Over thirteen years after the Dodd–Frank Wall Street Reform and Consumer Protection Act added Section 10D to the Securities Exchange Act of 1934 (the “Exchange Act”), the Securities and Exchange Commission’s (“SEC”) clawback rules became effective on October 2, 2023 (the “Clawback Rules”). Companies listed on national exchanges such as the New York Stock Exchange (“NYSE”) and the Nasdaq Stock Market (“Nasdaq”) will be required to adopt clawback policies by December 1, 2023 and comply with their respective listing standards. Companies, executives and advisors have understandably been grappling with how to ensure compliance with these new Clawback Rules. Below, we address some common questions that we have received.
1. When should a company’s clawback policy be effective? When do companies need to adopt their policies?
Each company must recover all incentive-based compensation received by executive officers on or after the effective date of the applicable Listing Standard. Accordingly, the effective date of the clawback policy should be October 2, 2023 (regardless of when the policy itself is formally adopted).
However, the Clawback Rules allow 60 days following the effective date of the Listing Standards for companies to adopt their clawback polices. This means companies have until December 1, 2023 to adopt a compliant clawback policy.
2. Should the company’s board of directors or its compensation committee adopt the clawback policy?
The Clawback Rules do not address whether the board or the compensation committee should adopt the clawback policy and the answer likely depends on the company’s governance structure and, in particular, what authorities and responsibilities have been delegated to the compensation committee via the compensation committee charter. If clawback-related matters are already detailed in the responsibilities of the compensation committee or if there is broad language in the charter that could be interpreted to cover clawback policies (for example, a provision stating the compensation committee is responsible for all executive officer compensation matters) then the compensation committee can likely adopt the policy independently. If these provisions are not included in the compensation committee charter, then either the compensation committee should recommend approval to the board and the board should subsequently approve the policy, or the board should independently approve the policy and, if applicable, delegate authority to the compensation committee to administer the policy. Companies should review their compensation committee charters to determine whether to include any additional authorities or clarifications of authority as it relates to the clawback policy and administration thereof.
3. Who should administer the clawback policy?
With one exception, the Clawback Rules do not prescribe who needs to administer the clawback policy. Subject to local laws, either the board of directors or a committee designated by the board can administer the policy.
The one exception where the Clawback Rules address the administration of the policy is in the determination of when recovery would be impracticable. In the event of an accounting restatement, companies are required to recover any erroneously awarded compensation “reasonably promptly.” However, there are three limited situations in which the company is exempt from recovering compensation because recovery would be impracticable: (i) the direct expenses paid to a third party to assist in recovering the compensation would exceed the amount of erroneously awarded compensation (the “Direct Expense Impracticability Exception”), (ii) recovery would violate a home country law (the “Home Country Law Impracticability Exception”), or (iii) recovery would violate anti-alienation rules applicable to tax-qualified retirement plans. The Clawback Rules specify that the impracticability determination must be made by a committee of independent directors responsible for executive compensation decisions (e.g., the compensation committee). In the absence of such a committee (which may be relevant to certain foreign private issuers, “controlled companies” where more than 50% of the voting power is held by a single individual, group, or issuer and smaller reporting companies), the determination would need to be made by a majority of the independent directors serving on the board.
We recommend that a company’s compensation committee administer the policy. The compensation committee can consult with other committees (such as the audit committee) and outside advisors when making decisions related to the policy. It is also advisable for the administrator of the policy to authorize and empower any officer or employee of the company to take actions necessary or appropriate to carry out the policy (other than with respect to any recovery under the policy involving such officer or employee), such as filing required disclosures or making filings required by the Listing Standards and assisting with necessary calculations and recovery obligations, where appropriate.
4. Does the Home Country Law Impracticability Exception apply to the home country of the company or the domicile of the executive?
The Clawback Rules provide that the Home Country Law Impracticability Exception only applies to the company’s jurisdiction of incorporation as opposed to the domicile of an executive. However, the SEC explained that to the extent the laws of a jurisdiction other than the company’s place of incorporation would present obstacles to recovery, those obstacles are more appropriately addressed by the discretion inherent in the Direct Expense Impracticability Exception. Thus, for example, a company might be able to argue that in the event the local law of an executive’s domicile prohibits clawback of compensation, attempted recovery would cause the direct expenses paid to a third party to assist in recovering the compensation to likely exceed the amount of erroneously awarded compensation. This will of course be subject to the particular facts and circumstances of the case at hand.
5. For U.S. companies, which executive officers are subject to the clawback policy?
For U.S. companies, the definition of “executive officer” for purposes of the Clawback Rules is modeled after the definition of “officer” under Section 16 of the Exchange Act (“Section 16”). As such, any executive already determined to be an “officer” for purposes of Section 16 would also be subject to the clawback policy.
Notably, the Clawback Rules only require recovery of compensation received by a person after beginning service as an executive officer and if that person served as an executive at any time during the recovery period.
6. For foreign-private issuers (“FPIs”), which executive officers are subject to the clawback policy?
FPIs are exempt from Section 16, and as a result the determination of which executive officers are subject to the clawback policy can be more complex. Beyond the company’s president, principal financial officer, and principal accounting officer (or controller), the question turns on a determination of who at the company is in charge of a “principal” business unit, division, or function and which officers perform “policy-making functions.” These determinations can involve significant judgement calls based on the specific facts and circumstances relevant to a company. For example, the analysis for whether an officer performs policy-making functions is focused on which members of management have decision-making authority on policy matters. Similarly, determining whether an officer of a subsidiary or a divisional officer should be considered an executive officer also requires an analysis of all the facts and circumstances. The factors relevant to this determination are not always readily identifiable, but consist primarily of subjective factors involving the individual’s participation in decisions involving significant corporate policy.
7. Should covered executive officers be identified in the clawback policy?
We generally would not recommend specifically identifying covered executive officers in the clawback policy. The identification of executives not only increases the possibility of administrative errors if the list is not regularly updated, but could also be the basis of a challenge by an individual if they are subject to the Clawback Rules but inadvertently excluded from the policy. Similarly, if an executive officer’s role changes and the list is not updated accordingly, companies risk unintentionally broadening their scope of executives whose compensation is subject to recovery under the Clawback Rules. This is of particular concern for FPIs in light of the potential disconnect between the covered executive officers subject to the clawback policy and those for whom disclosure would be required in the event a clawback is triggered. In such circumstances, if the FPI were to rely on the limited disclosure contemplated by the Clawback Rules and not detail the compliance actions applicable to the full group of covered officers, stakeholders may question why all listed individuals are not addressed, and this may give rise to negative inferences, enhanced scrutiny and/or a practice of overdisclosing.
8. What is considered “incentive-based compensation” for purposes of the clawback policy?
“Incentive-based compensation” for purposes of the Clawback Rules is any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any financial reporting measure. Financial reporting measures consist of (i) stock price, (ii) total shareholder return, (iii) any other measures that are determined and presented in accordance with the accounting principles used in preparing the company’s financial statements, and (iv) any measures derived wholly or in part from these measures, including non-GAAP measures.
Examples of “incentive-based compensation” include: (i) non-equity incentive plan awards earned based wholly or in part on satisfying a financial reporting measure performance goal; (ii) bonuses paid from a “bonus pool,” the size of which is determined based wholly or in part on satisfying a financial reporting measure performance goal; (iii) other cash awards based on satisfaction of a financial reporting measure performance goal; (iv) restricted stock, restricted stock units (“RSUs”), performance share units, stock options, and stock appreciation rights that are granted or vest based wholly or in part on satisfying a financial reporting measure performance goal; and (v) proceeds received upon the sale of shares acquired through an incentive plan that were granted or vested based wholly or in part on satisfying a financial reporting measure performance goal.
On the other hand, annual base salary, purely-discretionary bonuses or compensation that is granted or vests based on (i) length of service to the company; or (ii) satisfying subjective standards (e.g., “demonstrated leadership”) or strategic or operational measures (e.g., consummating a merger or opening a specified number of stores) would not be considered “incentive-based compensation” for purposes of the clawback policy.
We note that companies should carefully evaluate whether specific forms of compensation would potentially be subject to clawback, as the line can be thin between compensation considered to be “granted, earned, or vested in part upon the attainment of any financial reporting measure” and compensation that is discretionary or based on a subjective standard. Companies and their advisors should also be thoughtful as to how they document their processes, procedures and rationale for granting compensation, as the description of the compensation and how it was determined could potentially impact whether the compensation is subject to recovery. In measuring compliance with the Clawback Rules, it is fair to assume that some deference will be given to contemporaneous documentation of what incremental portion of the award the company deemed was tied to the financial reporting measure metric at the time of grant or determination. Accordingly, it may be advisable in documenting grants that are either derivative to financial reporting measure metrics (e.g., a pool that is funded in the aggregate on such metrics but allocated individually based on subjective or discretionary performance) or are blended (i.e., paid based on a combination of metrics, some of which are not financial, or rely on discretion to alter the result achieved solely based on the financial metrics) to clearly discuss the methodology and allocation or weighting the compensation committee contemplated at the time, consider what impact this might have on whether or not the awards (or a portion thereof) would fall within the scope of the Clawback Rules, as well as how such methodologies could impact disclosures relating to such awards. Similarly, where a compensation committee has considered a number of performance factors in determining whether to grant an award (and how much to grant), some of which may relate to financial performance measures in a broader context, the committee should consider how best to document its decision making process in the context of these rules. Having a clear record of methodology at the outset may help to quantify the appropriate amount to recover and preserve maximum flexibility in the event a clawback is triggered and compliance with the Clawback Rules is required.
9. If incentive-based compensation was granted prior to October 2, 2023, does that mean such compensation is not covered by the Clawback Rules?
As mentioned above, the Clawback Rules apply to all incentive-based compensation “received” after October 2, 2023. Thus, the grant date is irrelevant for purposes of the policy. Instead, the relevant date is the date on which the incentive-based compensation is “received” – i.e., the fiscal period during which the applicable financial reporting measure is attained, even if the payment or grant of the compensation occurs before or after the end of that period. In other words, if a grant of an award is based, either wholly or in part, on satisfaction of a financial reporting measure performance goal, the award would be deemed received in the fiscal period when that measure was satisfied as opposed to when the award was granted. Accordingly, incentive-based compensation that is the subject of a compensation contract or arrangement that existed prior to October 2, 2023 that was not “received” until after such date would therefore be subject to recovery.
Additionally, as indicated above, the Clawback Rules only require recovery of compensation received by a person after beginning service as an executive officer. However, it is important to note that while recovery of compensation “received” by an individual prior to becoming an executive officer is not required under the Clawback Rules, an award of incentive-based compensation granted to an individual before the individual becomes an executive officer will be subject to recovery if such compensation was “received” by the individual at any time during the performance period after beginning service as an executive officer.
For example, if in December 2022 an executive officer was granted performance-related RSUs (“PRSUs”) that vest based on 2023 revenue goals, the PRSUs would be subject to clawback despite being granted before October 2, 2023. This is because the PRSUs vest based upon the achievement of a 2023 financial reporting measure and would be deemed received after October 2, 2023.
On the other hand, if a company promised an executive a cash bonus in 2021 that depended on the company’s achievement of specified year-end revenue goals for 2022 and those goals are met, then even if the cash bonus is not paid to the executive until after October 2, 2023, it would not be subject to clawback as it would be deemed received at the end of 2022 for purposes of the Clawback Rules.
10. Should clawback policies include an acknowledgement for executives to sign? What other steps should a company take to ensure its clawback policy is enforceable?
With delisting from the NYSE or Nasdaq at stake for failure to recover compensation “reasonably promptly,” it is important for companies to take steps to ensure their clawback policies are enforceable. The SEC has indicated that inconsistency between its rules and any existing compensation contracts would not be an excuse for failure to recover and noted that companies have had ample notice of the statutory mandate for the SEC’s adoption of the Clawback Rules. Accordingly, it would be advisable for companies to require executive officers subject to the clawback policy to sign a form acknowledging and accepting the terms of the policy. Additionally, we recommend incorporating the terms of the clawback policy into future employment or equity award agreements for covered executives.
These steps are especially important after a recent case involving the enforcement of a clawback policy, Hertz Corp. v. Frissora, emphasized the need to follow contract law principles in addition to having a policy in place in order for a company to be able to claw back compensation. In other words, adopting the policy may not be enough – and thus we believe it is advisable for companies to have executives review the policy and acknowledge and accept the terms of the policy via execution of an acknowledgement form. Such an acknowledgement form could include terms providing (i) that the policy applies to all incentive-based compensation, including any previously granted awards that fall within the scope of the rules and amends any pre-existing employment or equity-award agreement between the executive and company to the extent necessary to give effect thereto; (ii) that the executive will return any erroneously awarded compensation reasonably promptly and waive any right that would conflict with the company’s right to recover; and (iii) that the administrator can recover the amount of erroneously awarded compensation through any method of recovery it deems appropriate (including through offsetting against any compensation payable to the executive officer). We note that if companies choose to implement an acknowledgement process, they should carefully review any subsequent award documentation and related agreements to ensure that any language stating that the contract represents the entire agreement between the parties or supersedes pre-existing agreements does not inadvertently weaken the clawback acknowledgement.
11. If a company has an existing clawback policy in place, should it revise the existing policy to comply with the Clawback Rules or draft a new clawback policy?
Whether a company decides to revise an existing clawback policy to be compliant with the Clawback Rules or drafts a new clawback policy depends on the specific facts and circumstances. Relevant factors include the scope of the existing policy, including the executive or employee population subject to the policy, the type of compensation subject to clawback (i.e., whether time-based compensation is subject to recovery), whether misconduct and other non-accounting restatement events trigger the policy and the level of discretion the company has in administering the existing policy. We have found that clients have generally tended to adopt a standalone clawback policy that is narrowly focused on compliance with the requirements of the Clawback Rules, which can then be publicly disclosed to comply with the listing standards, while at the same time maintaining any pre-existing clawback policies (which are likely to materially differ from the Clawback Rules) until such time as the compensation committee can do a holistic review of its broader clawback policies and determine if and how such policies may be amended in light of the Clawback Rules.
12. Do companies need to post their clawback policies on their website?
Companies need to file their clawback policy as an exhibit to the annual report on Form 10-K, 20-F or 40-F, as applicable. There is no requirement in the Clawback Rules for a company to post the clawback policy on its website.
13. Do companies need to take any steps to affirm adoption of a clawback policy with the relevant listing exchange?
On September 8, 2023, the NYSE emailed companies listed on its exchange to indicate that by no later than December 31, 2023, each listed company will be required to confirm, via Listing Manager, either (i) its adoption of a clawback policy by December 1, 2023 or (ii) its reliance on an applicable exemption. In addition, NYSE-listed companies submitting initial applications for securities to be listed on or after October 2, 2023 will be required to confirm the adoption of a clawback policy as part of its listing application in Listing Manager.
We have confirmed with the NYSE that this function is not yet available on Listing Manager and the NYSE will send a subsequent communication in the fourth quarter of 2023 with further details on this affirmation process.
We have not yet heard of any similar requirements for Nasdaq-listed companies.
* * *
We will continue to monitor and report on any developments relating to the Clawback Rules, in particular if we see the SEC or the exchanges developing and publishing additional interpretative guidance. We also are happy to assist with drafting or reviewing clawback polices to ensure compliance with the Clawback Rules and answering any related questions. We note that there are many other complex clawback-related questions that depend on specific facts and circumstances that are not addressed in this post, but please contact any of the authors or your regular Cleary Gottlieb contacts for further discussion or if you have questions.
This message was prepared as a service to clients and other friends of Cleary Gottlieb to report on recent developments that may be of interest to them. The information in it is therefore general, and should not be considered or relied on as legal advice.
 See 229 C.F.R. §240.10D-1.
 This includes Section 303A.14 of the NYSE Listed Company Manual and Nasdaq Listing Rule 5608 (collectively, the “Listing Standards”).
 See Question 9 below for more discussion regarding incentive-based compensation that was granted prior to October 2, 2023.
 229 C.F.R. §240.10D-1(a)(2). As used herein, references to a “clawback policy” or the “policy” mean a clawback policy that is adopted by a company for purposes of complying with Rule 10D-1 under the Exchange Act and the Listing Standards.
 229 C.F.R. §240.10D-1(b)(1)(i).
 Such law must have been adopted prior to November 28, 2022. See Question 4 below for more discussion regarding the Home Country Law Impracticability Exception.
 229 C.F.R. §240.10D-1(b)(1)(iv).
 The Clawback Rules define an executive officer as follows: “An executive officer is the issuer’s president, principal financial officer, principal accounting officer (or if there is no such accounting officer, the controller), any vice-president of the issuer 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 issuer. Executive officers of the issuer’s parent(s) or subsidiaries are deemed executive officers of the issuer if they perform such policy making functions for the issuer. In addition, when the issuer is a limited partnership, officers or employees of the general partner(s) who perform policy-making functions for the limited partnership are deemed officers of the limited partnership. When the issuer is a trust, officers, or employees of the trustee(s) who perform policy-making functions for the trust are deemed officers of the trust. Policy-making function is not intended to include policy-making functions that are not significant. Identification of an executive officer for purposes of this section would include at a minimum executive officers identified pursuant to 17 C.F.R. §229.401(b).” 229 C.F.R. §240.10D-1(d).
 The Clawback Rules state that identification of executive officers includes “at a minimum” those executives identified pursuant to 17 C.F.R. §229.401(b). See supra note 11. This suggests that if a company includes an executive whose role is not otherwise specified in 17 C.F.R. §229.401(b), including inadvertently by virtue of failing to update the list, the company could be deemed to have adopted a broader scope of individuals whose compensation would be subject to recovery under the Clawback Rules.
 See SEC Compliance & Disclosure Interpretation 121H.02.
 229 C.F.R. §240.10D-1(d).
 Examples of financial reporting measures include revenues, net income, operating income, EBITDA, liquidity measures such as working capital or operating cash flow, earnings measures, sales per square foot or same store sales, and cost per employee. See Release at 59-60.
 Release at 64.
 Release at 64-65.
 229 C.F.R. §240.10D-1(d). Ministerial acts or other conditions necessary to effect payment, such as calculating the amount earned or obtaining approval from the board of directors also do not affect determination of the date received. Release at 69.
 Release at 68. Similarly, if an equity award vests only upon satisfaction of a financial reporting measure performance condition, the award would be deemed received in the fiscal period when it vests. Additionally, a non-equity incentive plan or cash award would be deemed received in the fiscal year that the executive officer earns the award based on satisfaction of the relevant financial reporting measure performance goal, rather than a subsequent date on which the award was paid. Id.
 Release at 53.
 This example assumes a fiscal year that follows the calendar year.
 Release at 88.
 Companies should still note in their clawback policies that the policy shall still apply to, and be enforceable against, any executive officer regardless of whether or not such executive officer properly signs such a form.
 See Hertz Corp. v. Frissora, 2:19-cv-08927, 2023 U.S. Dist. LEXIS 109846 (D.N.J. June 26, 2023). We note that the case is an unpublished federal district court opinion and would not be binding on companies. However, while the case does not create a binding precedent, it is possible that other courts will follow this approach and it gives a view as to how a judge may rule when it comes to the enforceability of a clawback policy.