On October 26, 2022, the Securities and Exchange Commission (the “SEC”) adopted a long-awaited rule that will require listed companies to adopt and publicly file so-called “clawback” policies.  As we discuss in more detail in this alert, the rule requires listed companies to adopt clawback policies to recover, reasonably promptly, incentive-based compensation that proves to be excessive following an accounting restatement.  The executives covered by the rule are persons who served as an executive officer at any time during the performance period for such incentive-based compensation.  The amount that must be recovered generally includes excess compensation earned during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement.

Among other executive compensation implications, the SEC contemplates that existing contractual arrangements with executives may need to be amended as a result of the new rule.  The rule mandates recovery of erroneously paid compensation, subject to narrow exceptions that generally include a finding that it is impracticable to do so because the cost of recovery exceeds the amount to be recovered.  The SEC’s adopting release states that inconsistency between the rule and existing compensation contracts is not a basis for such an impracticability finding.  As such, listed companies may wish to consider whether existing compensation arrangements should be amended to facilitate compliance with the mandate to recover.  In addition, listed companies may wish to review contractual clawback provisions in existing agreements for conformity with their clawback policies (as may need to be amended to conform with the new rule).  Going forward, where clawbacks are required, there may be complex questions concerning whether there may be additional compensation arrangements not cited in the release that may be subject to clawback, the amount of excess compensation that needs to be recovered, and the methods to satisfy the SEC’s requirement to undertake reasonable efforts to recover such compensation.