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Statement on the Final Rule Related to Listing Standards for Recovery of Erroneously Awarded Compensation

Oct. 26, 2022

Today, the Commission is voting on a recommendation to adopt rules implementing Section 954 of the Dodd-Frank Act (“Section 954”) by directing the exchanges to establish listing standards for the recovery of compensation erroneously awarded to management, generally referred to as “clawbacks.”[1] I have several objections to how the Commission is implementing Section 954.

Outsourcing the Commission’s Economic Analysis Responsibilities

It has been well established that the Commission undertakes an economic analysis of its proposed rules and subjects that analysis to public comment. Yet, the Commission did not do so for this proposal. Instead, the Commission conducted an economic analysis of the proposal and the factual data as it existed in 2015, not 2022.

Rather than re-proposing the 2015 rules with updated data and analysis,[2] the Commission took a procedural shortcut and simply re-opened the comment period.[3] The reopening notice recognized that “important developments” related to clawbacks had occurred since 2015.[4] But rather than providing a new economic analysis, the Commission raised questions as to whether there “[a]re … any other developments … that should affect our consideration of the Proposed Rules or their potential economic effects [and] are there any changes we should consider in the methodologies and estimates used to analyze the economic effects…”[5] In effect, the Commission outsourced its responsibility to conduct an appropriate economic analysis to commenters – and then it only gave them 30 days to do so.

A lot has changed since 2015 – arguably, a full business cycle has passed since that time.[6] As such, the Commission should have undertaken new economic analysis of costs and benefits. The publication in June 2022 of a supplemental memo providing some economic data falls short of the breadth of the analysis contained in the 2015 proposal.[7]

It’s Déjà Vu all Over Again.[8]

Like other recent rulemakings, the comment period for 2021 and 2022 reopening notices was 30 days. I have expressed my objections to these shortened comment periods elsewhere.[9] These shortened comment periods significantly weaken a cornerstone of effective rulemaking: feedback from investors, issuers, and intermediaries to provide us with their expertise. This process improves our ability to make informed decisions.

Compliance Burdens Have Been Updated

I am pleased, however, that today’s recommendation is using an updated cost burden calculation.[10] Prior estimates likely dramatically understated the compliance burdens when the Commission estimated that legal professionals would have an average cost of $400 per hour.[11] Today, the Commission has revised that number to $600 per hour—a 50% increase, to reflect an inflation adjustment. It is important that our estimates are up-to-date so that costs are properly evaluated, both on an individual and cumulative basis. The prior $400 estimate was used for about 16 years.[12] I hope that moving forward, these estimates will be revised regularly to reflect current compliance costs.

The Commission’s Final Rules Are Overly Broad

Today’s recommendation also includes a new interpretation that Section 954, which covers “an accounting restatement due to the material noncompliance … with any financial reporting requirement,” should include “little r” restatements.[13] The inclusion of “little r” restatements represents a dramatic shift in the Commission’s interpretation of Section 954.[14] The 2015 proposal contained not a single reference to the term “little r” and minimal discussion of related terms.[15] The Commission’s first signal that the rules would capture “little r” restatements came nearly eleven years after the passage of the Dodd-Frank Act, and six years after the 2015 proposal.[16] The adopting release we are voting on today, contains 65 references to “little r” restatements.

Today’s release cites an Audit Analytics restatement study.[17] An accompanying release for the study provides background on “little r” restatements, noting that: “‘little r’ restatements, deal with immaterial misstatements, or adjustments made in the normal course of business … [b]ecause revision restatements are less severe, they are not generally viewed as a sign of poor reporting.”[18] By broadening the scope of the 2015 proposal to include “little r” restatements, the final rules appear to conflict with the statutory directive and even some of the underlying data.

Moreover, brand new checkbox disclosure on Form 10-K has been included with respect to “little r restatements,” irrespective of whether it is connected to a clawback or executive compensation payment issue.[19] While concerns about the use of “little r” restatements may be a topic worthy of addressing, including this checkbox disclosure extends far beyond the scope of the Section 954 rulemaking.

In addition, the final definition of the term “executive officer” appears overly broad. Congress indicated that the clawbacks should apply to “executive officers, a very limited number of employees.”[20] Yet the rules adopted today may capture persons beyond the narrow scope contemplated by Congress. Commenters have raised related concerns regarding the scope of this definition, but the final rules appear to brush these concerns aside.[21]

Unintended Regulatory Consequences

Ultimately, the final rules may increase misalignments between the interests of shareholders and corporate executives. My predecessors raised concerns related to the Dodd-Frank Act’s executive compensation provisions,[22] and noted that under Section 954, “compensation arrangements [might] be restructured so that executives end up receiving less incentive pay that could be clawed back but larger discretionary bonuses ...”[23] This may result in salary increases, rather than compensation mechanisms tied to financial reporting measures. The broad approach the Commission takes may ultimately weaken alignment of interests between shareholders and management.[24] According to some media reports, parallel trends may already be occurring as corporations remove performance goals and replace options with shares.[25]

Therefore, I am unable to support the recommendation today. I thank, however, the staff in the Divisions of Corporation Finance, Economic and Risk Analysis, Trading and Markets, and the Offices of the General Counsel and the Chief Accountant, for their work and for their willingness to engage, particularly Steve Hearne, Jessica Barberich, Luna Bloom, Chyhe Becker, and Al Sheen. I also want to acknowledge the comprehensive summary of the public comments received, including a 117-page summary for the original 2015 proposal and a 26-page summary on the 2021 re-opening of the comment period.

[1] Pub. L. No. 111-203, Sec. 953(a), 124 Stat. 1841 (2010).

[2] Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 34-75342 (Jul. 1, 2015) [80 FR 41144 (Jul. 14, 2015)] (the “2015 Proposal”) available at

[3] Reopening of Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 34-93311 (Oct. 14, 2021) (the “2021 Reopening Notice”) available at; Reopening of Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 34-95057 (June 8, 2022)(the “2022 Reopening Notice”) available at

[4] 2021 Reopening Notice at 6.

[5] Id. at 19.

[6] Approximately six and a half years passed between the time of the 2015 Proposal and the 2022 Reopening Notice, which represents under many measures a full business cycle. Refer to the business cycle troughs and peaks for the period between June 1857 and February 2022, available at

[7] For context, the Economic Analysis and Paperwork Reduction Act analysis in the 2015 Proposing release represented nearly 60 pages of impact analysis, whereas the memorandum from the Division of Economic and Risk Analysis (DERA) was 9 pages long. Memorandum supplemental data and analysis on the voluntary adoption of compensation recovery provisions by issuers and the impact of including “little r” restatements as triggers for a compensation recovery analysis (June 8, 2022) available at

[8] For a selection of quotes from Yogi Berra in the context of a discussion on clawbacks, see Dissenting Statement at an Open Meeting on Dodd-Frank Act “Clawback” Provision, Commissioner Michael S. Piwowar (July 1, 2015) available at

[9] Remarks at the APABA-DC Awards and Installation Reception, Commissioner Mark T. Uyeda (Oct. 19, 2022) available at

[10] Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 33-11126 (Oct. 26, 2022), available at

[11] See e.g., Reopening of Comment Period for Pay Versus Performance, Release No. 34-94074 (Jan. 27, 2022) [87 FR 5751 (Feb. 2, 2022)], available at

[12] See Executive Compensation and Related Person Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158, 53214 n. 574)] (“We recently have increased this hourly rate estimate to $400.00 per hour after consulting with several private law firms”).

[13] Listing Standards for Recovery of Erroneously Awarded Compensation at 34.

[14] See 2015 Proposal. See also generally, Highlights of the Dialogue with the Director of the SEC’s Division of Corporation Finance, Meeting of the Federal Regulation of Securities Committee of the ABA Business Law Section, as part of that Section’s Annual Meeting in Chicago, Illinois (Sept. 18, 2015), written summary available at, noting that The Division of Corporation Finance Director Keith F. Higgins “confirmed that the [2015] proposal extends only to so-called “Big R” restatements, meaning restatements to correct material errors in the financial statements. There is no intention here to create new restatement definitions that deviate from GAAP concepts associated with restatement under ASC 250.”

[15] 2015 Proposal at note 262, referencing a study discussing “non-4.02 restatements.”

[16] See 2021 Reopening Notice; 2022 Reopening Notice.

[17] Audit Analytics, 2020 Financial Restatements (A Twenty Year Review), (Nov. 2021) available at

[18] Audit Analytics 2020 Financial Restatements Review, (Dec. 7, 2021) available at

[19] Listing Standards for Recovery of Erroneously Awarded Compensation at 117.

[20] Report of the Senate Committee on Banking, Housing, and Urban Affairs, S.3217, Report No. 111-176 at 136 (Apr. 30, 2010).

[21] See e.g., Letter from David Lynn, Chair, American Bar Association Committee on Federal Regulation of Securities of the Section of Business Law (Feb. 11, 2016) available at

[22] Remarks at the 26th Annual Corporate Law Institute, Tulane University Law School: Federal Preemption of State Corporate Governance, Commissioner Daniel M. Gallagher, (Mar. 27, 2014) available at

[23] Remarks at Society of Corporate Secretaries & Governance Professionals, 66th National Conference on “The Shape of Things to Come.” Commissioner Troy A. Paredes, (July 13, 2012), available at

[24] See remarks from The Division of Economic and Risk Analysis Director Mark J. Flannery at the Open Commission Meeting of July 1, 2015, available at at 16:00, noting that under the 2015 Proposal “[…] the interest of the executives could therefore diverge from those of the shareholders.”

[25] See Patrick Temple-West, US Companies Rework Bonus Plans to Protect Executive Pay, Financial Times (Oct. 22, 2022), available at

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