On October 26, 2022, the Securities and Exchange Commission (the “SEC”) adopted a long-awaited rule[1] that will require listed companies to adopt and publicly file so-called “clawback” policies to recover erroneously awarded incentive-based compensation following accounting restatements. Companies with securities listed on national securities exchanges, including NYSE and Nasdaq, will be required to implement such policies within 60 days of the effective date of new listing standards, which the exchanges must adopt within 12 months of the new rule’s publication in the Federal Register. Companies who fail to comply will be subject to delisting.

The most significant deviation from the SEC’s initial proposal of the clawback rule in 2015 is that Rule 10D-1 will require companies to conduct a clawback analysis not only for “Big R” accounting restatements, which must be disclosed under Item 4.02(a) of Form 8-K, but also for “little r” accounting restatements, which involve the correction of errors in prior period financial statements when those financial statements are included in a current period filing.

Clawback Policy Requirements

Under the new rule, a listed company’s clawback policy must require the company to recover, reasonably promptly, erroneously awarded incentive-based compensation from persons who served as an executive officer at any time during the performance period for such incentive-based compensation and who received such compensation during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement. The compensation to be recovered is the amount in excess of what would have been paid based on the restated results.

More specifically, the clawback analysis will be triggered when the company is required to prepare an accounting restatement due to the material noncompliance of the company with any financial reporting requirement under the securities laws, including (i) any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements (a so-called “Big R” restatement) or (ii) that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. The latter category is often referred to as “little r” restatements, which involve the correction of errors that are immaterial to previously-issued financial statements but which are corrected in a current period report.

Recovery will be required on a “no fault” basis, without regard to whether any misconduct occurred and without regard to whether an executive officer was responsible for the erroneous financial statements. Companies will be prohibited from indemnifying current or former executive officers against the loss of erroneously paid compensation.

Key Definitions

  • “Incentive-based compensation” means any compensation that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure. The words “in part” mean that incentive-based compensation includes awards based in part on the attainment of a financial reporting measure and in part on the attainment of some other metric, such as an operational target. The definition is also intended to include awards for which the amount earned is initially determined based on attainment of a financial reporting measure but is subject to subsequent discretion by a company’s compensation committee to either increase or decrease the amount.
  • “Financial reporting measure” is defined to mean measures that are determined and presented in accordance with the accounting principles used in preparing the company’s financial statements, and any measures that are derived wholly or in part from such measures. Stock price and total shareholder return are considered financial reporting measures. A financial reporting measure need not be presented within the financial statements or included in a filing with the SEC.
  • “Executive officer” under Rule 10D-1 uses a definition that is similar to that of “officer” in Rule 16a-1(f) under the Securities Exchange Act of 1934 (the “Exchange Act”). It means the company’s president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president in charge of a principal business unit, division or function, any other officer who performs a policy-making function, and any other person who performs similar policy-making functions for the company. An executive officer’s compensation is only subject to recovery (i) after beginning service as an executive officer and (ii) if that person served as an executive officer at any time during the performance period for incentive-based compensation affected by the restatement.

The new rule does not define the term “accounting restatement,” as the SEC noted that existing accounting standards and guidance adequately define the term. The adopting release posits that the term encompasses both “Big R” restatements and “little r” restatements, because both scenarios involve the revision of previously issued financial statements to correct errors in such statements. The adopting release also notes that out-of-period adjustments would not be considered a restatement as they do not involve errors that are material to prior period financial statements or corrections of such errors that are material to current period financial statements. Further, the adopting release notes that, under current accounting standards, certain changes to a company’s financial statements would not constitute an error correction, and thus would not trigger a clawback analysis. These include, for example, retrospective application of a change in accounting principle, retrospective revisions for stock splits or other changes in capital structure or retrospective revisions to segment information due to a change in the structure of a company’s internal organization.

Restatement Determination

Rule 10D-1 provides that a company’s clawback policy will apply to any incentive-based compensation received during the three completed fiscal years immediately preceding the date that the company is required to prepare an accounting restatement. The date a company is required to prepare a restatement is the earlier of (i) the date its board of directors, board committee or officers concludes, or reasonably should have concluded, that the company is required to prepare an accounting restatement due to the material noncompliance with any financial reporting requirement under the securities laws; or (ii) the date that a court, regulator or other body directs the company to prepare an accounting restatement. The adopting release notes that to the extent a company is required to file an Item 4.02(a) Form 8-K, the conclusion that it is required to prepare an accounting restatement is expected to coincide with the occurrence of the event disclosed in the Form 8-K.

Calculating the Recovery Amount

Under Rule 10D-1, the amount to be recovered is the amount of incentive-based compensation received by an executive officer in excess of the amount that otherwise would have been received had it been determined based on the restated results. Recovery amounts are to be calculated excluding any taxes paid by the executive.

In the case of incentive-based awards that are based on stock price or total shareholder return, where the amount of erroneously awarded compensation is not subject to mathematical recalculation directly from the information in the accounting restatement, Rule 10D-1 permits companies to use a “reasonable estimate” of the effect of the restatement on the applicable measure to determine the amount to be recovered, so long as the company provides documentation of the determination to its exchange. Notably, the SEC declined to provide guidance or a safe harbor on permissible estimation methodologies.

While the calculation of the amount to be recovered should be straightforward in some cases, such as a cash-based incentive award based solely on the achievement of one or more financial reporting measures, it will be less obvious in other situations. The adopting release provides some general guidance on the approach to be followed in calculating the recovery amount. 

  • As a general matter, the adopting release indicates that a company should recalculate the applicable financial reporting measure and the amount of incentive-based compensation based on such measure, and then determine whether, based on that financial reporting measure as calculated by relying on the original financial statements and taking into account any discretion that the compensation committee had applied to reduce the amount originally received, the executive officer received a greater amount of incentive-based compensation than would have been received by applying the recalculated financial reporting measure.
  • Where incentive-based compensation is based only in part on the achievement of a financial reporting measure goal, the company would first need to determine the portion of the original incentive-based compensation based on or derived from the financial reporting measure that was restated, and would then need to recalculate the affected portion based on the financial reporting measure as restated, and recover the difference between the greater amount based on the original financial statements and the lesser amount that would have been received based on the restatement.
  • For cash awards, the erroneously awarded compensation is the difference between the amount of the cash award (whether payable as a lump sum or over time) that was received and the amount that should have been received applying the restated financial reporting measure.
  • For cash awards paid from bonus pools, the erroneously awarded compensation is the pro rata portion of any deficiency that results from the aggregate bonus pool that is reduced based on applying the restated financial reporting measure.
  • For equity awards, if the shares, options, or SARs are still held at the time of recovery, the erroneously awarded compensation is the number of such securities received in excess of the number that should have been received applying the restated financial reporting measure (or the value of that excess number). If the options or SARs have been exercised, but the underlying shares have not been sold, the erroneously awarded compensation is the number of shares underlying the excess options or SARs (or the value thereof).[2]

Limited Discretion to Decline to Seek Recovery

Rule 10D-1 provides that a company must recover erroneously paid compensation in compliance with its clawback policy unless one of three narrow circumstances applies and the company’s independent compensation committee determines that such recovery is impracticable. The three narrow exceptions are: (i) where the direct expense paid to a third party to assist in enforcing the policy would exceed the amount to be recovered; (ii) where recovery would violate the company’s home country law that existed at the time of Rule 10D-1’s adoption; and (iii) where recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the Internal Revenue Code (thereby permitting companies to forgo recovery from tax-qualified plans). There is no de minimis threshold for pursuing recovery.

  • Where impracticality is based on third-party expense, the company will be required to make a reasonable attempt to recover before concluding that it would be impracticable to do so and must document such attempts and provide such documentation to its exchange.
  • Where impracticality is based on a violation of home country law, the company will be required to obtain an opinion of home country counsel and provide such opinion to its exchange.

The adopting release states that inconsistency between Rule 10D-1 and existing compensation contracts is not a basis for finding recovery to be impracticable and contemplates that such contracts may need to be amended to accommodate recovery.

Rule 10D-I requires a clawback policy to state that the company will pursue recovery “reasonably promptly,” which is not defined under the rule. The adopting release notes that establishing a deferred payment plan that allows an executive officer to repay owed erroneous compensation as soon as possible without unreasonable economic hardship to the executive officer, depending on the particular facts and circumstances, would satisfy this requirement. Helpfully, the SEC clarifies that this would not be considered a personal loan prohibited by Section 402 of the Sarbanes-Oxley Act of 2002.

New Disclosure Requirements

Under the new rule, all listed companies will be required to file a copy of their clawback policy as an exhibit to their annual report on Form 10-K or equivalent filing. This requirement will not apply until after a company adopts a clawback policy following implementation of listing standards by the national securities exchanges.

In addition, new Item 402(w) of Regulation S-K will apply if, during or after its last completed fiscal year, the company was required to prepare an accounting restatement that required recovery of erroneously awarded compensation pursuant to its clawback policy or there was an outstanding balance of erroneously awarded compensation relating to a prior restatement. In these circumstances, the company will be required to disclose (in any proxy or information statement containing executive compensation disclosures under Item 402 of Regulation S-K or in any annual report on Form 10-K):

  • The date on which it was required to prepare an accounting restatement, the aggregate dollar amount of erroneously awarded compensation attributable to the restatement (including an analysis of how the recoverable amount was calculated) or, if such amount has not yet been determined, an explanation of the reasons and disclosure of the amount and related disclosures in the next filing that is subject to Item 402.
  • The aggregate dollar amount of erroneously awarded compensation that remained outstanding at the end of its last completed fiscal year.
  • If the erroneously awarded compensation related to stock price or total shareholder return, the estimates used to determine the amount and an explanation of the methodology used for such estimates.
  • If recovery would be impracticable as discussed above, the amount of recovery forgone for each current and former named executive officer, individually and as a group, as well as a brief description of the reason recovery was foregone.
  • For each current and former named executive officer, the amount of erroneously awarded compensation still owed that had been outstanding for 180 days or longer since the date the issuer determined the amount owed.

Of note, the last two disclosure requirements only apply to named executive officers, as opposed to all executive officers.

Lastly, companies will be required to respond to additional check boxes on the cover of Form 10-K to disclose (i) whether the financial statements of the company included in the filing reflect correction of an error to previously issued financial statements and (ii) whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the company’s executive officers during the relevant recovery period. To assist investors in contextualizing the check boxes, companies that prepared an accounting restatement during the prior fiscal year but concluded that recovery of erroneously awarded compensation was not required will also be required to disclose under Item 402(w) why application of the company’s recovery policy resulted in this conclusion.

Companies Covered

The new clawback policy requirement will generally apply to all listed companies, with limited exceptions, such as for registered investment companies that do not provide incentive-based compensation to their employees. There is no exception from Rule 10D-1 for foreign private issuers, controlled companies, smaller reporting companies or emerging growth companies. Where necessary, corresponding amendments have been made to Form 40-F, Form 20-F and Form N-CSR for foreign private issuers, certain Canadian issuers and listed funds.

Compliance Timeline

Under Rule 10D-1, the national securities exchanges will be required to adopt listing standards in conformity with Rule 10D-1 within 12 months of the rule’s publication in the Federal Register. Listed companies will have 60 days from the effectiveness of these new requirements to adopt clawback policies meeting the requirements of Rule 10D-1. Companies must comply with the new clawback disclosure requirements in their proxies, annual information statements and annual reports filed after adoption of their clawback policies, meaning that calendar-year reporting companies will likely first be required to include such clawback disclosure in their proxy statements and annual reports in 2024.

Companies will be required to use Inline XBRL to tag their new clawback-related disclosures.

Next Steps and Observations

The new rule represents a significant new compliance obligation for public companies, although many public companies have already adopted some form of clawback policy. Upon adopting (or amending) clawback policies that comply with the new requirements, listed companies will need to closely monitor both “Big R” and “little r” restatements to determine when clawback analyses are required. Companies may also wish to consider how clawback policies interact with existing compensation arrangements and whether any amendments to such arrangements are warranted to conform to, or facilitate compliance with, the mandate to establish policies to recover erroneously paid compensation under the new rule.


[1] Rule 10D-1, which was first proposed in 2015 and re-opened for comment twice, implements Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

[2] The adopting release does not offer guidance on how to calculate the recovery amount if the shares underlying such award have been sold, but presumably the company would need to determine the value of such shares in relation to the estimated value that would have been realized on a sale occurring after the accounting restatement. 

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Photo of Mellissa Campbell Duru Mellissa Campbell Duru

Mellissa Campbell Duru is a Special Counsel in Covington’s Washington office and is a deputy co-leader of the firm’s ESG practice. She advises clients on U.S. securities regulation, capital markets transactions, and strategic corporate governance planning. She develops advisory guidance for public companies…

Mellissa Campbell Duru is a Special Counsel in Covington’s Washington office and is a deputy co-leader of the firm’s ESG practice. She advises clients on U.S. securities regulation, capital markets transactions, and strategic corporate governance planning. She develops advisory guidance for public companies and asset managers on ESG matters and public company disclosure and reporting obligations. Mellissa joined the firm after over 15 years at the U.S. Securities and Exchange Commission where she served as Counsel to SEC Commissioner Kara Stein and in a range of transactional and policy advisory roles in the Division of Corporation Finance and Division of Examinations.  As Counsel to SEC Commissioner Kara Stein, Mellissa was the lead advisor on ESG U.S. and international framework developments, including sustainable finance reporting and investment matters, cybersecurity, data privacy and governance issues, initial token offerings and financial technology developments, capital formation and exempt offering rulemakings, and SEC advisory committee matters.

Photo of David H. Engvall David H. Engvall

David Engvall provides securities, transactional and general corporate advice to clients ranging from development stage ventures to large public companies.  His work includes private and public equity and debt securities offerings, investment transactions, corporate governance matters, and mergers and acquisitions.  Mr. Engvall also…

David Engvall provides securities, transactional and general corporate advice to clients ranging from development stage ventures to large public companies.  His work includes private and public equity and debt securities offerings, investment transactions, corporate governance matters, and mergers and acquisitions.  Mr. Engvall also advises public company clients on a wide variety of SEC compliance and disclosure matters.  Recently, Mr. Engvall has been actively engaged in advising clients on a number of securities law provisions under the Dodd-Frank Wall Street Reform and Consumer Protection Act, including executive compensation, corporate governance, and specialized disclosures such as those pertaining to conflict minerals.  His practice includes clients in a variety of industries, with a recent focus on the energy, financial institutions and telecommunications industries.

Photo of Matthew Franker Matthew Franker

Matt Franker has nearly twenty years of experience advising public and private companies, underwriters, and boards of directors in capital markets offerings, securities disclosure and compliance, corporate governance and ESG matters, mergers and acquisitions, and general corporate issues. Matt has significant experience representing…

Matt Franker has nearly twenty years of experience advising public and private companies, underwriters, and boards of directors in capital markets offerings, securities disclosure and compliance, corporate governance and ESG matters, mergers and acquisitions, and general corporate issues. Matt has significant experience representing companies from a broad range of industries, including life sciences, financial services, manufacturing, energy, consumer products, and telecommunications. Matt, a former SEC staff member, also has extensive experience advising clients on SEC rulemakings and regulatory proceedings.

Matt has been recognized in Legal 500 for his work on capital markets transactions, and his capital markets experience includes advising companies and underwriters on registered and exempt offerings of common and preferred equity securities and investment grade, high-yield and convertible debt securities, exchange offers, debt tender offers, and consent solicitations. Matt has an extensive securities advisory practice focused on assisting public companies in a wide variety of disclosure, corporate governance, and compliance matters.

Prior to joining Covington, Matt served as an attorney-adviser with the U.S. Securities and Exchange Commission’s Division of Corporation Finance. While at the SEC, he worked on a wide variety of transactional and securities compliance matters, with an emphasis on the manufacturing, construction, and financial services industries. His experience at the SEC focused on IPOs, secondary offerings, mergers and acquisitions, exchange offers, going-private transactions, PIPEs and private equity financings and evaluating no-action requests to exclude shareholder proposals under Exchange Act Rule 14a-8.

Martin Levy

Martin Levy is an associate in the firm’s Washington’s office. He is a member of the Environmental and Energy Regulatory practice, focusing on low-carbon and renewable energy incentives, carbon markets, environmental marketing claims, and other corporate climate change initiatives. He advises power generators…

Martin Levy is an associate in the firm’s Washington’s office. He is a member of the Environmental and Energy Regulatory practice, focusing on low-carbon and renewable energy incentives, carbon markets, environmental marketing claims, and other corporate climate change initiatives. He advises power generators, technology companies, and financial institutions on how to better align their business practices with “net zero” commitments. Before joining Covington, Martin was a vetting attorney with the Biden-Harris Presidential Transition, a law clerk at the Eastern District of New York, and an undergraduate environmental law instructor at Boston College.

Charlotte May

Advising clients on a broad range of corporate and securities matters, Charlotte May regularly handles capital markets transactions, mergers and acquisitions, and general corporate governance, securities disclosure, and compliance issues.

Charlotte represents a wide range of corporate clients with particular experience in the…

Advising clients on a broad range of corporate and securities matters, Charlotte May regularly handles capital markets transactions, mergers and acquisitions, and general corporate governance, securities disclosure, and compliance issues.

Charlotte represents a wide range of corporate clients with particular experience in the financial services and life sciences industries. She assists clients with respect to various transactional matters, including primary and secondary registered offerings, private placements, exchange offers, tender offers, mergers and acquisitions, FinTech partnerships and acquisitions and similar matters. She also advises various public companies in the preparation of SEC periodic reports, proxy statements, beneficial ownership reports, public company disclosure and on other securities law and stock exchange compliance matters. Charlotte also counsels public companies on a variety of corporate governance matters, including board and committee composition, FinTech governance and organization, environmental, social, and corporate governance (ESG) matters, internal and disclosure controls, insider trading and similar matters.

Charlotte’s recent pro bono work includes advising Humane Rescue Alliance in its acquisition of St. Hubert’s Animal Welfare Center and advising Kitty of Angels, Inc. in its formation as a California nonprofit and 501(c)(3) company. She is also a board member for Kitty of Angels, Inc. In addition to her work at Covington, Charlotte:

  • Acts as the Co-Chair of the American Bar Association’s Women in M&A Subcommittee, which focuses on the participation, promotion, and retention of women in the M&A field
  • Frequently speaks and publishes on topics in M&A for the American Bar Association and is a producer for the ABA Business Law section’s webinars for M&A.
  • Served as a Attorney Working Group Leader on the American Bar Association M&A Market Trends Subcommittee Public Target Deal Points Study
  • Served as a Study Leader for the American Bar Association’s M&A Market Trends Subcommittee Deal Points Study on Carveout Transactions.

Charlotte was a judicial extern for Hon. Judge Consuelo B. Marshall, U.S. District Court, Central District of California prior to joining the firm.