Last fall, the U.S. Securities and Exchange Commission (the “SEC”) adopted a comprehensive set of rules related to recovery of erroneously awarded incentive-based compensation (the “SEC clawback rules”).  Included in the SEC clawback rules is Rule 10D-1 of the Securities Exchange Act of 1934, as amended, which directs national securities exchanges and associations to establish listing standards providing for listed issuers to adopt and adhere to incentive-based compensation clawback policies and to comply with the applicable related disclosure requirements in their filings with the SEC.  Recently, each of Nasdaq and the NYSE proposed new listing standards in accordance with the directive.

The provisions of Nasdaq’s new Listing Rule 5608 and NYSE’s new Section 303A.14 each mirror the requirements set forth in Rule 10D-1, matching the SEC’s phrasing nearly word-for-word.  Neither rule goes beyond Rule 10D-1’s requirements, which are described in detail along with the related new disclosures introduced by the SEC clawback rules in our prior client alert.  The major difference between the Nasdaq and the NYSE proposals is the consequence of non-compliance, with the NYSE’s proposal providing for more immediate actions against non-compliant issuers and bifurcating the delisting procedures to be followed depending on the deficiency.

These listing standards are subject to a public comment period of 21 days from the date they are published in the Federal Register, and thereafter remain subject to SEC review and approval.  Per the SEC clawback rules, November 28, 2023 is the outside date by which the exchanges’ rules will become effective; however, they may become effective sooner.  Once the rules are effective, issuers will have 60 days to adopt a compliant clawback policy—meaning issuers will need to adopt a clawback policy by no later than January 27, 2024 (if not sooner).  

What are the Consequences of Non-Compliance?

NYSE

Late Adoption of Clawback Policy

Pursuant to the proposed listing standards, the NYSE will consider a “Late Recovery Policy Adoption Delinquency” to have occurred if an issuer fails to adopt a clawback policy within 60 days following the effective date of NYSE’s clawback rules.  Issuers who have not adopted a clawback policy within the required time must notify the NYSE within five days of the delinquency.  The NYSE will then send a notification to the delinquent issuer outlining the procedures to be followed to cure the deficiency.  Within five days of the NYSE notification, the issuer will be required to issue a press release regarding the noncompliance, including the reasons why and the anticipated cure date.  If the issuer fails to issue a press release, the NYSE will issue one on its behalf.

Generally, the issuer will have six months to adopt a clawback policy in accordance with the NYSE’s clawback rules, though the NYSE can exercise its discretion to grant the issuer up to another six months’ cure period.  Once the issuer has exceeded its cure period, if it remains in noncompliance, the NYSE will commence suspension and delisting procedures immediately.  The NYSE also reserves the right to commence suspension and delisting procedures during the cure period to the extent that the issuer is subject to delisting pursuant to another section of the Listing Company Manual or to the extent that it is “advisable to do so on the basis of an analysis of all relevant factors.”

Noncompliance

The proposed listing standards also provide that if the exchange determines that a NYSE-listed issuer has not recovered erroneously awarded incentive-based compensation reasonably promptly, trading in the issuer’s securities will be immediately suspended and the exchange will immediately begin delisting procedures.

Nasdaq

Under Nasdaq’s proposed listing standards, an issuer that fails to comply with the new rules (either by not adopting a policy or by not recovering erroneously awarded incentive-based compensation under the policy reasonably promptly) will be required to submit a plan to Nasdaq in order to regain compliance.  The administrative process will follow the model currently employed to cure similar corporate governance noncompliance, which enables Nasdaq to grant issuers up to 180 days to cure a deficiency prior to delisting (subject to an additional up to 180 day extension by the hearings panel). 

Did the Exchanges Clarify “Reasonably Promptly”?

Taking the SEC’s lead, neither Nasdaq nor the NYSE chose to define “reasonably promptly” in their proposed listing stands, leaving what is considered “reasonably promptly” subject to interpretation.  Both exchanges clarified that they will assess whether an issuer has recovered erroneously awarded incentive-based compensation “reasonably promptly” on a “holistic basis,” taking into account whether the issuer found an appropriate harmony between cost and speed of recovery given the facts and circumstances of each executive officer subject to a clawback.

The NYSE’s proposed listing standards are accessible here and Nasdaq’s are accessible here.

What Should Issuers Be Doing?

Issuers should take the following steps ahead of the effectiveness of the listing standards:

• Review the SEC clawback rules and the applicable exchange’s proposed listing standards to understand the full scope of the new requirements, including with the board of directors.
• Communicate the upcoming changes with executive officers and work through questions.
• Prepare and adopt a clawback policy that is compliant with the applicable listing exchange requirements, or adopt any necessary amendments to an existing policy.
• Engage with their compensation consultant and review existing compensation structures to determine if any changes or clarifications should be made in light of the new listing standards, including whether forms of compensation that are not intended to be “incentive-based compensation” are adequately documented.
• Develop appropriate procedures to be followed in the event of an accounting restatement to ensure compliance with the applicable disclosure requirements and with the issuer’s recoupment responsibilities.
• Review and amend (if necessary) indemnification agreements with executive officers and the issuer’s bylaws to take into account the prohibition on issuers indemnifying executive officers for clawbacks effected under the listing standards.
• Prepare to file the clawback policy as an exhibit to the annual report covering fiscal year 2023.