February 6, 2023
Dodd-Frank Clawback Rules: The Great Checkbox Debate of 2023
Recently, the Corp Fin Staff issued a series of Compliance & Disclosure Interpretations to address some of the open questions on the Dodd-Frank clawback rules. Dave blogged last week on TheCorporateCounsel.net about each topic:
– Exchange Act Rule CDI 121H.01 – Dave wrote that, just in the nick of time, the Staff has clarified that “while the check boxes and other disclosure requirements will be in the rules and forms in 2023, we do not expect issuers to provide such disclosure until they are required to have a recovery policy under the applicable listing standard.”
Many interpret this CDI to mean that you are not required to mark the checkboxes, but you still need to put the text of them on the cover page – to match the new version of Form 10-K that’s posted on SEC.gov. However, there’s a concern among some practitioners that it could be misleading (particularly for the first checkbox) to put the text on the cover page and not mark the box if there had been a restatement. So, does the Staff want companies to put the text of both checkboxes on the cover page and include a note to say that it’s not applicable to this Form 10-K? Or not include them at all, despite the Form?
By the end of the Northwestern Pritzker School of Law’s Securities Regulation Institute last week, this issue earned its own name: “The Great Checkbox Debate of 2023.” Despite what some folks apparently heard or wanted to hear, Corp Fin Director Erik Gerding did not publicly give a response beyond what was in the CDI. We hope that the Staff is able to clear this up with further guidance – but as I blogged last week, they are not going to be making Enforcement referrals on foot-faults. This is a fleeting issue and it’s probably not worth getting too worked up about it.
– Exchange Act Rule CDIs 121H.02 and 121H.03 (as well as Exchange Act Forms CDIs 110.08 and 112.03) – As Dave blogged, these CDIs address how the term “named executive officer” is to be interpreted for foreign private issuers filing on Forms 20-F and 40-F, given that foreign private issuers do not provide disclosure under Item 402 of Regulation S-K, which includes the definition of “named executive officer.” This interpretation will come into play when a company completes the financial restatement that triggered the company’s clawback policy and needs to provide related disclosure about recovery of erroneously awarded compensation from NEOs.
– Exchange Act Rules CDI 121H.04 – This CDI says that the clawback rule is intended to apply broadly. Your Rule 10D-1-compliant clawback policy could reach compensation in compensation plans other than tax-qualified retirement plans – such as long term disability, life insurance, SERPs, or any other compensation that is based on the incentive-based compensation. See Dave’s blog for more detail.
– Liz Dunshee