The SEC’s executive compensation clawback rule has insurance and corporate governance implications for NYSE and Nasdaq-listed companies.

On October 26, 2022, the U.S. Securities and Exchange Commission (SEC) adopted a final rule requiring all publicly traded companies to adopt and disclose an executive incentive-based compensation clawback policy, previously mandated under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The final rule requires publicly traded companies to develop, enforce and disclose a policy for recouping erroneously awarded incentive-based compensation to past and present executive officers following “an accounting restatement due to material noncompliance.” The rule looks back over a three-year period from the year before the date of the restatement. It applies both to corrections of material errors in previously issued financial statements (which are referred to as “big R” restatements) and to corrections of non-material errors that would result in a material misstatement if left uncorrected or corrected in a current period financial statement (known as “little r” restatements).

The rule applies to executive officers who receive incentive-based compensation.^* It applies on a “no-fault” basis, which means that the rule and potential clawback is not limited to executive officers whose misconduct contributed to the restatement of financials.

The SEC rule became effective on January 27, 2023 and allowed for 90 days from effectiveness for all exchanges to file their proposed listing standards. On February 22, 2023, the New York Stock Exchange (NYSE) and Nasdaq proposed listing standards implementing the new clawback rules with no additional standards or disclosure obligations beyond the SEC rules. On June 5 and 6, the NYSE and Nasdaq filed amendments to their proposed listing standards to delay the effective date of their clawback-related listing standards until October 2, 2023. On June 9, 2023, the SEC approved these amendments and a policy will apply to erroneously awarded incentive-based compensation received on or after October 2, 2023. NYSE and Nasdaq-listed companies will have until Friday, December 1 to adopt a compliant clawback policy. Incentive compensation earned on or after the date the clawback policy becomes effective will be subject to clawback provisions.

Compensation Clawback Disclosure Expands

Section 954 of the Dodd-Frank Act stipulated that the SEC direct the exchanges to “develop and implement a policy” for how public companies should disclose and recoup erroneously awarded incentive-based compensation. The final rule implements the long-awaited executive compensation clawback and disclosure policy. Public companies will be required to comply with the disclosure requirements within their 10-K filings each year. Failure to appropriately disclose or enact your company’s clawback policy when an accounting restatement leads to a different performance metric calculation could result in a delisting event.

Public companies should consider the following actions to prepare for the final compensation clawback rule:

• Collaborate with your company’s directors and officers (D&Os), including but not limited to the audit and compensation committees, to understand the requirements of the final rule.
  
• Review your existing incentive-based compensation clawback policy with outside counsel and with our Corporate Governance Group to determine if you need to revise your current policy or adopt a new plan to ensure compliance with stock exchange rules.
  
• Be prepared to make required disclosures about the clawback policy, including:
  
  
  • Filing the clawback policy with the SEC as an exhibit to the annual report (Form 10-K or 20-F).
    
  • For U.S. Companies: disclosing any restatement and application of the policy by checkmark
    (and tagged in eXtensible Business Reporting Language or XBRL) on the cover of the 10-K and describing in the proxy statement any actions taken to recover the erroneously paid compensation.
    
• Review the financial and performance metrics that your company uses in incentive-based compensation and the corresponding impact of a restatement.
  
• Consult with your D&O insurance broker to understand the implications of your current insurance policies and whether any solutions could be made available to officers.
  

D&O Insurance Coverage for Clawbacks Shrinks

The SEC rule is a no-fault policy and does not evaluate misconduct. It explicitly prohibits a public company from not only indemnifying officers in the event the clawback rule is invoked, but also from paying or reimbursing the premium for any such insurance policy on behalf of the executive officers. Any existing insurance coverage that provides indemnity for the return of erroneously awarded compensation in an actual compensation clawback event will no longer be available once the final exchange rules go into effect.

Most market standard Side A Difference-in-Conditions (A/DIC) policies include coverage for “facilitation costs” or costs and expenses associated with the return of amounts incurred or required to be paid pursuant to Section 954 of the Dodd-Frank Act. We expect that Side A/DIC policies and insurers will continue to provide this coverage going forward.

Ensure Your Compensation Clawback Policies Are Compliant

Our Financial Services Group (FSG) is finalizing a D&O compensation clawback insurance solution that provides dedicated reimbursement coverage to one, several or all the executive officers if a clawback occurs. If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon broker or our FSG team members listed below.

Our Corporate Governance Group (CGG) drafts and reviews compensation clawback policies. If you have questions about your compensation clawback policies, please contact our CGG team members listed below.

^* A president, principal financial officer, principal accounting officer or the controller if there is no such accounting officer. Any vice president of the company in charge of a principal business unit, division, or function (such as sales, administration, or finance). Any other officer who performs a policy-making function or any other person who performs similar policy-making functions for the company. Any individual who served as an executive officer at any time during the 3-year lookback period. No recovery is required for compensation paid prior to becoming an executive officer.

Key Contacts

Collin Breeney
Financial Services Broker, North America
New York









Chryssi Friend
Financial Services Practice Leader, North America
Bermuda







Nicholas Greet
Financial Services Practice Leader, North America
London







Michael Keyes
Financial Services Broker, North America
London








Dan Pliskin
Corporate Governance Practice Leader, North America
Virtual







Laura Wanlass
Corporate Governance Practice Leader, North America
Virtual

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