New rules introduced to stop incorrect executive payouts

October 28, 2022

New rules aimed at preventing executives from wrongly keeping payouts based on inaccurate financial statements have been introduced by the Securities and Exchange Commission (SEC).

Securities exchanges will be required to adopt listing standards that require issuers to have a policy for the recovery of erroneously awarded incentive-based compensation paid to current or former company chiefs.

The policy will have to be clearly laid out in annual reports and disclose any recovery-related activity.

SEC Chair Gary Gensler said: “I believe these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors.

“Through today’s action and working with the exchanges, we have the opportunity to fulfil Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials.”

SEC proposed the new rules in 2015 and they were opened up to consultation in 2021 and 2022.

They will implement Section 10D of the Securities Exchange Act of 1934, a provision added by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

They will require a listed issue to:

• adopt and comply with a written policy for recovery of erroneously awarded incentive-based compensation received by current or former executive officers
• where necessary, prepare an accounting restatement due to its material noncompliance with any financial reporting requirement under the securities laws, during the three completed fiscal years immediately preceding the date that the issuer is required to prepare an accounting restatement
• disclose those compensation recovery policies in accordance with SEC rules, including providing the information in tagged data format

With regards to recovery activity, they will be required to:

• file their written recovery policies as exhibits to their annual reports
• indicate by check boxes on their annual reports whether the financial statements included in the filings reflect correction of an error to previously issued financial statements and whether any of those error corrections are restatements that required a recovery analysis
• disclose any actions they have taken pursuant to such recovery policies