On February 22, 2023, the New York Stock Exchange (“NYSE”) and the Nasdaq Stock Market (“Nasdaq”) filed rule proposals to adopt new listing standards implementing Rule 10D-1 under the Securities Exchange Act of 1934. That rule, which the Securities and Exchange Commission (the “SEC”) adopted in October 2022, requires national securities exchanges to implement standards to require listed companies to adopt and publicly file so-called “clawback” policies to recover erroneously awarded incentive-based compensation following accounting restatements. 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.
The proposed listing standards are subject to a 21-day comment period once published in the Federal Register before the SEC can approve them, and must, in any event, become effective by November 28, 2023. Listed companies will be required to adopt clawback policies that comply with the new standards within 60 days of the effective date of the applicable listing standards (the “Adoption Deadline”).
The listing standards proposed by both NYSE and Nasdaq are materially consistent with Rule 10D-1 and its adopting release. Among other things, both proposed listing standards provide for the commencement of delisting proceedings for listed companies that fail to either adopt a compliant clawback policy or comply with such policy after a clawback obligation arises. These delisting provisions are discussed below, and, for an in-depth discussion of Rule 10D-1’s requirements, please refer to our previous alert.
NYSE – Delisting for Noncompliance
Failure to Adopt a Policy: As proposed, a company listed on NYSE that fails to adopt a compliant clawback policy by the Adoption Deadline will have five days to notify NYSE, after which the exchange will send a written delinquency notification to the company. Upon receipt of this notification, the company would have five days to contact NYSE to discuss the delinquency and to issue a press release disclosing the company’s delinquency, the reason for the delinquency and, if known, the anticipated date on which a clawback policy will be adopted. If the company fails to issue such a press release in time, NYSE will issue a press release stating that the company has received a delinquency notice.
NYSE’s proposed Section 802.01F provides for two consecutive six-month cure periods (the second of which is subject to NYSE’s discretion) during which a company’s securities may continue to be traded despite failing to adopt a compliant clawback policy. Nevertheless, NYSE retains sole discretion to initiate suspension and delisting procedures under Section 804 at any time following a company’s failure to timely adopt a compliant clawback policy. If a company has not adopted a compliant clawback policy within one year of the Adoption Deadline, NYSE must immediately initiate suspension and delisting procedures.
Failure to Comply with an Adopted Policy: After adoption of a compliant clawback policy, if a company fails to comply with its policy “reasonably promptly” after a clawback obligation arises, NYSE will immediately suspend trading in the company’s securities and commence the delisting procedure set forth in Section 804 of the NYSE Listed Company Manual. As opposed to a failure to adopt a policy, there is no stated cure period for a company’s failure to comply with an adopted clawback policy.
Nasdaq – Delisting for Noncompliance
As proposed, a Nasdaq company that fails to either adopt a compliant clawback policy by the Adoption Deadline or comply with its clawback policy “reasonably promptly” after a clawback obligation arises would be required to submit to Nasdaq a plan to regain compliance, generally within 45 days of receiving a notice of noncompliance. The Nasdaq staff would have discretion to provide up to 180 days to cure the deficiency. If, following the cure period, the company remains non-compliant, Nasdaq will immediately issue a delisting letter.
As described above, listed companies will be required to adopt clawback policies meeting the requirements of the applicable exchange listing standards by the applicable Adoption Deadline, i.e., 60 days after the applicable effective date. As proposed, a listed company would be required to apply its clawback policy to incentive-based compensation received on or after the effective date of the applicable listing standard.
NYSE’s and Nasdaq’s proposed standards also require listed companies to file all clawback-related disclosures required by Rule 10D-1, as discussed in our prior alert, including filing a copy of their clawback policy as an exhibit to their Annual Report on Form 10-K or equivalent filing and disclosing details relating to restatements that required clawbacks during each prior fiscal year. This likely means that calendar-year reporting companies will first be required to include such clawback disclosure in their proxy statements and annual reports in 2024.
On January 27, 2023, the SEC staff published an initial set of clawback-related C&DIs. One of these, C&DI 121H.01, notes that, under Rule 10D-1, effective January 27, 2023, clawback-related check boxes were added to the cover pages of Forms 10-K, 20-F and 40-F to indicate whether the form includes the correction of an error in previously issued financial statements and a related recovery analysis. The C&DI clarifies that issuers are not required to provide such disclosure until they are required to have a clawback policy under the applicable listing standard.
Although the proposed standards are not yet final, listed companies should begin drafting or amending clawback policies that are compliant with Rule 10D-1 and the likely applicable listing standards. Because both NYSE’s and Nasdaq’s proposed listing standards are materially consistent with Rule 10D-1, we expect that any changes in the final standards will not have a significant impact on the content of such clawback policies.
If you have any questions concerning the material discussed in this advisory, please contact the members of our Securities and Capital Markets practice group.
 NYSE would adopt new Sections 303A.14 and 802.01F of the NYSE Listed Company Manual, and Nasdaq would adopt new listing rule 5608 and amend certain listing rules in the 5800 series. NYSE’s proposal is linked here, and Nasdaq’s proposal is linked here.
 In this context, the ameliorative procedures in Sections 802.02 and 802.03 of the NYSE Listed Company Manual will be unavailable. These procedures generally allow for a company that receives a notification of noncompliance to submit a plan detailing actions the company plans to take to regain conformity with NYSE’s listing standards.
 “Reasonably promptly” is not defined in Rule 10D-1 or NYSE’s or Nasdaq’s proposed standards. In prefaces to both rule proposals, the exchanges note that “[t]he issuer’s obligation to recover erroneously awarded incentive based compensation reasonably promptly will be assessed on a holistic basis with respect to each such accounting restatement prepared by the issuer. In evaluating whether an issuer is recovering erroneously awarded incentive-based compensation reasonably promptly, the Exchange will consider whether the issuer is pursuing an appropriate balance of cost and speed in determining the appropriate means to seek recovery, and whether the issuer is securing recovery through means that are appropriate based on the particular facts and circumstances of each executive officer that owes a recoverable amount.”
 As above, the ameliorative procedures in Sections 802.02 and 802.03 of the NYSE Listed Company Manual will be unavailable.
 Companies would still be able to appeal to Nasdaq’s Hearings Panel, which could allow up to an additional 180 days to cure the deficiency.