Getting Ready for Clawbacks Changes

Now that both the New York Stock Exchange and the Nasdaq Stock Market have released their versions of the Dodd-Frank clawback rule, the clock is ticking for companies to comply with the new listing standards. Both proposed listing standards were published in the Federal Register on March 13, which means the 21-day public comment period will end April 3, at which point the SEC will almost certainly approve both rules as they are essentially identical to the SEC’s final rule.

The deadline for the stock exchanges to finalize the listing standards is November 28, 2023, but they may do so earlier than this; after that, companies have 60 days to become fully compliant, so the latest possible compliance date would be January 27, 2024 (but could be earlier).

The two exchanges produced very similar listing standards (here is a side-by-side comparison by Davis Polk). Both exchanges will delist companies that fail to adopt a compliant clawback policy or fail to claw back compensation in accordance with the policy. As companies plan the changes that are needed, a pair of recent articles by Willis Towers Watson and Morgan Lewis may be useful:

• Multiple Clawback Policies. Companies are considering whether it makes sense to have more than one clawback policy in place before year-end. For example, a company could have a Dodd-Frank compliant no-fault policy that applies only to current and former Section 16 officers, plus a fault-based policy (that may be tied to any misconduct, not just a restatement) that applies more broadly.
  
  
• Impact of DOJ Clawback Directive. The DOJ’s recent announcement of its first ever Pilot Program on Compensation Incentives and Clawbacks further complicates how companies assess their current clawback policies. The pilot is intended to “shift the burden of corporate malfeasance away from uninvolved shareholders onto those more directly responsible,” i.e., executives and employees. Going forward, companies involved in criminal cases 1) must add compliance metrics to incentive plans and 2) may receive fine reductions if they seek to claw back compensation from wrongdoers. Companies should consider taking this into account when redrafting current clawback policies.
  
  
• Covered Compensation. Unlike most current clawback policies, the Dodd-Frank mandate covers all incentive-based pay including TSR-based incentives. Further, the SEC recently released interpretations stating that the rule is intended to apply broadly to all incentive-based compensation, including that held in SERPs, life insurance and long-term disability plans. Companies need to consider how they will calculate amounts to be clawed back and how the recovery process will work.
  
  
• New Contracts. Companies should ensure that new compensation arrangements are clearly subject to the mandatory clawback policy, taking into account state laws. Some companies may consider mandatory deferrals or holding periods similar to what is used in financial services to facilitate clawbacks in the event of a restatement.

The renewed focus on clawbacks comes as the former head of Wells Fargo’s retail bank, Carrie Tolstedt, is facing up to 16 months in prison and a penalty of $17 million for her role in the bank’s fake accounts scandal of 2016. Both Tolstedt and then-CEO John Stumpf had compensation clawed back by the board after the scandal came to light, a move many decried as “too little, too late.”