 13, 2006). See also Statement of Acting Chief Accountant Paul Munter, Assessing Materiality: Focusing on the Reasonable Investor When Evaluating Errors (Mar. 9, 2022).
 See Report of the Senate Committee on Banking, Housing, and Urban Affairs, S.3217, Report No. 111-176 at 135- 36 (Apr. 30, 2010) (“The Committee believes it is unfair to shareholders for corporations to allow executives to retain compensation that they were awarded erroneously.”).