Understanding Nasdaq and NYSE Clawback Rules and SEC Clawback Standards
Author: Destiny Aigbe
November 6, 2024
On October 26, 2022, the SEC finalized rules for clawback policies related to erroneously awarded executive compensation, known as the “Clawback Rules.” Implemented under Section 954 of the Dodd-Frank Act, the rules direct national exchanges, including Nasdaq and NYSE, to mandate disclosure and enforcement of clawback policies. These standards affect all listed companies, requiring them to recover incentive-based compensation from executives if accounting restatements are necessary due to non-compliance with financial reporting standards.
NASDAQ CLAWBACK RULES OVERVIEW
Nasdaq Listing Rule 5608 mirrors SEC Rule 10D-1, requiring companies to recover erroneously awarded incentive-based compensation when a material error in financial reporting triggers an accounting restatement. The rule applies to executive officers serving during the fiscal year in which incentive-based compensation was awarded, and mandates recovery for the previous three fiscal years. Nasdaq’s rule allows exceptions only when recovery would be impracticable due to high enforcement costs, conflicts with pre-existing home country laws, or when it could endanger a tax-qualified retirement plan.
Companies must promptly adopt written recovery policies and document any non-recoverable compensation, with Nasdaq requiring that the full amount of overcompensated incentive-based pay be calculated and disclosed without regard to taxes. Nasdaq further emphasizes consistent policy application across executives and prohibits indemnification for recovered compensation.
NYSE CLAWBACK RULES OVERVIEW
Similarly, NYSE Listed Company Manual Section 303A.14 mandates that companies recover erroneously awarded compensation in cases of accounting restatements, defining similar parameters for which executives, periods, and compensation types are covered. The NYSE rules also prevent indemnifying executives for clawbacks, requiring companies to promptly act upon identified errors and justify any non-recovery through rigorous documentation, particularly if impracticability is claimed. Both Nasdaq and NYSE’s rules, following the SEC guidelines, standardize the scope and procedures for clawbacks across all listed companies.
KEY DEFINITIONS AND IMPLICATIONS OF SEC CLAWBACK RULES
The SEC rules define “incentive-based compensation” as any performance-based pay that depends on financial metrics, including stock price or total shareholder return. Executive officers are defined broadly to include principal executives and key decision-makers. The SEC’s guidelines require clawbacks in response to any material restatements, including “little r” restatements, for an extensive range of executive compensation. Compliance with these standards is vital as companies face potential delisting for non-adherence.
These rules underscore a commitment to governance and transparency in corporate executive compensation, aligning with Dodd-Frank’s objectives for financial accountability.
Source: This information is summarized based on insights provided by the Securities Law Blog, which offers a detailed analysis of the Nasdaq and NYSE Clawback Rules following the SEC’s adoption of final rules under the Dodd-Frank Act.
About the Author
Destiny Aigbe
Managing Partner
Aigbe Law PLLC | Dark Alpha Capital
A Corporate and Securities Law Firm
With a robust foundation in law and finance, Destiny Aigbe has carved a distinguished career, underpinned by his pivotal role in orchestrating and managing complex transactions that have propelled companies to significant growth and market prominence. As a seasoned attorney and strategic advisor, Destiny has been instrumental in facilitating over $75 million in capital raises, demonstrating a keen acumen for securing funding and fostering investor confidence.
Destiny's leadership in the execution of six successful public listings, through meticulously structured reverse mergers and registration statements, showcases his adeptness in navigating the intricacies of the public markets and his capacity to guide companies through transformative growth phases. His involvement in five mergers as an operator further illustrates his versatile skill set, extending beyond legal expertise to include hands-on management and operational strategy, though these ventures did not involve funding.
Destiny's professional journey is marked by a commitment to excellence and a diverse range of experiences, from representing a wide spectrum of clients including public and private companies, and investment firms, to holding significant roles within the US government. His tenure with the US Department of State and the National Institutes of Health highlights his adaptability and his contribution to the advancement of entrepreneurial ventures in sectors like biotechnology and nanotechnology through strategic funding initiatives.
An alumnus of Vanderbilt University Law School, Destiny focused on Finance and Mergers & Acquisitions, further honing his expertise with a certificate in Law and Business. His foundational education in Finance was obtained with honors from the University of Maryland's Robert H. Smith School of Business, which laid the groundwork for his subsequent achievements in investment banking and legal practice.
Residing in the Washington, D.C. area, Destiny Aigbe continues to leverage his extensive experience and insightful leadership to drive innovation, growth, and success for his clients and the ventures he is involved with.
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