The Advisors' Blog

We’ve posted the transcript for our recent webcast – “SEC Clawback Rules: What to Do Now.”  Our panelists covered a variety of topics associated with the looming clawback listing standards.  Here’s an excerpt from Ariane Andrade’s review of the disclosure requirements that will come into play once an issuer has adopted a compliant clawback policy:

The disclosure requirements affect the annual report on Form 10-K and proxy and information statements where the issuer has to report the information that’s required by Item 402 of Regulation S-K. The new rule requires that the exchange listing standards include a requirement that listed issuers have to disclose their policies. We would expect that a failure to comply would prompt the commencement of delisting proceedings by the applicable exchange.

First, on the annual report in 10-K, the policy itself will have to be filed as an exhibit to the 10-K, and then there will be two new boxes to check on the cover page of Forms 10-K, 20-F and 40-F to indicate if the financial statements that are covered by the filing reflect the correction of an error to previously issued financials, and whether those corrections were restatements that required recovery. The SEC justifies this by saying that the check boxes will provide greater transparency, in particular around “little r” restatements, and they’ll allow investors to more easily identify which restatements triggered a compensation recovery analysis.

The new rule also amends Item 402 of Regulation S-K and Forms 40-F and 20-F to require listed issuers to disclose how they have applied their recovery policies. First, there’s a new instruction to the Summary Compensation Table that requires that any amounts that are recovered pursuant to a clawback policy have to reduce the amount that’s reported in that applicable column in the table, as well as the total column for the fiscal year in which the amount recovered initially was reported. Any of those adjustments have to be identified in a footnote to the table, as well.

Then, there’s new Item 402(w) that kicks in if at any time during or after the last completed fiscal year, the issuer had to prepare an accounting restatement that required recovery of erroneously awarded compensation pursuant to the clawback policy, or if there was an outstanding balance as of the end of the last completed fiscal year of erroneously awarded compensation to be recovered as a result of a prior restatement, then that requires certain disclosure of information pursuant to Item 402.

– John Jenkins