[Federal Register Volume 80, Number 134 (Tuesday, July 14, 2015)]
[Proposed Rules]
[Pages 41144-41196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16613]



[[Page 41143]]

Vol. 80

Tuesday,

No. 134

July 14, 2015

Part II





Securities and Exchange Commission





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17 CFR Parts 229, 240, 249, et al.





Listing Standards for Recovery of Erroneously Awarded Compensation; 
Proposed Rule

  Federal Register / Vol. 80 , No. 134 / Tuesday, July 14, 2015 / 
Proposed Rules  

[[Page 41144]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 240, 249, and 274

[RELEASE NOS. 33-9861; 34-75342; IC-31702; File No. S7-12-15]
RIN 3235-AK99


Listing Standards for Recovery of Erroneously Awarded 
Compensation

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing a new rule and rule and form amendments to 
implement the provisions of Section 954 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010, which added Section 10D to 
the Securities Exchange Act of 1934. Section 10D requires the 
Commission to adopt rules directing the national securities exchanges 
and national securities associations to prohibit the listing of any 
security of an issuer that is not in compliance with Section 10D's 
requirements for disclosure of the issuer's policy on incentive-based 
compensation and recovery of incentive-based compensation that is 
received in excess of what would have been received under an accounting 
restatement. The proposed rule and rule amendments would direct the 
national securities exchanges and national securities associations to 
establish listing standards that would require each issuer to develop 
and implement a policy providing for the recovery, under certain 
circumstances, of incentive-based compensation based on financial 
information required to be reported under the securities laws that is 
received by current or former executive officers, and require the 
disclosure of the policy. A listed issuer would be required to file the 
policy as an exhibit to its annual report.

DATES: Comments should be received on or before September 14, 2015.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to [email protected]; or
     Use the Federal Rulemaking ePortal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary, U.S. 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090.

All submissions should refer to File Number S7-12-15. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change; we do 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the SEC's Web site. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Anne Krauskopf, Senior Special 
Counsel, or Carolyn Sherman, Special Counsel at (202) 551-3500, in the 
Office of Chief Counsel, Division of Corporation Finance, or Joel K. 
Levine, Associate Chief Accountant at (202) 551-3400, in the Office of 
Chief Accountant, Division of Corporation Finance, U.S. Securities and 
Exchange Commission, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing to add new Rule 10D-1 \1\ 
under the Securities Exchange Act of 1934.\2\ We also are proposing 
amendments to Items 402,\3\ 404 \4\ and 601 \5\ of Regulation S-K,\6\ 
Item 22 of Schedule 14A,\7\ Exchange Act Forms 20-F \8\ and 40-F,\9\ 
and Form N-CSR \10\ under the Exchange Act and the Investment Company 
Act of 1940.\11\
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    \1\ 17 CFR 240.10D-1.
    \2\ 15 U.S.C. 78a et seq.
    \3\ 17 CFR 229.402.
    \4\ 17 CFR 229.404.
    \5\ 17 CFR 229.601.
    \6\ 17 CFR 229.10 et seq.
    \7\ 17 CFR 240.14a-101.
    \8\ 17 CFR 249.220f.
    \9\ 17 CFR 249.240f.
    \10\ 17 CFR 249.331 and 274.128.
    \11\ 15 U.S.C. 80a-1 et seq.
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Table of Contents

 
 
 
I. Background and Summary..................................            7
II. Discussion of the Proposals............................           10
    A. Issuers and Securities Subject to Proposed Exchange            11
     Act Rule 10D-1........................................
        1. General.........................................           11
        2. Securities Futures Products and Standardized               17
         Options...........................................
        3. Registered Investment Companies.................           20
    B. Restatements........................................           23
        1. Restatements Triggering Application of Recovery            23
         Policy............................................
        2. Date the Issuer Is Required to Prepare an                  28
         Accounting Restatement............................
    C. Application of Recovery Policy......................           33
        1. Executive Officers Subject to Recovery Policy...           33
        2. Incentive-Based Compensation....................           39
            a. Incentive-Based Compensation Subject to                39
             Recovery Policy...............................
            b. Time Period Covered by Recovery Policy......           51
            c. When Incentive-Based Compensation Is                   54
             ``Received''..................................
        3. Recovery Process................................           58
            a. Determination of Excess Compensation........           58
            b. Board Discretion Regarding Whether to Seek             67
             Recovery......................................
            c. Board Discretion Regarding Manner of                   73
             Recovery......................................
            i. Amount to Be Recovered......................           74
            ii. Means of Recovery..........................           75
 


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        4. Compliance with Recovery Policy.................           79
    D. Disclosure of Issuer Policy on Incentive-Based                 80
     Compensation..........................................
        1. Listed U.S. Issuers.............................           83
        2. Listed Foreign Issuers..........................           88
    E. Indemnification and Insurance.......................           95
    F. Transition and Timing...............................           99
III. Economic Analysis.....................................          103
    A. Baseline............................................          105
    B. Analysis of Potential Economic Effects..............          114
        1. Potential Effects on Financial Reporting........          115
        2. Potential Effects on Executive Compensation.....          122
        3. Additional Potential Effects on Listed Issuers..          133
        4. Potential Effects on U.S. Exchanges.............          140
        5. Indemnification and Insurance...................          142
    C. Alternatives........................................          144
        1. Exemptions for Certain Categories of Issuers....          144
        2. Excluding Incentive-Based Compensation Tied to            145
         Stock Price.......................................
        3. Other Alternatives Considered...................          147
    D. Request for Comment.................................          149
IV. Paperwork Reduction Act................................          151
    A. Background..........................................          151
    B. Summary of Proposed Rule and Rule Amendments........          153
    C. Paperwork Reduction Act Burden Estimates............          156
    D. Solicitation of Comments............................          161
V. Small Business Regulatory Enforcement Fairness Act......          162
VI. Initial Regulatory Flexibility Act Analysis............          163
    A. Reasons for, and Objectives of, the Proposed Action.          163
    B. Legal Basis.........................................          164
    C. Small Entities Subject to the Proposed Action.......          164
    D. Reporting, Recordkeeping, and other Compliance                166
     Requirements..........................................
    E. Duplicative, Overlapping or Conflicting Federal               169
     Rules.................................................
    F. Significant Alternatives............................          169
    G. Solicitation of Comments............................          171
VII. Statutory Authority and Text of the Proposed                    172
 Amendments................................................
 

I. Background and Summary

    We are proposing a new rule, and rule and form amendments to 
implement the provisions of Section 954 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010 (the ``Act''),\12\ which 
added Section 10D to the Securities Exchange Act of 1934 (the 
``Exchange Act''). Specifically, Section 10D(a) of the Exchange Act 
requires the Commission to adopt rules directing the national 
securities exchanges \13\ (the ``exchanges'') and the national 
securities associations \14\ (the ``associations'') to prohibit the 
listing of any security of an issuer that is not in compliance with the 
requirements of Section 10D(b). Section 10D(b) requires the Commission 
to adopt rules directing the exchanges to establish listing standards 
to require each issuer to develop and implement a policy providing:
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    \12\ Public Law 111-203, 124 Stat. 1900 (2010).
    \13\ A ``national securities exchange'' is an exchange 
registered as such under Section 6 of the Exchange Act [15 U.S.C. 
78f]. There are currently eighteen exchanges registered under 
Section 6(a) of the Exchange Act: BATS Exchange, BATS Y-Exchange, 
BOX Options Exchange, C2 Options Exchange, Chicago Board Options 
Exchange, Chicago Stock Exchange, EDGA Exchange, EDGX Exchange, 
International Securities Exchange (``ISE''), ISE Gemini, Miami 
International Securities Exchange, NASDAQ OMX BX, NASDAQ OMX PHLX, 
The NASDAQ Stock Market, National Stock Exchange, New York Stock 
Exchange (``NYSE''), NYSE Arca and NYSE MKT. Certain exchanges are 
registered with the Commission through a notice filing under Section 
6(g) of the Exchange Act for the purpose of trading security 
futures. As discussed in Section II.A.2, below, we propose to exempt 
security futures products and standardized options from the scope of 
the proposed rule. To the extent that our final rule exempts the 
listing of security futures products and standardized options from 
its scope, any registered national securities exchange that lists 
and trades only security futures products or standardized options 
would not be required to file a rule change in order to comply.
    \14\ A ``national securities association'' is an association of 
brokers and dealers registered as such under Section 15A of the 
Exchange Act [15 U.S.C. 78o-3]. The Financial Industry Regulatory 
Authority (``FINRA'') is the only association registered with the 
Commission under section 15A(a) of the Exchange Act. Because FINRA 
does not list securities, generally we refer only to the exchanges 
in this release. However, if any associations were to list 
securities, the rule proposals would apply to them also.
    In addition, Section 15A(k) of the Exchange Act (15 U.S.C. 78o-
3(k) provides that a futures association registered under Section 17 
of the Commodity Exchange Act (7 U.S.C. 21) shall be registered as 
an association for the limited purpose of regulating the activities 
of members who are registered as broker-dealers in security futures 
products pursuant to Section 15(b)(11) of the Exchange Act (15 
U.S.C. 78o(b)(11)).
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    (1) For the disclosure of the issuer's policy on incentive-based 
compensation that is based on financial information required to be 
reported under the securities laws; and
    (2) that, in the event that the issuer is required to prepare an 
accounting restatement due to the issuer's material noncompliance with 
any financial reporting requirement under the securities laws, the 
issuer will recover from any of the issuer's current or former 
executive officers who received incentive-based compensation (including 
stock options awarded as compensation) during the three-year period 
preceding the date the issuer is required to prepare the accounting 
restatement, based on the erroneous data, in excess of what would have 
been paid to the executive officer under the accounting restatement.
    Other statutes and rules currently administered by the Commission 
also address the recovery of executive compensation:
     Section 304 of the Sarbanes-Oxley Act of 2002 (``SOX'') 
\15\ provides that if an issuer is required to prepare an accounting 
restatement due to the material noncompliance of the issuer, as a 
result of misconduct,\16\ with any financial reporting requirements 
under the securities laws, the chief executive officer and chief 
financial officer of the issuer shall reimburse the issuer for any 
bonus or other incentive-based or equity-based compensation received by

[[Page 41146]]

that person from the issuer during the 12-month period following the 
first public issuance or filing with the Commission (whichever first 
occurs) of the financial document embodying such financial reporting 
requirement; and any profits realized from the sale of securities of 
the issuer during that 12-month period; and
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    \15\ 15 U.S.C. 7243.
    \16\ The CEO or CFO need not personally engage in misconduct for 
recovery to be required under Section 304. See SEC v. Jenkins, 718 
F.Supp. 2d 1070, 1074-75 (D. Ariz. 2010) (``[T]he misconduct of the 
issuer is the misconduct that triggers the reimbursement obligation 
of the CEO and the CFO.''); SEC v. Baker, 2012 U.S. Dist. LEXIS 
161784 (W.D. Tex 2012).
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     Item 402(b) of Regulation S-K includes, as an example of 
the kind of information that should be addressed, if material, in the 
company's Compensation Discussion and Analysis (``CD&A''), company 
policies and decisions regarding the adjustment or recovery of awards 
or payments to named executive officers \17\ if the relevant company 
performance measures upon which they are based are restated or 
otherwise adjusted in a manner that would reduce the size of an award 
or payment.\18\
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    \17\ As defined in Item 402(a)(3) of Regulation S-K, ``named 
executive officers'' are all individuals serving as the company's 
principal executive officer during the last completed fiscal year, 
all individuals serving as the company's principal financial officer 
during that fiscal year, the company's three other most highly 
compensated executive officers who were serving as executive 
officers at the end of that year, and up to two additional 
individuals who would have been among the three most highly 
compensated but for not serving as executive officers at the end of 
that year.
    \18\ Item 402(b)(2)(viii). Item 402(b) contains the requirements 
for CD&A, which is intended to be a narrative overview that puts 
into context the executive compensation disclosure provided in 
response to the other requirements of Item 402. The CD&A disclosure 
requirement is principles-based, in that it identifies the 
disclosure concept and provides several non-exclusive examples. 
Under Item 402(b)(1), companies must explain all material elements 
of their named executive officers' compensation by addressing 
mandatory principles-based topics in CD&A. Item 402(b)(2) sets forth 
nonexclusive examples of the kind of information that should be 
addressed in CD&A, if material.
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    The proposed rule and rule amendments would supplement these 
existing provisions by directing the exchanges to establish listing 
standards that require listed issuers to:
     Adopt and comply with written policies for recovery of 
incentive-based compensation based on financial information required to 
be reported under the securities laws, applicable to the listed 
issuers' executive officers, over a period of three years; and
     disclose those recovery policies in accordance with 
Commission rules.
    To assure that issuers listed on different exchanges are subject to 
the same disclosure requirements regarding compensation recovery 
policies, we are proposing amendments to the disclosure rules that 
would require all issuers listed on any exchange to file their written 
recovery policy as an exhibit to their annual reports and, if they have 
taken actions pursuant to that policy, to disclose those actions.
    Under the proposed rule and rule amendments, an issuer would be 
subject to delisting if it does not:
     Adopt a compensation recovery policy that complies with 
the applicable listing standard;
     disclose the policy in accordance with Commission rules, 
including providing the information in tagged data format; or
     comply with the policy's recovery provisions.

Listed issuers could, of course, adopt policies more extensive than 
those called for by the listing standards, so long as those policies at 
a minimum satisfied the listing standards, and exchanges and 
associations could adopt listing standards with requirements that are 
more extensive than those of proposed Rule 10D-1.

II. Discussion of the Proposals

    We are proposing new Exchange Act Rule 10D-1 to set forth the 
listing requirements that exchanges would be directed to establish 
pursuant to Section 10D of the Exchange Act. We also are proposing rule 
amendments to Regulation S-K, to the forms by which foreign private 
issuers file their Exchange Act annual reports, and for certain 
investment companies, to Form N-CSR and Schedule 14A. These amendments 
would require disclosure of the listed issuer's policy on recovery of 
incentive-based compensation and information about actions taken 
pursuant to such recovery policy. In developing these proposals, we 
considered the comment letters we received on Section 10D pursuant to 
our initiative to receive advance public comment in implementing the 
Act.\19\
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    \19\ In connection with all of the Dodd-Frank Act rulemakings, 
we sought comment from the public prior to the issuance of a 
proposing release. Comments related to the executive compensation 
provisions of the Dodd-Frank Act are available at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml. Regarding Section 10D, we received pre-proposal 
letters from AFL-CIO, Americans for Financial Reform, As You Sow, 
Center for Effective Government, Demos, Institute for Policy 
Studies/Global Economy Project, International Brotherhood of 
Teamsters, Other98.org, Public Citizen and Service Employees 
International Union (``AFL-CIO Joint Letter''); American Benefits 
Council; Baker, Donelson, Bearman, Caldwell & Berkowitz, PC; Brian 
Foley & Company, Inc.; Center on Executive Compensation; Clark 
Consulting, LLC; Committee on Federal Regulation of Securities of 
the Section of Business Law of the American Bar Association (``ABA 
Business Law Section''); Compensia, Inc.; Davis Polk & Wardwell LLP; 
Frederic W. Cook & Co., Inc.; Mai Datta, Ph.D., Professor of 
Finance, Wayne State University; Stuart R. Lombardi; Meridian 
Compensation Partners, LLC; PGGM Investments; Pay Governance LLC; 
Protective Life Corporation; Robert E. Scully Jr., Member, Stites 
Harbison, PLLC; Society of Corporate Secretaries and Governance 
Professionals; Towers Watson; and Sheila Waddell.
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A. Issuers and Securities Subject to Proposed Exchange Act Rule 10D-1

1. General
    Section 10D of the Exchange Act provides that the Commission shall, 
by rule, direct the exchanges ``to prohibit the listing of any security 
of an issuer that does not comply with the requirements of [Section 
10D].'' Commenters raised questions as to whether the rule should apply 
to all issuers with listed securities, such as foreign private issuers 
\20\ and issuers of listed debt whose stock is not also listed.\21\
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    \20\ See letters from ABA Business Law Section (noting that 
foreign private issuers are not required to comply with the proxy 
rules or Item 402 executive compensation disclosure, and that home 
countries may have a greater interest in determining whether 
companies should have recourse against their executives) and Brian 
Foley & Company, Inc. (seeking clarification whether Section 954 
applies to foreign private issuers).
    \21\ See letter from Brian Foley & Company, Inc.
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    For the reasons discussed below, the rule and rule amendments we 
propose would require exchanges to apply the disclosure and recovery 
policy requirements to all listed issuers, with only limited 
exceptions. As a preliminary matter, we read the language of Section 
10D as generally calling for a broad application of the mandated 
listing standards. Section 10D does not distinguish among issuers or 
types of securities, and does not specifically instruct the Commission 
to exempt any particular types of issuers or securities or direct the 
Commission to permit the exchanges to provide such exemptions in 
listing them.\22\ We recognize, however, that we could use our general 
exemptive authority under the Exchange Act \23\ to exempt specific 
categories of issuers or securities to the extent that doing so would 
be necessary or appropriate in the public interest and consistent with 
the protection of investors. In evaluating whether to exempt specific 
categories of issuers and securities, though, we have considered 
whether providing exemptions from the requirements of Section 10D would 
be

[[Page 41147]]

consistent with what we understand to be the purpose of this statutory 
provision. In this regard, we note that a report by the Senate 
Committee on Banking, Housing and Urban Affairs stated that ``[t]his 
proposal will clarify that all issuers must have a policy in place to 
recover compensation based on inaccurate accounting so that 
shareholders do not have to embark on costly legal expenses to recoup 
their losses or so that executives must return monies that should 
belong to the shareholders.'' \24\ As discussed below, we propose to 
exempt security futures products, standardized options, and the 
securities of certain registered investment companies from the proposed 
listing standards because we believe the compensation structures of 
issuers of these securities render application of the rule and rule 
amendments unnecessary.\25\ We are not proposing otherwise to exempt 
categories of listed issuers, such as emerging growth companies,\26\ 
smaller reporting companies,\27\ foreign private issuers,\28\ and 
controlled companies,\29\ because we believe the objective of 
recovering excess incentive-based compensation is as relevant for these 
categories of listed issuers as for any other listed issuer. In 
reaching this conclusion, we also considered the relative burdens of 
compliance on these categories of issuers. As discussed more fully in 
the Economic Analysis, while we recognize that the proposed listing 
standards could, in certain respects, impose a disproportionate burden 
on these categories of issuers, there is also reason to believe that 
these issuers, as well as investors and the markets in general, may 
derive benefits from being subject to the proposed listing 
standards.\30\
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    \22\ In this regard, Section 10D differs from the Act's other 
governance-related provisions, such as Section 951 Shareholder Vote 
on Executive Compensation Disclosure (amending the Exchange Act to 
add Section 14A) and Section 952 Compensation Committee Independence 
(amending the Exchange Act to add Section 10C), which include 
specific direction for either the Commission or the exchanges to 
consider exemptions for classes of issuers, or to provide 
exemptions. Additionally, Section 951 instructs the Commission to 
take into account whether Section 951's requirements 
disproportionately burden small issuers.
    \23\ Section 36(a) of the Exchange Act (15 U.S.C. 78mm(a)).
    \24\ See Report of the Senate Committee on Banking, Housing, and 
Urban Affairs, S.3217, Report No. 111-176 at 135-36 (April 30, 2010) 
(``Senate Report'').
    \25\ See Sections II.A.2 and 3, below.
    \26\ Section 2(a)(19) of the Securities Act of 1933 (the 
``Securities Act'') and Exchange Act Section 3(a)(80) define 
``emerging growth company'' as ``an issuer that had total annual 
gross revenues of less than $1,000,000,000 . . . during its most 
recently completed fiscal year.'' An issuer shall continue to be 
deemed an emerging growth company until the earliest of (1) the last 
day of the fiscal year during which it had total annual gross 
revenues of $1 billion; (2) the last day of the fiscal year 
following the fifth anniversary of the first sale of its common 
equity securities; (3) the date on which it has issued more than $1 
billion in non-convertible date during the previous three years; or 
(4) the date on which it is deemed a large accelerated filer.
    \27\ Exchange Act Rule 12b-2 defines ``smaller reporting 
company'' as ``an issuer that is not an investment company, an 
asset-backed issuer . . ., or a majority-owned subsidiary of a 
parent that is not a smaller reporting company and that: (1) Had a 
public float of less than $75 million as of the last business day of 
its most recently completed second fiscal quarter, computed by 
multiplying the aggregate worldwide number of shares of its voting 
and non-voting common equity held by non-affiliates by the price at 
which the common equity was last sold, or the average of the bid and 
asked prices of common equity, in the principal market for the 
common equity; or (2) in the case of an initial registration 
statement under the Securities Act or Exchange Act for shares of its 
common equity, had a public float of less than $75 million as of a 
date within 30 days of the date of the filing of the registration 
statement, computed by multiplying the aggregate worldwide number of 
such shares held by non-affiliates before the registration plus, in 
the case of a Securities Act registration statement, the number of 
such shares included in the registration statement by the estimated 
public offering price of the shares; or (3) in the case of an issuer 
whose public float as calculated under paragraph (1) or (2) of this 
definition was zero, had annual revenues of less than $50 million 
during the most recently completed fiscal year for which audited 
financial statements are available.'' Whether or not an issuer is a 
smaller reporting company is determined on an annual basis.
    \28\ Exchange Act Rule 3b-4(c) defines ``foreign private 
issuer'' as ``any foreign issuer other than a foreign government 
except for an issuer meeting the following conditions as of the last 
business day of its most recently completed second fiscal quarter: 
(1) More than 50 percent of the issuer's outstanding voting 
securities are directly or indirectly held of record by residents of 
the United States; and (2) (i) the majority of the executive 
officers or directors are United States citizens or residents, (ii) 
more than 50 percent of the assets of the issuer are located in the 
United States, or (iii) the business of the issuer is administered 
principally in the United States.'' Exchange Act Rule 3b-4(b) 
defines ``foreign issuer'' as ``any issuer which is a foreign 
government, a national of any foreign country or a corporation or 
other organization incorporated or organized under the laws of any 
foreign country.''
    \29\ Under New York Stock Exchange Rule 303A.00 and NASDAQ Stock 
Market LLC Rule 5615(c) a ``controlled compan[y]'' is defined as a 
company of which more than 50% of the voting power for the election 
of directors is held by an individual, group or another company.
    \30\ See Section III, below.
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    In our determination of whether to propose exemptions for foreign 
private issuers we considered the views of commenters that submitted 
comments before this proposal \31\ as well as the incidence of 
restatements among this category of listed issuers. We are aware of 
studies that indicate that these issuers, from time to time, restate 
their financial statements to correct accounting errors.\32\ For 
example, during 2012 and 2013 foreign private issuers, which are 
approximately 10 percent of all registrants, accounted for over 10 
percent of all restatements.\33\
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    \31\ See letters from Brian Foley & Company, Inc. (seeking 
clarification of whether Section 954 would apply to foreign private 
issuers and listed debt where the issuer's equity is not listed); 
ABA Business Law Section(recommending the Commission exercise its 
authority to exempt foreign private issuers from Section 954 
rulemaking).
    \32\ See 2013 Financial Restatements: A Thirteen Year 
Comparison, Audit Analytics (2014) (``A Thirteen Year Comparison'') 
(addressing accelerated foreign filers, non-accelerated foreign 
filers, accelerated U.S. filers, and non-accelerated U.S. filers), 
and Financial Restatement Trends in the United States: 2003-2012, 
Professor Susan Scholz, University of Kansas, Study Commissioned by 
the Center for Audit Quality (comparing U.S. and foreign issuers).
    \33\ See A Thirteen Year Comparison.
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    Although some exchange listing standards permit foreign private 
issuers to follow home country practice in lieu of certain corporate 
governance requirements,\34\ our proposed rule and rule amendments 
would not permit the exchanges to exempt foreign private issuers from 
compliance with Section 10D's disclosure and recovery requirements. 
Consistent with a comment we received,\35\ our proposal would, however, 
allow exchanges to permit foreign private issuers to forgo recovery as 
impracticable if the recovery of erroneously awarded compensation 
pursuant to Section 10D would violate the home country's laws so long 
as certain other conditions are met.\36\
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    \34\ See, e.g., New York Stock Exchange Rule 303A.00 and NASDAQ 
Stock Market LLC Rule 5615(a)(3).
    \35\ See letter from ABA Business Law Section.
    \36\ See Section II.C.3.b, below, for a discussion of proposed 
board discretion in these circumstances.
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    We also considered the incidence of restatements for smaller 
reporting companies, emerging growth companies and controlled companies 
in determining not to exclude such companies from these requirements. 
For example, during 2012 and 2013, U.S. issuers who are not accelerated 
filers \37\ accounted for approximately 55 percent of total U.S. issuer 
restatements.\38\
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    \37\ As defined in Exchange Act Rule 12b-2 [17 CFR 240.12b-2].
    \38\ See A Thirteen Year Comparison.
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    We believe that smaller reporting companies constitute a 
substantial majority of U.S. non-accelerated filers. We also believe 
that at least some of these categories of issuers use incentive-based 
compensation arrangements that are based on achievement of financial 
reporting measures that may be affected by accounting restatements. As 
a result, we believe that shareholders of these listed issuers would 
benefit from a policy to recover excess incentive-based compensation 
and that applying the proposed rule and rule amendments to these 
issuers will further the statutory goal of assuring that executive 
officers do not retain incentive-based compensation that they received 
erroneously. For similar reasons, we are not proposing to grant the 
exchanges discretion to decide whether additional categories of issuers 
should be exempted from the proposed listing standards.
    Further, Section 10D refers to ``any security'' of an issuer, which 
would include not only common equity securities, but also debt and 
preferred

[[Page 41148]]

securities. Accordingly, apart from the proposed exemptions discussed 
below, we are proposing that the listing standards and other 
requirements of the proposed rule and rule amendments apply without 
regard to the type of securities issued, including to issuers of listed 
debt or preferred securities that do not have listed equity. As 
described in the Economic Analysis,\39\ the potential benefits of a 
recovery policy would likely accrue to the holders of debt and 
preferred securities as well as to equity holders. For the same 
reasons, we do not propose to grant the exchanges discretion to decide 
whether certain categories of securities should be exempted from the 
proposed listing standards.
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    \39\ See Section III, below.
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Request for Comment
    1. Should the listing standards and other requirements of the 
proposed rule and rule amendments apply generally to all listed 
issuers, as proposed? If not, what types of issuers should be exempted, 
and why? Please explain the rationale that justifies exempting any 
particular category of issuer.
    2. Should we distinguish among listed issuers based on the types of 
securities listed? Please explain the rationale for any such exemption. 
For example, do issuers with listed non-convertible debt or preferred 
stock that do not have listed common equity raise the same concerns as 
issuers with listed common equity? For listed issuers that do not have 
listed common equity, do the different residual claims against the cash 
flows of the issuer warrant a different treatment?
    3. Would the proposed listing standards conflict with any home 
country laws, stock exchange requirements, or corporate governance 
arrangements that apply to foreign private issuers? If so, please 
explain the nature of those conflicts. Should the proposed rule and 
rule amendments allow exchanges to permit foreign private issuers to 
forego recovery of erroneously awarded compensation if recovery would 
violate the home country's laws and certain conditions were met, as 
proposed? Is such an exception necessary or appropriate? If no, why 
not? If not, are there more appropriate or effective means to address 
such conflicts?
    4. In the event that a foreign private issuer's home country has a 
law that like Section 10D requires the issuer to disclose its policies 
on incentive-based compensation and recover erroneously awarded 
incentive-based compensation from current or former executive 
officers,\40\ should the foreign private issuer be permitted to comply 
with its home country law instead of complying with the listing 
standard of the U.S. exchange that lists the foreign private issuer's 
securities? Please explain why or why not.
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    \40\ See, e.g., the UK Corporate Governance Code, September 
2014, available at https://frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-2014.pdf. Under 
Section D. of the Corporate Governance Code, a company's 
remuneration scheme for executive directors for performance-related 
remuneration should ``include provisions that would enable the 
company to recover sums paid or withhold the payment of any sum, and 
specify the circumstances in which it would be appropriate to do 
so.'' See also, e.g., Directive 2013/36/EU of the European 
Parliament and of the Council of June 26, 2013, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32013L0036. The EU 
Capital Requirements Directive IV includes specific requirements on 
compensation, including a bonus cap up to 100% of variable 
remuneration or, with shareholder approval, 200% of total fixed pay, 
which must be subject to ``malus or clawback'' arrangements.
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    5. Should there be a mechanism to determine whether additional 
categories of issuers and/or securities should be exempted from the 
proposed listing standards? If so, what mechanism would be appropriate? 
Should new financial products that may be developed in the future be 
subject to the proposed requirements? Why or why not? What principles 
or requirements, if any, should apply to any mechanism? In the absence 
of a discretionary mechanism for future exemptions, would the proposed 
rule potentially hinder competition? If so, how?
2. Securities Futures Products and Standardized Options
    The Exchange Act's definition of ``equity security'' includes any 
security future on any stock or similar security.\41\ Exchanges 
registered under Section 6 of the Exchange Act and associations 
registered under Section 15A(a) of the Exchange Act may trade futures 
on individual securities and on narrow-based security indexes 
(``securities futures products'') \42\ without such securities being 
subject to the registration requirements of the Securities Act of 1933 
(``Securities Act'') and the Exchange Act so long as they are cleared 
by a clearing agency that is registered under Section 17A of the 
Exchange Act or that is exempt from registration under Section 
17A(b)(7) of the Exchange Act.\43\ In December 2002, we adopted rules 
to provide comparable regulatory treatment for standardized 
options.\44\
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    \41\ Exchange Act Section 3(a)(11).
    \42\ Exchange Act Section 3(a)(56) [15 U.S.C. 78c(a)(56)], and 
Commodities Exchange Act Section 1a(32) [7 U.S.C. 1a(32)] define 
``security futures product'' as any security future or any put, 
call, straddle, option or privilege on any security future.
    \43\ See Securities Act Section 3(a)(14) [15 U.S.C. 77c(a)(14)], 
Exchange Act Section 12(a) [15 U.S.C. 78l(a)], and Exchange Act Rule 
12h-1(e) [17 CFR 240.12h-1(e)].
    \44\ See Release No. 33-8171 (Dec. 23, 2002) [68 FR 188]. In 
that release, we exempted standardized options issued by registered 
clearing agencies and traded on a registered exchange or on a 
registered association from all provisions of the Securities Act, 
other than the antifraud provision of Section 17, as well as the 
Exchange Act registration provisions. Standardized options are 
defined in Exchange Act Rule 9b-1(a)(4) [17 CFR 240.9b-1(a)(4)] as 
option contracts trading on an exchange, an automated quotation 
system of a registered association, or a foreign securities exchange 
which relate to option classes the terms of which are limited to 
specific expiration dates and exercise prices, or such other 
securities as the Commission may, by order, designate.
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    The role of a clearing agency as the issuer for security futures 
products and standardized options is fundamentally different from that 
of other listed issuers.\45\ The purchaser of security futures products 
and standardized options does not, except in the most formal sense, 
make an investment decision regarding the clearing agency. As a result, 
information about the clearing agency's business, its officers and 
directors and their compensation, and its financial statements is less 
relevant to investors in these securities than information about the 
issuer of the underlying security.\46\ Moreover, the investment risk in 
security futures products and standardized options is largely 
determined by the market performance of the underlying security rather 
than the performance of the clearing agency, which is a self-regulatory 
organization subject to regulatory oversight.
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    \45\ See Fair Administration and Governance of Self-Regulatory 
Organizations; Disclosure and Regulatory Reporting by Self-
Regulatory Organizations; Recordkeeping Requirements for Self-
Regulatory Organizations; Ownership and Voting Limitations for 
Members of Self-Regulatory Organizations; Ownership Reporting 
Requirements for Members of Self-Regulatory Organizations; Listing 
and Trading of Affiliated Securities by a Self-Regulatory 
Organization, Release No. 34-50699 (Nov. 18, 2004) [69 FR 71126], at 
n. 260 (``Standardized options and security futures products are 
issued and guaranteed by a clearing agency.'')
    \46\ See Listing Standards for Compensation Committees, Release 
No. 33-9199 (Mar. 30, 2011) at Section II.B.2.b.
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    In recognition of such fundamental differences, the Commission 
provided exemptions for security futures products and standardized 
options when it adopted the audit committee listing requirements in 
Exchange Act Rule10A-3 \47\ and the compensation committee listing 
requirements in Exchange Act Rule 10C-1.\48\ Specifically, these rules 
exempt the listing of a security futures

[[Page 41149]]

product cleared by a clearing agency that is registered pursuant to 
Section 17A of the Exchange Act or that is exempt from registration 
pursuant to Section 17A(b)(7)(A) and the listing of a standardized 
option issued by a clearing agency that is registered pursuant to 
Section 17A of the Exchange Act. For the reasons that we exempted these 
securities from Rules 10A-3 and 10C-1, and because any relationship 
between any incentive-based compensation that the clearing agency pays 
its executive officers and its financial statements would not be 
significant to investors in these futures and options, we propose to 
exempt these securities from the requirements of proposed Rule 10D-
1.\49\
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    \47\ See Exchange Act Rules 10A-3(c)(4) and (5).
    \48\ See Exchange Act Rules 10C-1(b)(5)(iii) and (iv).
    \49\ For these same reasons, we believe exempting such 
securities from Rule 10D-1 would be in the public interest and 
consistent with the protection of investors. See Exchange Act 
Section 36(a).
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Request for Comment
    6. Are our proposed exemptions for listing securities futures 
products and standardized options appropriate? Why or why not?
    7. Are there other types of securities that we should consider 
exempting from Rule 10D-1? If so, please explain which securities we 
should exempt and why.
3. Registered Investment Companies
    In some cases, registered investment companies list their 
securities on an exchange. These registered investment companies 
generally include closed-end management investment companies and 
certain open-end management investment companies and unit investment 
trusts (``UITs'') that operate as exchange-traded funds (``ETFs'').\50\ 
Listed registered management investment companies, unlike most other 
issuers, are generally externally managed and often have few, if any, 
employees that are compensated by the registered management investment 
companies, (i.e., the issuers). Instead, registered management 
investment companies typically rely on employees of the investment 
adviser to manage fund assets and carry out other related business 
activities. Such employees are typically compensated by the investment 
adviser of the registered management investment company as opposed to 
the fund. There are a small number of listed registered management 
investment companies that are internally managed. Such internally 
managed registered management investment companies might pay executive 
officers incentive-based compensation, as defined in proposed Rule 10D-
1.
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    \50\ See Investment Company Act Sections 5(a)(1) (definition of 
open-end management investment company) and 5(a)(2) (definition of 
closed-end management investment company) [15 U.S.C. 80a-5(a)]. See 
also Investment Company Act Section 4(2) (definition of UIT). ETFs 
are open-end management investment companies or UITs that offer 
redeemable securities that are listed and trade on an exchange. 
Since the investment portfolio of a UIT is generally fixed, UITs are 
not management investment companies. See text following note 48 
below.
---------------------------------------------------------------------------

    We believe that a listed registered management investment company 
\51\ should be subject to the requirements of proposed Rule 10D-1 only 
to the extent that it pays executive officers incentive-based 
compensation. Accordingly, we propose to exempt the listing of any 
security issued by a registered management investment company if such 
management company has not awarded incentive-based compensation to any 
executive officer of the registered management investment company in 
any of the last three fiscal years or, in the case of a company that 
has been listed for less than three fiscal years, since the initial 
listing.\52\ Management investment companies that have paid incentive-
based compensation in that time period, however, would be subject to 
the rule and rule amendments and be required to have implemented a 
compensation recovery policy like other listed issuers. The conditional 
exemption would avoid causing management investment companies that do 
not pay incentive-based compensation to develop recovery policies they 
may never use.
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    \51\ We note that, as proposed, business development companies, 
which are a category of closed-end management investment company 
that are not registered under the Investment Company Act, would be 
subject to proposed Rule 10D-1. [15 U.S.C. 80a-2(a)(48) and 80a-53-
64]. The purpose of business development companies is to fund small 
and developing businesses. In discussing the amendments to the 
Investment Company Act that established business development 
companies, the House Report noted such companies' special purpose 
and specifically recognized the need for such companies to be able 
to offer incentive-based compensation to their officers. See H.R. 
Rep. No. 1341, 96th Cong., 2d Sess. 21 (1980). We therefore see no 
reason to exempt business development companies that list their 
securities for trading on an exchange from the general requirements 
of the proposed rule.
    \52\ Proposed Rule 10D-1(b)(2)(iv). We expect that each exchange 
and association would adopt the necessary listing standards to 
ensure that those registered management investment companies that 
qualify for the exemption have complied with the proposed rule's 
exemption requirements.
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    We are also proposing to exempt the listing of any security issued 
by a UIT from the requirements of proposed Rule 10D-1.\53\ Unlike 
management investment companies, UITs are pooled investment entities 
without a board of directors, corporate officers, or an investment 
adviser to render investment advice during the life of the UIT. In 
addition, because the investment portfolio of a UIT is generally fixed, 
UITs are not actively managed. Also, unlike registered management 
investment companies, UITs do not file a certified shareholder report. 
Accordingly, we believe that due to their particular structure and 
characteristics, the requirements of proposed Rule 10D-1 would be 
inapplicable to UITs.\54\
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    \53\ Proposed Rule 10D-1(b)(2)(iii).
    \54\ For similar reasons, the Commission exempted UITs when it 
adopted the audit committee listing requirements in Exchange Act 
Rule 10A-3. See Exchange Act Rules 10A-3(c)(6).
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    We are also proposing to amend Form N-CSR to redesignate Item 12 as 
Item 13 \55\ and to add new paragraph (a)(3) to that Item. The new 
paragraph would require any registered management investment company 
that would be subject to the requirements of proposed Rule 10D-1 to 
include as an exhibit to its annual report on Form N-CSR its policy on 
recovery of incentive-based compensation.
---------------------------------------------------------------------------

    \55\ We are also proposing a conforming amendment to General 
Instruction D to Form N-CSR to refer to redesignated Item 13(a)(1).
---------------------------------------------------------------------------

    We are also proposing to add new Item 12 to Form N-CSR as well as 
to amend Item 22 of Schedule 14A of the Exchange Act. Both amendments 
would require registered management investment companies that would be 
subject to proposed Rule 10D-1 to provide information that would mirror 
the disclosure requirements of Item 402(w) of Regulation S-K.\56\
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    \56\ See Section II.D.1, below.
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Request for Comment
    8. Are the exemptions for registered management investment 
companies and UITs as described above appropriate? Why or why not?
    9. Should we conditionally exempt business development companies 
from the proposed listing standards, to the same extent as we propose 
to do with registered management investment companies? If so, please 
explain why.
    10. Should we unconditionally exempt registered management 
investment companies from the proposed listing standards, as we propose 
to do with UITs? Should we unconditionally exempt registered open-end 
management investment companies that list their securities on an 
exchange, and only apply the conditional exemption to closed-end 
management investment companies? Please explain why.
    11. Should we require listed registered management investment 
companies to disclose in annual reports on Form N-CSR or elsewhere 
whether or not the registered management investment company has in fact

[[Page 41150]]

awarded incentive-based compensation to executive officers in the last 
three fiscal years, or in the case of a registered management 
investment company that has been listed for less than three fiscal 
years, since the listing of the registered management investment 
company? Should a similar disclosure requirement apply to UITs?

B. Restatements

1. Restatements Triggering Application of Recovery Policy
    Sections 10D(a) and 10D(b)(2) require exchanges and associations to 
adopt listing standards that require issuers to adopt and comply with 
policies that require recovery ``in the event that the issuer is 
required to prepare an accounting restatement due to the material 
noncompliance of the issuer with any financial reporting requirement 
under the securities laws.'' The Senate Report indicated that Section 
10D was intended to result in ``public companies [adopting policies] to 
recover money that they erroneously paid in incentive compensation to 
executives as a result of material noncompliance with accounting rules. 
This is money that the executive would not have received if the 
accounting was done properly.'' \57\ Commenters equested guidance 
regarding the definition of material noncompliance generally.\58\ One 
commenter recommended that the Commission either identify the 
circumstances that would constitute material noncompliance with 
financial reporting requirements or, at a minimum, provide examples of 
such circumstances as a guide for making such a determination, since 
the determination of whether or not any noncompliance is material would 
be based on the facts and circumstances of each situation.\59\ In 
addressing who must make the material noncompliance determination, one 
commenter noted that Section 10D was unclear as to who must make this 
determination \60\ and others recommended that the determination be 
left to the issuer.\61\
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    \57\ Senate Report at 135.
    \58\ See letters from Frederic W. Cook & Co., Inc., Towers 
Watson, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC and 
Compensia, Inc.
    \59\ See letter from Compensia, Inc.
    \60\ See letter from Compensia, Inc.
    \61\ See letters from Baker, Donelson, Bearman, Caldwell & 
Berkowitz, PC and David Polk & Wardwell LLP.
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    Two commenters noted that because a restatement would have to be 
the result of material noncompliance with financial reporting 
requirements, Congress recognized that not all accounting restatements 
would require recovery.\62\ Several commenters recommended that the 
Commission exclude restatements based on changes in generally accepted 
accounting principles from the types of restatements that trigger 
recovery.\63\ Another commenter observed that a change in accounting 
standards would appear not to trigger recovery, but a change in how an 
auditor interprets accounting standards may trigger recovery, even 
absent issues regarding whether the issuer had adequate controls in 
place over its financial reporting system.\64\
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    \62\ See letters from Towers Watson and Baker, Donelson, 
Bearman, Caldwell & Berkowitz, PC.
    \63\ See letters from Center on Executive Compensation, Frederic 
W. Cook & Co., Inc. and Protective Life Corporation.
    \64\ See letter from Towers Watson.
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    We believe that an error that is material to previously issued 
financial statements constitutes ``material noncompliance'' by the 
issuer with a financial reporting requirement under the securities 
laws, as contemplated by Section 10D. Accordingly, proposed Rule 10D-1 
would provide that issuers adopt and comply with a written policy 
providing that in the event the issuer is required to prepare a 
restatement \65\ to correct an error \66\ that is material to 
previously issued financial statements,\67\ the obligation to prepare 
the restatement would trigger application of the recovery policy.\68\ 
In connection with this, proposed Rule 10D-1 would define an accounting 
restatement as the result of the process of revising previously issued 
financial statements to reflect the correction of one or more errors 
that are material to those financial statements.\69\ We do not propose 
to describe any type or characteristic of an error that would be 
considered material for purposes of the listing standards required by 
proposed Rule 10D-1 because materiality is a determination that must be 
analyzed in the context of particular facts and circumstances. 
Moreover, materiality has received extensive and comprehensive judicial 
and regulatory attention.\70\ We note that issuers should consider 
whether a series of immaterial error corrections, whether or not they 
resulted in filing amendments to previously filed financial statements, 
could be considered a material error when viewed in the aggregate.
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    \65\ Under U.S. Generally Accepted Accounting Principles 
(``GAAP''), a restatement is ``the process of revising previously 
issued financial statements to reflect the correction of an error in 
those financial statements.'' See FASB ASC Topic 250, Accounting 
Changes and Error Corrections (formerly SFAS No. 154, Accounting 
Changes and Error Corrections) (``ASC Topic 250''). Under 
International Financial Reporting Standards as issued by the 
International Accounting Standards Board (``IFRS''), a retrospective 
restatement is ``correcting the recognition, measurement and 
disclosure of amounts of elements of financial statements as if a 
prior period error had never occurred.'' See IAS 8, Accounting 
Policies, Changes in Accounting Estimates and Errors, paragraph 5.
    \66\ Under GAAP, an error in previously issued financial 
statements is ``[a]n error in recognition, measurement, 
presentation, or disclosure in financial statements resulting from 
mathematical mistakes, mistakes in the application of generally 
accepted accounting principles (GAAP), or oversight or misuse of 
facts that existed at the time the financial statements were 
prepared. A change from an accounting principle that is not 
generally accepted to one that is generally accepted is a correction 
of an error.'' See ASC Topic 250. Under IFRS, prior period errors 
are ``omissions from, and misstatements in, the entity's financial 
statements for one or more prior periods arising from a failure to 
use, or misuse of, reliable information that: (a) Was available when 
financial statements for those periods were authorised for issue; 
and (b) could reasonably be expected to have been obtained and taken 
into account in the preparation and presentation of those financial 
statements. Such errors include the effects of mathematical 
mistakes, mistakes in applying accounting policies, oversights or 
misinterpretations of facts, and fraud.'' See IAS 8, Accounting 
Policies, Changes in Accounting Estimates and Errors, paragraph 5.
    \67\ When we refer to financial statements, we mean the 
statement of financial position (balance sheet), income statement, 
statement of comprehensive income, statement of cash flows, 
statement of owners' equity, and accompanying footnotes, as required 
by Commission regulations. When we refer to financial statements for 
registered investment companies and business development companies, 
we mean the statement of assets and liabilities (balance sheet) or 
statement of net assets, statement of operations, statement of 
changes in net assets, statement of cash flows, schedules required 
by Rule 6-10 of Regulation S-X, financial highlights, and 
accompanying footnotes, as required by Commission regulations.
    \68\ Proposed Rule 10D-1(c)(5).
    \69\ Proposed Rule 10D-1(c)(1)
    \70\ See, e.g., TSC Industries, Inc. v. Northway, 426 U.S. 438 
(1976); Basic v. Levinson, 485 U.S. 224 (1988).
---------------------------------------------------------------------------

    As indicated in the accounting standards, the following types of 
changes to an issuer's financial statements do not represent error 
corrections, and therefore would not trigger application of the 
issuer's recovery policy under the proposed listing standards:
     Retrospective application of a change in accounting 
principle; \71\
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    \71\ A change in accounting principle is ``[a] change from one 
generally accepted accounting principle to another generally 
accepted accounting principle when there are two or more generally 
accepted accounting principles that apply or when the accounting 
principle formerly used is no longer generally accepted. A change in 
the method of applying an accounting principle also is considered a 
change in accounting principle.'' See ASC Topic 250. IAS 8 has 
similar guidance. A change from an accounting principle that is not 
generally accepted to one that is generally accepted, however, would 
be a correction of an error.
---------------------------------------------------------------------------

     Retrospective revision to reportable segment information 
due to a change in

[[Page 41151]]

the structure of an issuer's internal organization; \72\
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    \72\ If an issuer changes the structure of its internal 
organization in a manner that causes the composition of its 
reportable segments to change, the corresponding information for 
earlier periods, including interim periods, should be revised unless 
it is impracticable to do so. See ASC Topic 280-10-50-34. IFRS 8 has 
similar guidance.
---------------------------------------------------------------------------

     Retrospective reclassification due to a discontinued 
operation; \73\
---------------------------------------------------------------------------

    \73\ See ASC Topic 205-20. IFRS 5 has similar guidance.
---------------------------------------------------------------------------

     Retrospective application of a change in reporting entity, 
such as from a reorganization of entities under common control; \74\
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    \74\ See ASC Topic 250-10-45-21. IFRS does not have specific 
guidance addressing this reporting matter.
---------------------------------------------------------------------------

     Retrospective adjustment to provisional amounts in 
connection with a prior business combination; \75\ and
---------------------------------------------------------------------------

    \75\ See ASC Topic 805-10-25-13. IFRS 3 has similar guidance.
---------------------------------------------------------------------------

     Retrospective revision for stock splits.
Request for Comment
    12. For purposes of proposed Rule 10D-1, an accounting restatement 
would be defined as the result of the process of revising previously 
issued financial statements to correct errors that are material to 
those financial statements. Rather than including this definition in 
our proposed rule, should we refer to the definition of ``restatement'' 
in GAAP? \76\ If we do not refer to the definition in GAAP, is it 
appropriate to include in the proposed definition the phrase ``errors 
that are material'' or might it be confusing or redundant? Is our 
proposed approach the appropriate means to implement Section 10D, 
including its ``material noncompliance'' provision?
---------------------------------------------------------------------------

    \76\ See n.65, above.
---------------------------------------------------------------------------

    13. If an issuer evaluates whether certain errors are material, and 
concludes that such errors are immaterial or are not the result of 
material noncompliance, should the issuer disclose its evaluation? If 
so, what should be disclosed and where should such disclosure be 
required?
    14. Should any revision to previously issued financial statements 
that results in a reduction in incentive-based compensation received by 
an executive officer always trigger application of an issuer's recovery 
policy under the proposed listing standards? Why or why not?
    15. As noted above, certain changes to the financial statements 
would not trigger recovery because they do not represent error 
corrections under the accounting standards. Are there any other types 
of changes to an issuer's financial statements that should not be 
deemed to trigger application of the issuer's recovery policy?
    16. Should the proposed listing standards contain any anti-evasion 
language regarding the circumstances in which recovery would be 
triggered? If so, what should the language provide?
2. Date the Issuer Is Required To Prepare an Accounting Restatement
    Section 10D(b)(2) requires exchanges and associations to adopt 
listing standards that require issuers to adopt and comply with 
policies that require the recovery of excess incentive-based 
compensation ``during the 3-year period preceding the date on which the 
issuer is required to prepare an accounting restatement.'' Section 10D 
does not specify when a listed issuer is ``required to prepare an 
accounting restatement'' for purposes of this recovery provision.
    Several commenters requested clarification on how to determine the 
date on which the issuer is ``required to prepare an accounting 
restatement'' and provided suggestions in this regard.\77\ One 
commenter asked whether a restatement would be ``required'' for 
purposes of Section 10D as of the date the financial statements are 
stated incorrectly.\78\ Another commenter expressed the view that the 
date of the erroneous statement should be the date on which a new 
statement must be prepared.\79\ Other commenters recommended that the 
recovery trigger should be the date the issuer files an accounting 
restatement due to the issuer's material noncompliance with a financial 
reporting requirement under the securities laws.\80\ A different 
commenter suggested using the date the decision to undertake the 
restatement is made, providing as examples the date an issuer's board 
of directors authorizes the preparation of an accounting restatement or 
the date a court or regulatory authority orders or requires an issuer 
to prepare an accounting restatement.\81\ Another commenter recommended 
that the issuer be deemed ``required to prepare an accounting 
restatement'' when a Current Report on Form 8-K is filed disclosing 
non-reliance on the issuer's financial statements, or, if no Form 8-K 
is required, the date that either the board of directors or management 
determines that a restatement is required.\82\
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    \77\ See letters from Center on Executive Compensation, 
Compensia, Inc., Davis Polk & Wardwell LLP, Meridian Compensation 
Partners, LLC, and Towers Watson.
    \78\ See letter from Towers Watson.
    \79\ See AFL-CIO Joint Letter.
    \80\ See letters from Center on Executive Compensation and 
Protective Life Corporation.
    \81\ See letter from Compensia, Inc.
    \82\ See letter from Davis Polk & Wardwell LLP.
---------------------------------------------------------------------------

    We considered the alternatives identified by commenters for when an 
issuer is ``required to prepare an accounting restatement'' for 
purposes of the proposed listing standards, and are concerned that some 
of these alternatives would not operate effectively with the three-year 
look-back period for recovery prescribed by Section 10D. While the 
issuer has an obligation to file materially complete and accurate 
financial statements, which could support using the date the erroneous 
financial statements were filed as the triggering date for Section 10D, 
we believe this approach would not fully effectuate Section 10D's 
purpose. If the date of filing of the erroneous financial statements 
were used as the starting point for the look-back period, recovery 
would not apply to any incentive-based compensation received after that 
date, even when the amount was affected by the erroneous financial 
statements. For example, if 2014 net income was materially misstated, 
and a 2014-2016 long-term incentive plan had a performance measure of 
three-year cumulative net income, a look-back period that covered only 
the three years before the erroneous filing would not capture the 
compensation earned under that plan. While the date of the erroneous 
filing is easily discernible, using this date may result in listed 
issuers recovering only incentive-based compensation that was received 
during the fiscal year preceding the filing date of the financial 
statements that included the subsequently restated financial reporting 
measure. We believe this result would be inconsistent with the three-
year look-back period that the statute specifies.
    We also considered using the date the issuer files the accounting 
restatement for triggering the three-year look-back period. However, we 
believe this approach also would not appropriately implement Section 
10D because the issuer necessarily would have been required to prepare 
an accounting restatement at some point before it actually filed the 
restatement.\83\ Moreover, an issuer might improperly delay filing a 
restatement after determining that restatement was necessary, and by 
doing so could affect

[[Page 41152]]

the amounts of compensation subject to recovery.
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    \83\ As noted in Section II.C.2.b, below, the three-year look-
back period is not meant to limit or designate the reporting periods 
for which an accounting restatement is required, or to limit which 
restated financial statements may be filed with the Commission.
---------------------------------------------------------------------------

    In considering how best to craft a trigger for recovery under the 
proposed listing standards, we have sought to define the date on which 
an accounting restatement is required in a way that provides reasonable 
certainty for issuers, shareholders and exchanges while not permitting 
issuers to avoid recovery when a material error has occurred. To that 
end, we are proposing a definition that would be triggered by the 
occurrence of certain issuer or third-party determinations about the 
need for a restatement. Specifically, under the proposed listing 
standards, the proposed rule would state that the date on which an 
issuer is required to prepare an accounting restatement is the earlier 
to occur of:
     The date the issuer's board of directors, a committee of 
the board of directors, or the officer or officers of the issuer 
authorized to take such action if board action is not required, 
concludes, or reasonably should have concluded, that the issuer's 
previously issued financial statements contain a material error; or
     The date a court, regulator or other legally authorized 
body directs the issuer to restate its previously issued financial 
statements to correct a material error.\84\
---------------------------------------------------------------------------

    \84\ Proposed Rule 10D-1(c)(2).
---------------------------------------------------------------------------

    A note to the proposed rule would indicate that the first proposed 
date generally is expected to coincide with the occurrence of the event 
described in Item 4.02(a) of Exchange Act Form 8-K, although neither 
proposed date is predicated on a Form 8-K having been filed.\85\ For 
the first proposed date to occur, the issuer merely needs to have 
concluded that previously issued financial statements contain a 
material error, which we expect may occur before the precise amount of 
the error has been determined. While we recognize that listed issuers 
must apply judgment before concluding that previously issued financial 
statements contain a material error, we believe this judgment should be 
applied on an objective basis, which is when a reasonable issuer, based 
on the facts available, would have concluded that the previously issued 
financial statements contain a material error. In this regard, while 
not dispositive, we believe that an issuer would have to consider 
carefully any notice received from its independent auditor that 
previously issued financial statements contain a material error.
---------------------------------------------------------------------------

    \85\ Note to proposed Rule 10D-1(c)(2). For example, if a listed 
issuer files an Item 4.02(b) Form 8-K because it is advised by, or 
receives notice from, its independent accountant that disclosure 
should be made or action should be taken to prevent future reliance 
on a previously issued audit report or completed interim review 
related to previously issued financial statements that contain a 
material error, the triggering event for the recovery policy occurs 
when the listed issuer decides to restate its financial statements 
even if it subsequently neglects to file an Item 4.02(a) Form 8-K to 
report that decision.
---------------------------------------------------------------------------

    We recognize that the second proposed date on which an issuer would 
be required to prepare a restatement for purposes of Section 10D may 
occur earlier than the board's determination if a court or other 
legally authorized body, such as a regulator, directs the issuer to 
restate.
    We believe a definition that incorporates the proposed triggering 
events rather than leaving the determination solely to the discretion 
of the issuer would better realize the objectives of Section 10D while 
providing clarity about when a recovery policy, and specifically the 
determination of the three-year look-back period, will be triggered for 
purposes of the proposed listing standards. In this regard, we note 
that the proposed rule also states that an issuer's obligation to 
recover excess incentive-based compensation is not dependent on if or 
when the restated financial statements are filed. Further, we note that 
issuers that knowingly, recklessly or negligently misreport materially 
false or misleading financial information would be subject to liability 
under existing antifraud provisions.\86\
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    \86\ See Securities Act Section 17(a) [15 U.S.C. 77q(a)], 
Exchange Act Section 10(b) [15 U.S.C. 78j(b)] and Exchange Act Rule 
10b-5 [17 CFR 240.10b-5].
---------------------------------------------------------------------------

Request for Comment
    17. Is it appropriate to treat the earlier of the two proposed 
dates as ``the date on which an issuer is required to prepare an 
accounting restatement'' for purposes of triggering the Section 10D 
recovery obligation? If not, why not? Would using these dates provide 
sufficient certainty and transparency for issuers, investors and 
exchanges to determine when recovery would be triggered for purposes of 
compliance with the proposed listing standards? Are there additional 
triggers we should consider including?
    18. Should receipt of a notice from a company's independent auditor 
that previously issued financial statements contain a material error 
constitute a date when the issuer ``reasonably should have concluded'' 
that such statements contain a material error? Why or why not? What if 
the issuer disagrees with the auditor's conclusion?
    19. Are there other means of defining the date on which an issuer 
is required to prepare an accounting restatement that would provide 
clear benchmarks that do not inject subjectivity into when recovery 
would be triggered? If so, how should the date on which the issuer is 
required to prepare a restatement be defined?

C. Application of Recovery Policy

1. Executive Officers Subject to Recovery Policy
    Section 10D(b)(2) requires exchanges and associations to adopt 
listing standards that require issuers to adopt and comply with 
policies that provide for recovery of excess incentive-based 
compensation from ``any current or former executive officer of the 
issuer who received incentive-based compensation.'' Section 10D does 
not define ``executive officer'' for purposes of the recovery 
policy.\87\
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    \87\ The Senate Committee on Banking, Housing, and Urban Affairs 
noted that ``[t]his policy is required to apply to executive 
officers, a very limited number of employees, and is not required to 
apply to other employees.'' Senate Report at 136.
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    Several commenters requested guidance on the definition of 
executive officer.\88\ One commenter \89\ indicated that the Section 
10D's reference to executive officer appears to use the executive 
officer definition in Exchange Act Rule 3b-7.\90\ Another commenter 
\91\ questioned whether the recovery policy would cover officers 
subject to Exchange Act Section 16 \92\ or only the

[[Page 41153]]

named executive officers.\93\ Another specifically recommended using 
the Section 16 definition of ``officer,'' and stated that executive 
officers of subsidiaries should be included in the definition.\94\ A 
different commenter requested guidance regarding how the recovery 
policy should apply to persons who are executive officers during only a 
portion of the recovery period.\95\
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    \88\ See letters from Baker, Donelson, Bearman, Caldwell & 
Berkowitz, PC, Towers Watson and Robert E. Scully Jr.
    \89\ See letter from Towers Watson.
    \90\ Exchange Act Rule 3b-7 provides that ``[t]he term executive 
officer, when used with reference to a registrant, means its 
president, any vice president of the registrant 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 registrant.'' Executive officers of 
subsidiaries may be deemed executive officers of the registrant if 
they perform such policy making functions for the registrant.'' 17 
CFR 240.3b-7.
    \91\ See letter from Baker, Donelson, Bearman, Caldwell & 
Berkowitz, PC.
    \92\ 15 U.S.C. 78p. As defined in Exchange Act Rule 16a-1(f) [17 
CFR 240.16a-1(f)], the term ``officer'' means ``an 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. 
Officers of the issuer's parent(s) or subsidiaries shall be deemed 
officers of the issuer if they perform such policy-making functions 
for the issuer.'' The rule also contains specific provisions with 
respect to limited partnerships and trusts, and a note providing 
that ``policy-making function'' is not intended to include policy 
making functions that are not significant and that persons 
identified as ``executive officers'' pursuant to Item 401(b) of 
Regulation S-K [17 CFR 229.401(b)] are presumed to be officers for 
purposes of Section 16, as are other persons enumerated in Rule 16a-
1(f) but not in Item 401(b). 15 U.S.C. 78p.
    \93\ See Item 402(a)(3) of Regulation S-K. For smaller reporting 
companies and emerging growth companies, named executive officers 
include the following: all individuals serving as the issuer's 
principal executive officer or acting in similar capacities during 
the last completed fiscal year, regardless of compensation level; 
the issuer's two most highly compensated executive officers other 
than the principal executive officer who were serving as executive 
officers at the end of the last completed fiscal year; and up to two 
additional individuals for whom disclosure would have been provided 
based on highest compensation but for the fact that the individual 
was not serving as an executive officer of the issuer at the end of 
the last completed fiscal year. See Item 402(m)(2) of Regulation S-K 
and Section 102(c) of the Jumpstart Our Business Startups Act 
(``JOBS Act'').
    \94\ See AFL-CIO Joint Letter.
    \95\ See letter from Baker, Donelson, Bearman, Caldwell & 
Berkowitz, PC.
---------------------------------------------------------------------------

    We believe that Section 10D's mandatory recovery policy was 
intended to apply, at a minimum, to all executive officers of the 
issuer, rather than a more limited category such as the named executive 
officers for whom executive compensation disclosure is required under 
Item 402 of Regulation S-K. The Senate Report accompanying the statute 
indicates that ``[t]his policy is required to apply to executive 
officers[.]'' \96\ Moreover, we believe applying the recovery policy to 
all executive officers would more effectively realize the statutory 
goal of Section 10D because officers with policy making functions and 
important roles in the preparation of financial statements set the tone 
for and manage the issuer. In this regard, we do not believe that a 
listed issuer should be unable to recover unearned compensation from an 
executive officer simply because he or she was not one of the 
individuals identified for purposes of Item 402's disclosure 
requirements.
---------------------------------------------------------------------------

    \96\ See Senate Report.
---------------------------------------------------------------------------

    The proposed listing standards would include a definition of 
``executive officer'' in Rule 10D-1 that is modeled on the definition 
of ``officer'' in Rule 16a-1(f). For purposes of Section 10D, an 
``executive officer'' would be 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 parents or subsidiaries would be deemed executive officers of 
the issuer if they perform such policy making functions for the 
issuer.\97\
---------------------------------------------------------------------------

    \97\ Proposed Rule 10D-1(c)(3), which also would specify who 
would be executive officers if the issuer is a limited partnership 
or trust.
---------------------------------------------------------------------------

    In particular, the proposed definition would expressly include the 
principal financial officer and the principal accounting officer (or if 
there is no such accounting officer, the controller) among the officers 
specified. We believe that their responsibility for financial 
information justifies their inclusion in the definition of ``executive 
officer'' for this purpose, just as these officers were specifically 
included in the Rule 16a-1(f) definition of ``officer.\98\ Although the 
compensation recovery provisions of Section 10D apply without regard to 
an executive officer's responsibility for preparing the issuer's 
financial statements, we believe that it is clearly appropriate for 
officers with an important role in financial reporting to be subject to 
the recovery policy. The proposed definition, like Rule 16a-1(f), 
provides that executive officers of the issuer's parents or 
subsidiaries may be deemed executive officers of the issuer if they 
perform policy making functions for the issuer. As is the case for 
Section 16 officer determination, if pursuant to Item 401(b) of 
Regulation S-K the issuer identifies a person as an ``executive 
officer,'' it would be presumed that the board of directors has made 
that judgment and the persons so identified are executive officers for 
purposes of proposed Rule 10D-1.\99\
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    \98\ 17 CFR 240.16a-1(f). In proposing their inclusion in the 
Rule 16a-1(f) definition of ``officer,'' the Commission noted that 
principal financial officers and principal accounting officers are 
required to sign an issuer's Securities Act registration statements 
and Exchange Act annual reports on Form 10-K. Release No. 34-27148 
(Aug. 18, 1989) [54 FR 35667] at n. 31. Subsequently, Section 302 of 
SOX required the principal financial officer, as well as the 
principal executive officer, to certify the information contained in 
each annual or quarterly report filed under Section 13(a) or 15(d) 
of the Exchange, and the effectiveness of the issuer's internal 
controls. Listed companies could, of course, adopt policies that 
applied to a larger group of employees so long as the policy at a 
minimum applied to executive officers.
    \99\ See proposed Note to Rule10D-1(c)(3), modeled on the Note 
to Rule 16a-1(f).
---------------------------------------------------------------------------

    Section 10D(b)(2) calls for the recovery policy to apply to ``any 
current or former executive officer of the issuer who received 
incentive-based compensation [during the three-year look-back 
period].'' We believe that the statute was designed to require recovery 
of excess incentive-based compensation provided for service as an 
executive officer. Accordingly, the rule and rule amendments we propose 
would require recovery of excess incentive-based compensation received 
by an individual who served as an executive officer of the listed 
issuer at any time during the performance period for that incentive-
based compensation.\100\ This would include incentive-based 
compensation derived from an award authorized before the individual 
becomes an executive officer, and inducement awards granted in new hire 
situations, as long as the individual served as an executive officer of 
the listed issuer at any time during the award's performance period. As 
proposed, recovery would not apply to an individual who is an executive 
officer at the time recovery is required if that individual had not 
been an executive officer at any time during the performance period for 
the incentive-based compensation subject to recovery.
---------------------------------------------------------------------------

    \100\ Proposed Rule 10D-1(b)(1)(i)(B).
---------------------------------------------------------------------------

Request for Comment
    20. Consistent with the Rule 16a-1(f) definition of ``officer'', 
should we define ``executive officers'' to expressly include the 
principal financial officer and the principal accounting officer (or if 
there is no such accounting officer, the controller), as proposed?
    21. Are there any other officers, such as the chief legal officer, 
chief information officer, or such other officer, who by virtue of 
their position should be specifically named as executive officers 
subject to the issuer's recovery policy? If so, which additional 
officers should be subject to the issuer's recovery policy and why?
    22. Are there any other officers who should be included in the 
group of executive officers subject to the issuer's recovery policy, 
but who may not fall within the proposed definition? Is the definition 
of executive officer appropriate? If not, how else should executive 
officer be defined?
    23. Alternatively, is the proposed definition of ``executive 
officer'' too broad? Should we instead limit the recovery policy to 
``named executive officers,'' as defined in Items 402(a)(3) and 
402(m)(2) of Regulation S-K or otherwise define a more narrow set of 
officers subject to recovery?
    24. Will the scope of the term ``executive officer'' for purposes 
of Section 10D affect issuers' practices in

[[Page 41154]]

identifying executive officers for other purposes? If so, how, and what 
if anything should we do to address that? Are there other means of 
simplifying the identification of ``executive officers'' for purposes 
of Rule 10D-1 that would promote consistency with identifying executive 
officers for other purposes, such as Item 401(b) of Regulation S-K? Is 
there another, more appropriate definition?
    25. Is it consistent with the purposes of Section 10D to apply 
recovery to any incentive-based compensation earned during the three 
completed fiscal years immediately preceding the date that the issuer 
is required to prepare a restatement if that person served as an 
executive officer at any time during the performance period? 
Alternatively, should an individual be subject to recovery only for 
incentive-based compensation earned during the portion of the 
performance period during which the individual was serving as an 
executive officer? Should an individual who is an executive officer at 
the time recovery is required be subject to recovery even if that 
individual did not serve as an executive officer of the issuer at any 
time during the performance period for the affected incentive-based 
compensation? If a different standard should govern the circumstances 
when an executive officer or former executive officer is subject to 
recovery, what should that standard be, and why should it apply?
2. Incentive-Based Compensation
a. Incentive-Based Compensation Subject to Recovery Policy
    Section 10D(b)(2) requires exchanges and associations to adopt 
listing standards that require issuers to adopt and comply with 
recovery policies that apply to ``incentive-based compensation 
(including stock options awarded as compensation)'' that is received, 
based on the erroneous data, in ``excess of what would have been paid 
to the executive officer under the accounting restatement.'' Implicit 
in these statutory requirements is that the amount of such compensation 
received in the three-year look-back period would have been less if the 
financial statements originally had been prepared as later restated.
    Several commenters recommended that the Commission clarify the 
types of compensation to which the listing standards' recovery policy 
would apply.\101\ To that end, some commenters suggested potential 
standards that focused on the compensation being based on or related to 
publicly reported financial statements.\102\ For example, one commenter 
stated that any form of compensation that is contingent upon the 
achievement of one or more pre-determined and objective performance 
goals ``that expressly relate to and are derived from one or more 
financial or stock price metric set forth in an issuer's financial 
statements filed with the Commission'' should be incentive-based 
compensation for purposes of Section 10D.\103\ In some cases, 
commenters suggested we look to the existing definitions of ``incentive 
plan,'' ``equity incentive plan award'' and ``non-equity incentive plan 
award'' in Item 402(a)(6)(iii) of Regulation S-K in defining incentive-
based compensation subject to recovery.\104\
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    \101\ See, e.g., letters from ABA Business Law Section, American 
Benefits Council, Center on Executive Compensation, Meridian 
Compensation Partners, LLC, Protective Life Corporation, Robert E. 
Scully Jr, and Society of Corporate Secretaries and Governance 
Professionals.
    \102\ See, e.g., letters from ABA Business Law Section, American 
Benefits Council, Center on Executive Compensation, David Polk, and 
Meridian Compensation Partners, LLC.
    \103\ See letter from Meridian Compensation Partners, LLC.
    \104\ See letters from ABA Business Law Section and David Polk.
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    To identify compensation that is awarded or vests based on 
financial performance measures, some commenters \105\ provided various 
examples of financial information required to be reported under the 
securities laws, such as revenue, net income and earnings per share, 
and examples of related non-GAAP measures, such as EBITDA.\106\ 
Commenters also recommended that awards based solely on satisfaction of 
non-financial measures--for example, operational measures such as 
market share and customer satisfaction, subjective measures such as 
leadership, and strategic measures such as consummation of a merger--
should not be subject to an issuer's recovery policy.\107\ Generally, 
commenters who specifically addressed stock price and total shareholder 
return \108\ measures recommended excluding them from recovery 
policies,\109\ or expressed the view that any connection between the 
erroneous data relating to an accounting restatement and the 
fluctuating value of the issuer's stock would be tangential and 
speculative.\110\
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    \105\ See, e.g., letters from Center on Executive Compensation, 
Meridian Compensation Partners, LLC and Protective Life Corporation.
    \106\ Earnings before interest, taxes, depreciation and 
amortization.
    \107\ See, e.g., letters from Center on Executive Compensation, 
Meridian Compensation Partners, LLC, Protective Life Corporation, 
and Society of Corporate Secretaries and Governance Professionals.
    \108\ ``Total shareholder return'' or ``TSR'' is a measure based 
on the change in stock price plus dividends over a period of time.
    \109\ See letters from Center on Executive Compensation and 
Protective Life Corporation.
    \110\ See letter from American Benefits Council.
---------------------------------------------------------------------------

    One commenter who addressed the statute's inclusion of ``stock 
options awarded as compensation'' questioned whether recovery should 
apply to the extent the enhancement in an award's value is solely 
attributable to increases in the fair market value of the underlying 
shares.\111\ Other commenters recommended excluding from recovery 
equity awards that are not granted upon achievement of one or more pre-
determined and objective financial metrics, and that vest solely upon 
the passage of time, continued service or satisfaction of non-financial 
metrics.\112\
---------------------------------------------------------------------------

    \111\ See letter from American Benefits Council.
    \112\ See letters from Center on Executive Compensation, 
Compensia, Meridian Compensation Partners, LLC and Protective Life 
Corporation.
---------------------------------------------------------------------------

    Commenters also raised questions whether other forms of 
compensation, such as discretionary bonuses, future benefits under 
supplemental retirement benefit plans calculated based on incentive 
compensation awards and investment returns on incentive-based 
compensation deferred pursuant to deferred compensation plans, would be 
incentive-based compensation subject to recovery.\113\ In particular, 
some commenters requested guidance concerning bonuses paid pursuant to 
``pool plans,'' where achievement of financial performance measures 
establishes the overall size of the bonus pool, but discretion is 
exercised in determining the amount of individual bonuses.\114\
---------------------------------------------------------------------------

    \113\ See, e.g., letter from Robert E. Scully, Jr.
    \114\ See letters from Center on Executive Compensation and 
Protective Life Corporation.
---------------------------------------------------------------------------

    In considering how best to define incentive-based compensation for 
purposes of the proposed rule,\115\ we have considered the statutory 
language of Section 10D, the views of commenters, and the 
administrability of any mandatory recovery policy that encompasses such 
compensation. Rather than identifying each type or form of compensation 
to which a recovery policy required under the listing standards would 
apply, for purposes of proposed Rule 10D-1 we propose to define 
``incentive-based compensation'' in a principles-based manner, which we 
believe would enable the rule and rule amendments to operate 
effectively as new forms of compensation and new measures of

[[Page 41155]]

performance upon which compensation is based are developed. As 
proposed, ``incentive-based compensation'' would be defined as ``any 
compensation that is granted, earned or vested based wholly or in part 
upon the attainment of any financial reporting measure.'' \116\
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    \115\ The proposed definition would be applicable only to 
recovery of incentive-based compensation under proposed Rule 10D-1, 
and would not apply to the recovery of incentive-based compensation 
pursuant to SOX Section 304.
    \116\ See proposed Rule 10D-1(c)(4). ``In part,'' is included in 
the definition to clarify that incentive-based compensation need not 
be based solely upon attainment of a financial reporting measure. An 
example of compensation that is based in part upon the attainment of 
a financial reporting measure would include an award in which 60 
percent of the target amount is earned if a certain revenue level is 
achieved, and 40 percent of the target amount is earned if a certain 
number of new stores are opened. Similarly, an award for which the 
amount earned is based on attainment of a financial reporting 
measure but is subject to subsequent discretion by the compensation 
committee to either increase or decrease the amount would be based 
in part upon attainment of the financial reporting measure.
---------------------------------------------------------------------------

    The proposed definition would further provide that ``financial 
reporting measures'' are measures that are determined and presented in 
accordance with the accounting principles used in preparing the 
issuer's financial statements,\117\ any measures derived wholly or in 
part from such financial information,\118\ and stock price and total 
shareholder return. Such measures would be encompassed by the 
definition of financial reporting measures whether or not included in a 
filing with the Commission,\119\ and may be presented outside the 
financial statements, such as in Management's Discussion and Analysis 
of Financial Conditions and Results of Operations (``MD&A'') \120\ or 
the performance graph.\121\ Accordingly, examples of financial 
reporting measures would include, but would not be limited to, the 
following accounting-based measures (including measures derived 
therefrom):
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    \117\ For foreign private issuers whose financial statements are 
based upon a comprehensive body of accounting principles other than 
GAAP or IFRS, the restatement would relate to amounts reported using 
such other accounting principles but not the reconciliation to GAAP. 
We would not consider the reconciliation to GAAP to be within the 
meaning of financial reporting measures for purposes of this 
proposed rule.
    \118\ The proposed definition is broader than a ``non-GAAP 
financial measure'' for purposes of Exchange Act Regulation G [17 
CFR 244.100 et seq.] and Item 10 of Regulation S-K [17 CFR 229.10].
    \119\ For example, same store sales or regional sales volume may 
not be disclosed in a filing with the Commission, but nevertheless 
could be affected by an accounting restatement for revenue 
recognition.
    \120\ 17 CFR 229.303. See also Item 5, Form 20-F. Examples of 
this could be accounts receivable turnover, EBITDA, or sales per 
square foot.
    \121\ 17 CFR 229.201(e).
---------------------------------------------------------------------------

     Revenues;
     Net income;
     Operating income;
     Profitability of one or more reportable segments; \122\
---------------------------------------------------------------------------

    \122\ As disclosed in a financial statement footnote. See ASC 
Topic 280.
---------------------------------------------------------------------------

     Financial ratios (e.g., accounts receivable turnover and 
inventory turnover rates);
     Net assets or net asset value per share (for registered 
investment companies and business development companies that are 
subject to the rule);
     EBITDA; \123\
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    \123\ Earnings before interest, taxes, depreciation and 
amortization.
---------------------------------------------------------------------------

     Funds from operations (``FFO'') \124\ and adjusted funds 
from operations (``AFFO'');
---------------------------------------------------------------------------

    \124\ FFO is a non-GAAP financial measure commonly used in the 
real estate industry.
---------------------------------------------------------------------------

     Liquidity measures (e.g., working capital, operating cash 
flow);
     Return measures (e.g., return on invested capital, return 
on assets);
     Earnings measures (e.g., earnings per share);
     Sales per square foot or same store sales, where sales is 
subject to an accounting restatement;
     Revenue per user, or average revenue per user, where 
revenue is subject to an accounting restatement;
     Cost per employee, where cost is subject to an accounting 
restatement;
     Any of such financial reporting measures relative to a 
peer group, where the issuer's financial reporting measure is subject 
to an accounting restatement; and
     Tax basis income.

In addition to measures that are derived from the financial statements, 
the proposed definition of financial reporting measures would include 
performance measures based on stock price or total shareholder return. 
Section 10D(b) requires disclosure of an issuer's policy with respect 
to ``incentive-based compensation that is based on financial 
information required to be reported under the securities laws'' and 
recovery of compensation awarded ``based on the erroneous data.'' 
Although the phrase ``financial information required to be reported 
under the securities laws'' might be interpreted as applying only to 
accounting-based metrics, we believe that it also includes performance 
measures such as stock price and total shareholder return that are 
affected by accounting-related information and that are subject to our 
disclosure requirements.\125\ Further, Congress' direction to include 
compensation that is based on financial information and to recover 
compensation based on the erroneous accounting data suggests that we 
should include incentive compensation tied to measures such as stock 
price and total shareholder return to the extent that improper 
accounting affects such measures, and in turn results in excess 
compensation. We also recognize that total shareholder return is a 
frequently used performance metric for executive compensation,\126\ and 
that excluding it might not promote the goals we believe Congress 
intended. Moreover, we are concerned that not including TSR could 
incentivize issuers to alter their executive compensation arrangements 
in ways that would avoid application of the mandatory recovery policy 
and result in less efficient incentive alignment.\127\
---------------------------------------------------------------------------

    \125\ In this regard, we note that Item 201 of Regulation S-K 
requires issuers with common equity the principal market for which 
is an exchange, to disclose the high and low sales prices ``for each 
full quarterly period within the two most recent fiscal years and 
any subsequent interim period for which financial statements are 
included . . . .'' In addition, Item 201(e) of Regulation S-K 
requires issuers that are not smaller reporting companies to 
disclose stock price information and a performance graph comparing 
the company's cumulative total shareholder return with a performance 
indicator of the overall stock market and either a published 
industry index or company-determined peer comparison.
    \126\ See Section III, below.
    \127\ See Section III, below.
---------------------------------------------------------------------------

    In proposing that the statutory language should be interpreted to 
encompass incentive-based compensation tied to stock price and total 
shareholder return, as well as accounting-based metrics, we have 
considered potential administrative burdens that could be imposed on 
issuers in determining the amount of compensation to be recovered. In 
some cases, issuers may need to engage in complex analyses that require 
significant technical expertise and specialized knowledge, and may 
involve substantial exercise of judgment in order to determine the 
stock price impact of a material restatement. Due to the presence of 
confounding factors, it sometimes may be difficult to establish the 
relationship between an accounting error and the stock price. We 
recognize these potential challenges and, as discussed more fully 
below,\128\ are proposing that issuers be permitted to use reasonable 
estimates when determining the impact of a restatement on stock price 
and total shareholder return and to require them to disclose the 
estimates.\129\ We believe that being able to use reasonable estimates 
to assess the effect of the accounting restatement on these performance 
measures in determining the amount of erroneously awarded compensation 
should help to mitigate these potential difficulties.
---------------------------------------------------------------------------

    \128\ See Section II.C.3.a, below.
    \129\ See Section II.D.1, below.
---------------------------------------------------------------------------

    While the definition we are proposing is intended to be applied 
broadly and flexibly, it does not encompass all forms

[[Page 41156]]

of incentive compensation.\130\ An incentive plan award that is 
granted, earned or vested based solely upon the occurrence of certain 
non-financial events, such as opening a specified number of stores, 
obtaining regulatory approval of a product, consummating a merger or 
divestiture, completing a restructuring plan or financing transaction, 
would not be ``incentive-based compensation'' because these measures of 
performance are not financial reporting measures. Although these non-
financial metrics are not included in the proposed definition, we are 
soliciting comment below on whether the definition of ``incentive-based 
compensation'' should include additional performance measures.
---------------------------------------------------------------------------

    \130\ In this regard we note that the proposed definition of 
``incentive-based compensation'' is narrower in scope than the 
definition of ``incentive plan,'' in Item 402(a)(6)(iii) of 
Regulation S-K, which is ``any plan providing compensation intended 
to serve as an incentive for performance to occur over a specified 
period, whether such performance is measured by reference to 
financial performance of the registrant or an affiliate, the 
registrant's stock price, or any other performance measure.'' Item 
402(a)(6)(iii) of Regulation S-K [17 CFR 229.402(a)(6)(iii)]. The 
proposed Rule 10D-1 definition would not include ``other performance 
measures'' in light of Section 10D's reference to incentive-based 
compensation based on financial information required to be reported 
under the federal securities laws.
---------------------------------------------------------------------------

    The statute further specifies that incentive-based compensation to 
which recovery should apply under the recovery policy required by the 
listing standard ``includ[es] stock options awarded as compensation.'' 
Accordingly, as proposed, ``incentive-based compensation'' would 
include options and other equity awards whose grant or vesting is based 
wholly or in part upon the attainment of any measure based upon or 
derived from financial reporting measures.\131\ Applying the proposed 
Rule 10D-1 definition, compensation that would be subject to the 
recovery policy required by the proposed listing standards would 
include, but not be limited to:
---------------------------------------------------------------------------

    \131\ This would be the standard for purposes of proposed Rule 
10D-1 even though time-vested stock options are generally considered 
``performance-based'' for purposes of exclusion from the Internal 
Revenue Code Section 162(m) $1 million cap on tax-deductible 
executive compensation if the amount of compensation attributable to 
the options is based solely on an increase in company stock price, 
assuming the exercise price is no less than fair market value of the 
underlying stock on the date of grant. See 26 CFR 1.162-
27(e)(2)(vi).
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     Non-equity incentive plan awards that are earned based 
wholly or in part on satisfying a financial reporting measure 
performance goal;
     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;
     Restricted stock, restricted stock units (``RSUs''), 
performance share units (``PSUs''), stock options, and stock 
appreciation rights (``SARs'') that are granted or become vested based 
wholly or in part on satisfying a financial reporting measure 
performance goal; and
     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.
    Examples of compensation that would not be ``incentive-based 
compensation'' for this purpose would include, but not be limited to:
     Salaries; \132\
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    \132\ However, to the extent that an executive officer receives 
a salary increase earned wholly or in part based on the attainment 
of a financial reporting measure, such a salary increase would be 
subject to recovery as a non-equity incentive plan award for 
purposes of proposed Rule 10D-1.
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     Bonuses paid solely at the discretion of the compensation 
committee or board that are not paid from a ``bonus pool,'' the size of 
which is determined based wholly or in part on satisfying a financial 
reporting measure performance goal;
     Bonuses paid solely upon satisfying one or more subjective 
standards (e.g., demonstrated leadership) and/or completion of a 
specified employment period;
     Non-equity incentive plan awards earned solely upon 
satisfying one or more strategic measures (e.g., consummating a merger 
or divestiture), or operational measures (e.g., opening a specified 
number of stores, completion of a project, increase in market share); 
and
     Equity awards for which the grant is not contingent upon 
achieving any financial reporting measure performance goal and vesting 
is contingent solely upon completion of a specified employment period 
and/or attaining one or more non-financial reporting measures.
Request for Comment
    26. Is the scope of incentive-based compensation subject to 
recovery under Section 10D(b) properly defined by reference to 
compensation that is granted, earned or vested based wholly or in part 
upon attainment of any measure that is determined or presented in 
accordance with applicable accounting principles? If not, please 
explain what other forms of compensation should be covered and why.
    27. Is the proposed definition of ``incentive-based compensation'' 
the best means to capture all forms of compensation that could be 
subject to reduction if recalculated based on an accounting 
restatement? If not, please explain what other forms of compensation, 
which would not be covered by the proposed definition, should be 
covered.
    28. Are there circumstances in which compensation that is received 
upon completion of a specified employment period or upon the attainment 
of any other goal that is not covered by our proposed definition should 
be considered incentive-based compensation subject to recovery? Why or 
why not? If so, how would an issuer calculate the recoverable amounts 
in the event of an accounting restatement? Are there any other measures 
of compensation that should be included in the definition of incentive-
based compensation? If so, which ones and why?
    29. Should compensation that is based upon stock price performance 
or total shareholder return be considered incentive-based compensation 
subject to recovery? If not, please explain why not. If compensation 
that is based on stock price performance or total shareholder return is 
included as incentive-based compensation subject to recovery, what 
calculations would need to be made to determine the recoverable amount? 
What are the costs and technical expertise required to prepare these 
calculations? Who would make these calculations for issuers? Would the 
costs be greater than for calculations tied to other financial 
reporting measures, which would be subject to mathematical 
recalculation directly from the information in an accounting 
restatement? Would the exchanges be able to efficiently assess these 
calculations for purposes of enforcing compliance with their listing 
standards? Why or why not? Should we require an independent third party 
to assess management's calculations?
    30. Should incentive-based compensation be defined to include 
compensation that is based on satisfying one or more subjective 
standards (such as demonstrated leadership) to the extent that such 
subjective standards are satisfied in whole or in part by meeting a 
financial reporting measure performance goal (such as stock price 
performance or revenue metrics)? If so, how could this approach be 
implemented? Is it sufficient that the current proposal encompasses 
``any compensation that is granted, earned or vested based wholly or in 
part upon the

[[Page 41157]]

attainment of a financial reporting measure''? If not, why not?
    31. Should the proposed rule or listing standards contain any anti-
evasion language that would treat as incentive-based compensation 
amounts received purportedly based on one or more subjective standards 
but that are in fact based on financial information metrics, total 
shareholder return or stock price performance? If so, what should the 
language provide?
    32. Should the definition of ``incentive-based compensation'' 
included in Rule 10D-1 be principles-based, as proposed? Alternatively, 
should the definition specify performance measures that may be affected 
by an accounting restatement? If so, please explain which examples 
should be included and why.
    33. Regarding the statutory provision that incentive-based 
compensation subject to recovery ``includ[es] stock options awarded as 
compensation,'' does the proposed definition provide a basis by which 
issuers can identify equity awards that would be covered? If not, 
please explain why not. If all options should be subject to recovery, 
how should the amount subject to recovery following an accounting 
restatement be computed for time-vested options that are not granted 
based on satisfaction of a financial reporting measure performance 
goal?
    34. Regarding bonuses granted from a ``bonus pool,'' the size of 
which is based wholly or in part upon satisfying a financial reporting 
measure performance goal, does the proposed definition properly subject 
this form of compensation to recovery? If not, how should we treat such 
compensation for purposes of Rule 10D-1?
    35. Is further guidance needed as to how the proposed definition 
would apply to forms of compensation that may be paid out on a deferred 
basis, such as employee or employer contributions of incentive-based 
compensation to nonqualified deferred compensation plans and earnings 
thereon, and future retirement benefits payable under pension plans, 
such as supplemental retirement benefit plans, that are calculated 
based on incentive-based compensation? \133\ If so, what further 
guidance should we provide?
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    \133\ See Section II.C.3.a, below, addressing the computation of 
excess incentive-based compensation for these forms of compensation.
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b. Time Period Covered by Recovery Policy
    Section 10D(b)(2) requires exchanges and associations to adopt 
listing standards that require issuers to adopt and comply with 
recovery policies that apply to excess incentive-based compensation 
received ``during the three-year period preceding the date on which the 
issuer is required to prepare an accounting restatement'' but does not 
otherwise specify how this three -year look-back period should be 
measured. Commenters recommended that the listing standards address 
this point.\134\ One commenter suggested that it be the three fiscal 
years preceding the date that a Form 8-K is filed disclosing non-
reliance on the issuer's financial statements, or, if no Form 8-K is 
required, preceding the date that either the board of directors or 
management makes a determination that a restatement is required.\135\
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    \134\ See letters from Frederic W. Cook & Co., Inc., ABA 
Business Law Section and Baker, Donelson, Bearman, Caldwell & 
Berkowitz, PC.
    \135\ See letter from Davis Polk & Wardwell LLP.
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    Under proposed Rule 10D-1, the three-year look-back period for the 
recovery policy required by the listing standards would be the three 
completed fiscal years immediately preceding the date the issuer is 
required to prepare an accounting restatement.\136\ We believe that 
basing the look-back period on fiscal years, rather than a preceding 
36-month period, is consistent with issuers' general practice of making 
compensation decisions and awards on a fiscal year basis. Using the 
proposed recovery period trigger, if a calendar year issuer concludes 
in November 2018 that a restatement of previously issued financial 
statements is required and files the restated financial statements in 
January 2019, the recovery policy would apply to compensation received 
in 2015, 2016 and 2017. The three-year look-back period is not meant to 
alter the reporting periods for which an accounting restatement is 
required or for which restated financial statements are to be filed 
with the Commission.\137\ Moreover, an issuer would not be able to 
delay or relieve itself from the obligation to recover erroneously 
awarded incentive-based compensation by delaying or failing to file 
restated financial statements.
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    \136\ Proposed Rule 10D-1(b)(ii).
    \137\ For example, assume the three-year look-back period is 
2016, 2017 and 2018, and incentive compensation received (as 
``received'' would be defined in proposed Rule 10D-1(c)(6), 
discussed in Section II.C.2.c, below) in 2016 was earned by 
achieving a certain level of cumulative operating income for the 
two-year period from 2015 to 2016. In determining the amount of 
excess compensation received in 2016, the issuer would be required 
to prepare restated financial statements for 2015 and 2016 even if 
the issuer does not file one or both of those restated financial 
statements.
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    In proposing Rule 10D-1, we considered other approaches, such as a 
recovery policy that requires issuers to recover incentive-based 
compensation received during any period of three consecutive years 
preceding the date on which the issuer is required to prepare an 
accounting restatement so long as the incentive-based compensation was 
affected by the error. However, we do not believe that this approach is 
the most appropriate means to implement Section 10D because it would 
require additional judgments about which three years' compensation 
should be subject to recovery, making it less objective and harder for 
exchanges and listed issuers to apply uniformly.
    In situations where an issuer has changed its fiscal year end 
during the three-year look-back period, we are proposing that the 
issuer must recover any excess incentive-based compensation received 
during the transition period occurring during, or immediately 
following, that three-year period in addition to any excess incentive-
based compensation received during the three-year look-back period 
(i.e., a total of four periods).\138\ A transition period refers to the 
period between the closing date of the issuer's previous fiscal year 
end and the opening date of its new fiscal year.\139\ For example, 
consider a situation in which, in late 2015, an issuer changes its 
fiscal closing date from June 30 to December 31, and subsequently 
reports on the transition period from July 1, 2015 to December 31, 
2015. If the issuer's board of directors concludes in May 2017 that it 
will restate previously issued financial statements due to a material 
error, the look-back period would consist of the year ended June 30, 
2014, the year ended June 30, 2015, the period from July 1, 2015 to 
December 31, 2015, and the year ended December 31, 2016. However, 
consistent with Rule 3-06(a) of Regulation S-X, a transition period of 
nine to 12 months would be considered a full year in applying the 
three-year look-back period requirement.
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    \138\ Proposed Rule 10D-1(b)(1)(ii).
    \139\ 17 CFR 240.13a-10 and 17 CFR 240.15d-10
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Request for Comment
    36. Is the proposed approach to determine the three-year look-back 
period for recovery an appropriate means to implement Section 10D? Does 
it properly reflect the way in which issuers make their compensation 
decisions (on a fiscal year by fiscal year basis)? Why or why not?
    37. Should a different approach be used to determine the three-year 
look-back period for recovery? If so, how should the look-back period 
be determined, and why? For example, should an issuer be permitted to 
apply

[[Page 41158]]

its recovery policy to any three-year period in which incentive-based 
compensation received by executive officers was affected by the 
accounting error?
    38. Is the proposed approach regarding transition periods related 
to a change in fiscal year appropriate? If not, what alternative 
approach should we consider? Consistent with Rule 3-06(a) of Regulation 
S-X, should a transition period of nine to 12 months be considered a 
full year in satisfying the three-year look-back period requirement?
c. When Incentive-Based Compensation Is ``Received''
    Section 10D does not specify when an executive officer should be 
deemed to have received incentive-based compensation for the recovery 
policy required under the applicable listing standards. One commenter 
asked the Commission to clarify whether an option or SAR is received 
when it is granted or when it is exercised or whether restricted stock, 
RSUs, other stock-based compensation and long-term cash incentives are 
received when granted, earned, vested or paid out.\140\ Another 
commenter suggested that compensation be deemed received on the earlier 
of the date the compensation is paid to or earned by the executive 
officer, construing ``earned'' to mean when an executive officer 
obtains a non-forfeitable interest in a compensatory award.\141\
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    \140\ See letter from Brian Foley & Company, Inc.
    \141\ See letter from Meridian Compensation Partners, LLC.
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    As proposed, incentive-based compensation would be deemed received 
for purposes of triggering the recovery policy under Section 10D in the 
fiscal period \142\ during which the financial reporting measure 
specified in the incentive-based compensation award is attained, even 
if the payment or grant occurs after the end of that period.\143\ Under 
this standard, the date of receipt would depend upon the terms of the 
award. If the grant of an award is based, either wholly or in part, on 
satisfaction of a financial reporting measure, the award would be 
deemed received in the fiscal period when that measure was satisfied. 
If an equity award vests upon satisfaction of a financial reporting 
measure, the award would be deemed received in the fiscal period when 
it vests. Similarly, a cash award earned upon satisfaction of a 
financial reporting measure would be deemed received in the fiscal 
period when that measure is satisfied.
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    \142\ Including a transition period for a change in fiscal year, 
if applicable.
    \143\ Proposed Rule 10D-1(c)(6).
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    A particular award may be subject to multiple conditions. We are 
not proposing that an executive officer must have satisfied all 
conditions to an award for the incentive-based compensation to be 
deemed received for purposes of triggering the recovery policy. For 
example, an issuer could grant an executive officer an RSU award in 
which the number of RSUs earned is determined at the end of the three-
year incentive-based performance period (2015-2017), but the award is 
subject to service-based vesting for two more years (2018-2019). 
Although the executive officer does not have a non-forfeitable interest 
in the RSUs before expiration of the subsequent two-year service-based 
vesting period, the number of shares in which the RSUs ultimately will 
be paid will be established at the end of the three-year performance 
period. In light of Section 10D's purpose to require listed issuers to 
recover compensation that ``the executive would not have received if 
the accounting was done properly,'' \144\ we believe that in this 
circumstance the executive officer ``receives'' the compensation for 
purposes of triggering the recovery policy when the relevant financial 
reporting measure performance goal is attained, even if the executive 
officer has established only a contingent right to payment at that 
time. If the issuer's board of directors concludes in 2018 that the 
issuer will restate previously issued financial statements for 2015 
through 2017 (the three-year performance period),\145\ the recovery 
policy should apply to reduce the number of RSUs ultimately payable in 
stock, even though the executive has not yet satisfied the two-year 
service-based vesting condition to payment. In this example, if the 
executive officer were deemed not to receive the RSUs before obtaining 
a non-forfeitable interest in them, such a restatement of the financial 
statements that would reduce the number of RSUs ultimately payable in 
stock would not be subject to recovery because the incentive-based 
compensation would not have been received during the three-year look-
back period. We do not believe such an outcome would appropriately 
implement the policy underlying Section 10D, because it would mean that 
the mere passage of time pursuant to a service-based vesting condition 
or a subsequent performance condition unrelated to a financial 
reporting measure \146\ would preclude the issuer from recovering 
incentive-based compensation.
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    \144\ See Senate Report at 135.
    \145\ In this example, the three-year performance period 
coincides with the three-year look-back period covered by the 
recovery policy. See Section II.C.2.b. above regarding the three-
year look-back period.
    \146\ For example, if the subsequent condition in the example 
above was not service-based vesting but instead called for the 
issuer to open 100 stores during 2018 and 2019, or required the 
executive to comply with a non-compete or non-solicitation covenant 
during those years.
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    Ministerial acts or other conditions necessary to effect issuance 
or payment, such as calculating the amount earned or obtaining the 
board of directors' approval of payment, would not affect the 
determination of the date received. For example, for an equity award 
deemed received upon grant, receipt would occur in the fiscal year that 
the relevant financial reporting measure performance goal was 
satisfied, rather than a subsequent date on which the award was 
issued.\147\ Similarly, a non-equity incentive plan award would be 
deemed received in the fiscal year that the executive 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.\148\
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    \147\ The fiscal year in which an incentive-based equity award 
is deemed received upon grant in some cases may be a fiscal year 
preceding the fiscal year in which the ASC Topic 718 grant date 
occurs and for which it is reported in the Summary Compensation 
Table and Grants of Plan-Based Awards Table because our requirements 
for reporting equity awards in the Summary Compensation Table do not 
utilize a ``performance year'' standard. See Proxy Disclosure 
Enhancements, Release No. 33-9089 (Dec. 16, 2009) [74 FR 68334] at 
Section II.A.2.c.
    \148\ This would be the same fiscal year for which the non-
equity incentive plan award earnings are reported in the Summary 
Compensation Table, based on Instruction 1 to Item 402(c)(2)(vii), 
which provides: ``If the relevant performance measure is satisfied 
during the fiscal year (including for a single year in a plan with a 
multi-year performance measure), the earnings are reportable for 
that fiscal year, even if not payable until a later date, and are 
not reportable again in the fiscal year when amounts are paid to the 
named executive officer.''
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    Under proposed Rule 10D-1, incentive-based compensation would be 
subject to the issuer's recovery policy to the extent that it is 
received while the issuer has a class of securities listed on an 
exchange or an association.\149\ An award of incentive-based 
compensation granted to an executive officer before the issuer lists a 
class of securities would be subject to the recovery policy, so long as 
the incentive-based compensation was received by the executive officer 
while the issuer had a class of listed securities. Incentive-based 
compensation received by an executive officer before the issuer's 
securities become listed would not be subject to the recovery policy 
under our proposed

[[Page 41159]]

rule. As proposed, an exchange would not be permitted to list an issuer 
that it has delisted or that has been delisted from another exchange 
for failing to comply with its recovery policy until the issuer comes 
into compliance with that policy.\150\
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    \149\ Proposed Rule 10D-1(b)(1)(i)(A).
    \150\ Proposed Rule 10D-1(b)(1)(vi).
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Request for Comment
    39. Should incentive-based compensation be deemed ``received'' for 
purposes of triggering the recovery policy under Section 10D in the 
fiscal year during which attainment of the financial reporting measure 
specified in the incentive-based compensation award, by its terms, 
causes the incentive-based compensation to be granted, to be earned or 
to vest, as proposed? If not, when should incentive-based compensation 
be deemed ``received'' for purposes of triggering the recovery policy?
    40. Should an executive officer be required to obtain a non-
forfeitable entitlement to the incentive-based compensation to 
``receive'' the compensation? Would such a requirement effectuate the 
purpose of Section 10D? Should the rule specifically address the 
treatment of awards subject to multiple vesting conditions, only some 
of which may be linked to financial reporting measures? If so, what 
would be the appropriate treatment of such rewards?
    41. If following receipt, as proposed to be defined, an executive 
officer contributes incentive-based compensation to a nonqualified 
deferred compensation plan, how should deferral affect recovery? \151\
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    \151\ See Section II.C.3.a, below, addressing the computation of 
excess incentive-based compensation for this form of compensation.
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    42. Should incentive-based compensation be subject to the issuer's 
recovery policy only to the extent that it is received while the issuer 
has a class of securities listed, as proposed? If not, please explain 
in what circumstances a different standard should apply and why. For 
example, if a company lists in 2017, and restates the three prior 
fiscal years in 2018, should its policy require recovery of incentive-
based compensation received in 2015 or 2016?
3. Recovery Process
a. Determination of Excess Compensation
    Section 10D(2)(b) requires exchanges and associations to adopt 
listing standards that require issuers to adopt and comply with 
recovery policies that apply to the amount of incentive-based 
compensation received ``in excess of what would have been paid to the 
executive officer under the accounting restatement.''
    Commenters recommended that the Commission clarify how excess 
compensation subject to recovery should be determined.\152\ One 
commenter suggested that the Commission establish a clear set of 
guidelines as to how issuers should calculate the recoverable amount 
under a variety of common arrangements, or alternatively, a clear set 
of principles to be used to make such calculations.\153\ In some cases, 
commenters recommended specific ways to measure excess compensation for 
particular forms of incentive-based compensation. For example, for cash 
awards based upon the achievement of erroneous financial metrics, one 
commenter recommended that the excess incentive-based compensation 
should be the difference between the cash award that was granted and 
the cash award that should have been granted using the restated 
financial metric.\154\
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    \152\ See, e.g., letters from Center on Executive Compensation, 
Compensia, Inc., Meridian Compensation Partners, LLC, Pay Governance 
LLC and Towers Watson.
    \153\ See letter from Compensia, Inc.
    \154\ See letter from Center on Executive Compensation.
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    Several commenters sought clarity regarding performance-based 
equity awards, with some recommending various methods to calculate the 
recoverable amount for different forms of these awards, taking into 
account such factors as whether an award is granted or vested based on 
attaining a financial statement metric, whether or not an option has 
been exercised, and whether the shares have been sold.\155\
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    \155\ See, e.g., letters from Compensia, Inc., and Meridian 
Compensation Partners, LLC.
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    Regarding bonuses paid from ``pool plans,'' two commenters 
questioned whether determination of the recoverable amount might depend 
on whether the board or compensation committee had exercised any 
discretion, either in determining whether to allocate the entire pool 
to bonus awards or in determining individual bonus amounts.\156\ For 
example, commenters noted that if a restatement reduces the size of the 
bonus pool, but not below the aggregate amount that the board exercised 
discretion to pay out as bonuses, there would not appear to be any 
excess compensation to recover. Alternatively, if a restatement reduces 
the size of the bonus pool below the aggregate amount paid out, the 
commenters sought clarification whether each bonus paid would need to 
be ratably reduced, or if discretion could be exercised in allocating 
recovery of the excess amount among individual bonuses as long as the 
aggregate excess amount is recovered. Another commenter questioned, in 
general, whether the amount of compensation earned should be measured 
by reference to the target achieved, or the compensation actually 
provided after the compensation committee exercised discretion to 
either increase or decrease the amount.\157\ A different commenter 
suggested that where incentive-based compensation is not determined 
based solely on formulaic measures, but also on qualitative measures, 
the same percentage recoverable from the formulaic portion based on the 
restatement also should be recovered from the portion based on 
qualitative measures.\158\ Other commenters noted that executive 
officers would already have paid personal income taxes on incentive-
based compensation they had received.\159\
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    \156\ See letters from Center on Executive Compensation and 
Protective Life Corporation.
    \157\ See letter from Davis Polk & Wardwell LLP.
    \158\ See AFL-CIO Joint Letter.
    \159\ See letters from Clark Consulting, Davis Polk & Wardwell 
LLP and Frederic W. Cook & Co, Inc.
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    We propose to define the recoverable amount as ``the amount of 
incentive-based compensation received by the executive officer or 
former executive officer that exceeds the amount of incentive-based 
compensation that otherwise would have been received had it been 
determined based on the accounting restatement.'' \160\ Applying this 
definition, after an accounting restatement, the issuer would first 
recalculate the applicable financial reporting measure and the amount 
of incentive-based compensation based thereon. The issuer would then 
determine whether, based on that financial reporting measure as 
calculated relying on the original financial statements and taking into 
account any discretion that the compensation committee had applied to 
reduce the amount originally received, the executive officer received a 
greater amount of incentive-based compensation than would have been 
received applying the recalculated financial reporting measure.\161\ 
Where

[[Page 41160]]

incentive-based compensation is based only in part on the achievement 
of a financial reporting measure performance goal, the issuer first 
would determine the portion of the original incentive-based 
compensation based on or derived from the financial reporting measure 
that was restated. The issuer would then need to recalculate the 
affected portion based on the financial reporting measure as restated, 
and recover the difference between the greater amount based on the 
original financial statements and the lesser amount that would have 
been received based on the restatement.\162\
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    \160\ Proposed Rule 10D-1(b)(1)(iii).
    \161\ For example, assume a situation in which, based on the 
financial reporting measure as originally reported, the amount of 
the award was $3,000. However, the issuer exercised negative 
discretion to pay out only $2,000. Following the restatement, the 
amount of the award based on the corrected financial reporting 
measure is $1,800. Taking into account the issuer's exercise of 
negative discretion, the recoverable amount would be $200 (i.e., 
$2,000--$1,800).
    \162\ For example, assume a situation in which, based on the 
financial reporting measure as originally reported, the amount of 
the award was $3,000. The issuer exercised positive discretion to 
increase the amount by $1,000, paying out a total of $4,000. 
Following the restatement, the amount of the award based on the 
corrected financial reporting measure is $1,800. Taking into account 
the issuer's exercise of positive discretion, the recoverable amount 
would be $1,200, provided that based on the revised measurement, the 
exercise of positive discretion to increase the amount by $1,000 was 
still permitted under the terms of the plan.
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    For incentive-based compensation that is based on stock price or 
total shareholder return, where the amount of erroneously awarded 
compensation is not subject to mathematical recalculation directly from 
the information in an accounting restatement, the recoverable amount 
may be determined based on a reasonable estimate of the effect of the 
accounting restatement on the applicable measure.\163\ To reasonably 
estimate the effect on the stock price, there are a number of possible 
methods with different levels of complexity of the estimations and 
related costs.\164\ For these measures, the issuer would be required to 
maintain documentation of the determination of that reasonable estimate 
and provide such documentation to the relevant exchange or 
association.\165\
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    \163\ Proposed Rule 10D-1(b)(1)(iii)(A).
    \164\ See Section III.B.2, below, discussing different 
methodologies for determining a reasonable estimate of the effect of 
the accounting restatement on the stock price or total shareholder 
return.
    \165\ Proposed Rule 10D-1(b)(1)(iii)(B).
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    The recoverable amount would be calculated on a pre-tax basis \166\ 
to ensure that the company recovers the full amount of incentive-based 
compensation that was erroneously awarded, consistent with the policy 
underlying Section 10D. Recovery on a pre-tax basis also would permit 
the company to avoid the burden and administrative costs associated 
with calculating recoverable amounts based on the particular tax 
circumstances of individual executive officers, which may vary 
significantly based on factors independent of the incentive-based 
compensation.
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    \166\ Proposed Rule 10D-1(b)(1)(iii) provides that the 
erroneously awarded compensation shall be computed without regard to 
any taxes paid by the executive officer. The pre-tax amount refers 
to the full amount of incentive-based compensation received by the 
executive officer, rather than the amount remaining after he or she 
satisfies his or her personal income tax obligation on it.
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    While we intend for the definition to apply in a principles-based 
manner, we recognize that applying the principles may not always be 
simple. Cash awards that are received upon satisfaction of a financial 
reporting measure should be relatively straightforward. The recoverable 
amount would be the difference between the amount of the cash award 
(whether payable as a lump sum or over time) that was received and the 
amount that should have been received applying the restated financial 
reporting measure.\167\
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    \167\ Similarly, for nonqualified deferred compensation, the 
executive officer's account balance or distributions would be 
reduced by the excess incentive-based compensation contributed to 
the nonqualified deferred compensation plan and the interest or 
other earnings accrued thereon under the nonqualified deferred 
compensation plan. In addition, for retirement benefits under 
pension plans, the excess incentive-based compensation would be 
deducted from the benefit formula, and any related distributions 
would be recoverable.
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    For cash awards paid from bonus pools, the size of the aggregate 
bonus pool from which individual bonuses are paid would be reduced 
based on applying the restated financial reporting measure. If the 
reduced bonus pool is less than the aggregate amount of individual 
bonuses received from it, the excess amount of an individual bonus 
would be the pro rata portion of the deficiency. If the aggregate 
reduced bonus pool would have been sufficient to cover the individual 
bonuses received from it, then no recovery would be required.
    Equity awards involve different considerations. For equity awards, 
if the shares, options or SARs are still held at the time of recovery, 
the recoverable amount would be the number received in excess of the 
number that should have been received applying the restated financial 
reporting measure. If the options or SARs have been exercised, but the 
underlying shares have not been sold, the recoverable amount would be 
the number of shares underlying the excess options or SARs applying the 
restated financial measure. If the shares have been sold, the 
recoverable amount would be the sale proceeds received by the executive 
officer with respect to the excess number of shares.\168\ In any case 
in which the shares have been obtained upon exercise and payment of an 
exercise price, the recoverable amount would be reduced to reflect the 
applicable exercise price paid.\169\
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    \168\ Where excess shares have been gifted, such as gifts to 
charities, the recoverable amount would be the gifted shares' fair 
market value at the date of the gift.
    \169\ Shares sold can be traced consistent with Treas. Reg. 
1.1012-1(c) and Rule 144(d) [17 CFR 230.144(d)].
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    We recognize that there may be circumstances in which both proposed 
Rule 10D-1 and SOX Section 304 could provide for recovery of the same 
incentive-based compensation. The proposed rule is not intended to 
alter or otherwise affect the interpretation of Section 304 or the 
determination by the Commission or the courts of when reimbursement is 
required under Section 304. If, however, an executive officer 
reimburses an issuer pursuant to Section 304, such amounts should be 
credited to the extent that an issuer's Rule 10D-1 recovery policy 
requires repayment of the same compensation by that executive officer. 
Further, recovery under Rule 10D-1 would not preclude recovery under 
Section 304 to the extent any applicable amounts have not been 
reimbursed to the issuer.
Request for Comment
    43. Do the proposed rule and rule amendments articulate an 
appropriate standard for calculating the amount of excess incentive-
based compensation that listed issuers must recover? Why or why not?
    44. For incentive-based compensation based on stock price or total 
shareholder return, would permitting the recoverable amount to be 
determined based on a reasonable estimate of the effect of the 
accounting restatement, as proposed, facilitate administration of the 
rule by issuers and exchanges? Why or why not? Should we provide 
additional guidance regarding how such estimates should be calculated? 
If so, what particular factors should that guidance address?
    45. As proposed, should the issuer be required to maintain 
documentation of the determination of that reasonable estimate and 
provide such documentation to the relevant exchange? Why or why not? Is 
the documentation required sufficient for compliance monitoring? If 
not, what else should be required? Should the rule specify a period of 
time that an issuer would need to maintain such documentation or what 
types of documentation should be maintained? If so, what period of time 
or

[[Page 41161]]

documentation is appropriate? Should we require that such determination 
be disclosed, either to the exchange or in Commission filings? What 
would be the effects of such disclosure?
    46. Should the rule and rule amendments alternatively, or in 
addition, include specific instructions for how to compute the excess 
amount of specific forms of incentive-based compensation? If so, which 
ones and why?
    47. Is further guidance needed on the application of the proposed 
standard? If yes, what additional guidance is necessary? Is further 
guidance required regarding any particular form of compensation? For 
example:
    a. Should we provide guidance on how to determine the recoverable 
amount of supplemental retirement plan benefits that are calculated 
based on erroneously awarded incentive-based compensation? If so, what 
should that guidance be?
    b. For equity awards granted based on satisfaction of a financial 
reporting measure, the guidance above directs listed issuers to recover 
the excess number of shares or, if no longer held, the proceeds from 
the sale of the excess shares so that executive officers cannot benefit 
from future appreciation in shares that were not earned. Instead of 
recovering the excess number of shares, should listed issuers have the 
choice to recover the cash value of the excess shares? If so, should 
the shares be valued at the vesting date, the date the recoverable 
amount is determined, or some other date?
    c. Where the number of excess shares is less than the entire award 
and some of the shares received were sold and some are still held, 
should recovery be made first against the remaining shares that are 
held? Alternatively, should recovery apply first to shares that were 
sold, so as not to erode company stock holding policies? Should this 
decision be left to the listed issuer's discretion?
    d. Where excess shares have been gifted, such as gifts to 
charities, should the recoverable amount be the shares' fair market 
value at the date of the gift? If not, at what other date should the 
excess shares be valued?
    e. Is the guidance above appropriate for determining the 
recoverable amount where the listed issuer has exercised discretion to 
reduce or increase the original amount of incentive-based compensation 
received?
    48. Where the issuer chose to increase the original amount of 
incentive-based compensation, should an amount proportionate to the 
effect of the restatement on the financial statement measure also be 
recovered from the discretionary enhancement?
    49. One commenter recommended that the Commission require recovery 
of a proportionate amount of incentive compensation awarded under 
qualitative standards.\170\ Should we require recovery of amounts 
awarded under qualitative standards that may involve judgement by the 
board? If so, how would the excess compensation be calculated in those 
instances?
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    \170\ See AFL-CIO Joint Letter.
---------------------------------------------------------------------------

    50. Is further guidance needed regarding circumstances in which 
both proposed Rule 10D-1 and SOX Section 304 would apply?
b. Board Discretion Regarding Whether To Seek Recovery
    Section 10D requires exchanges and associations to adopt listing 
standards that require issuers to adopt and comply with recovery 
policies. Specifically, the statute provides that ``the issuer will 
recover'' incentive-based compensation, and does not address whether 
there are circumstances in which an issuer's board of directors may 
exercise discretion not to recover.
    Commenters suggested that the Commission's implementing rules 
should address the issue of board discretion whether to pursue recovery 
and, if such discretion is permitted, address its scope. Many of these 
commenters asserted that the Commission should allow for board 
discretion to determine whether to pursue recovery.\171\ Commenters 
raised concerns about situations where the potential costs of recovery 
may exceed the excess incentive-based compensation to be recovered 
\172\ and recommended that boards be permitted to evaluate the benefits 
of recovery against the costs involved.\173\ Commenters noted the 
following factors that may affect this decision: the likelihood of 
recovery; \174\ de minimis recovery; \175\ the need to pursue 
litigation to recover; \176\ and the possibility that recovery might 
violate existing statutory or contractual provisions.\177\ One 
commenter asserted that in the absence of discretion, companies will be 
incentivized to implement compensation arrangements that are not 
subject to Section 10D recovery provisions.\178\ Other commenters 
recommended the Commission establish a standard similar to the Troubled 
Asset Relief Program (``TARP'') standard where an issuer is not 
required to enforce its recovery policy if it would be unreasonable to 
do so.\179\
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    \171\ See letters from Davis Polk & Wardwell LLP, Center on 
Executive Compensation, Meridian Compensation Partners, LLC, 
American Benefits Council, Baker, Donelson, Bearman, Caldwell & 
Berkowitz, PC, Compensia, Inc., Clark Consulting, LLC, Society of 
Corporate Secretaries and Governance Professionals, Frederic W. Cook 
& Co., Inc., Stuart R. Lombardi and Protective Life Corporation.
    \172\ See letters from Clark Consulting, LLC and ABA Business 
Law Section.
    \173\ See letters from Davis Polk & Wardwell LLP, Meridian 
Compensation Partners, LLC, American Benefits Council, Compensia, 
Inc., Clark Consulting, LLC, Society of Corporate Secretaries and 
Governance Professionals, Stuart R. Lombardi and Protective Life 
Corporation.
    \174\ See letter from Society of Corporate Secretaries and 
Governance Professionals.
    \175\ See letters from Center on Executive Compensation, 
Meridian Compensation Partners, LLC, American Benefits Council, 
Frederic W. Cook & Co., Inc., and Protective Life Corporation.
    \176\ See letters from Society of Corporate Secretaries and 
Governance Professionals and Center on Executive Compensation.
    \177\ See letters from Society of Corporate Secretaries and 
Governance Professionals and Center on Executive Compensation.
    \178\ See letter from Stuart R. Lombardi. To guard against the 
abuse of discretion, this commenter recommended that following a 
restatement an issuer either should publicly announce its decision 
whether to pursue or decline recovery, or should delegate all 
clawback decision making authority to an independent party.
    \179\ See letters from Baker, Donelson, Bearman, Caldwell & 
Berkowitz, PC and Compensia, Inc.
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    In considering this issue, we note that the Emergency Economic 
Stabilization Act of 2008 (``EESA'') contained an executive 
compensation recovery provision \180\ applicable to any financial 
institution that sells troubled assets to the Secretary of the United 
States Department of the Treasury under TARP. In its interim final rule 
to provide guidance on the EESA's executive compensation and corporate 
governance provisions applicable to entities receiving financial 
assistance under TARP, the Department of the Treasury provided that 
``[t]he TARP recipient must exercise its clawback rights except to the 
extent it demonstrates that it is unreasonable to do so, such as, for 
example, if the expense of enforcing the rights would exceed the amount 
recovered.'' \181\
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    \180\ Section 111(b)(3)(B) of EESA, Public Law 110-343, 12 
U.S.C. 5221, as amended by Title VII of Division B of the American 
Recovery and Reinvestment Act of 2009 (``ARRA''), Public Law 111-5 
[123 STAT. 115] (Feb. 17, 2009).
    \181\ TARP Standards for Compensation and Corporate Governance, 
31 CFR 30.8.
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    We are mindful that allowing discretion whether to recover excess 
incentive-based compensation could undermine the purpose of Section 10D 
by permitting an issuer's board of directors to determine that an 
executive officer may retain incentive-based compensation to which he 
or she is not entitled. At the same time, we acknowledge that there are 
circumstances in which pursuing

[[Page 41162]]

recovery of excess incentive-based compensation may not be in the 
interest of shareholders and that a standard similar to the TARP 
standard would permit boards of directors to evaluate whether to pursue 
recovery of excess incentive-based compensation in particular 
circumstances.
    To address these circumstances, proposed Rule 10D-1 would provide 
that an issuer must recover erroneously awarded compensation in 
compliance with its recovery policy except to the extent that pursuit 
of recovery would be impracticable because it would impose undue costs 
on the issuer or its shareholders or would violate home country law and 
certain conditions are met. We believe the unqualified ``no-fault'' 
recovery mandate of Section 10D intends that the issuer should pursue 
recovery in most instances. For example, we do not believe the extent 
to which an individual executive officer may be responsible for the 
financial statement errors requiring the restatement could be 
considered in seeking the recovery. Further, we do not view 
inconsistency between the proposed rule and rule amendments and 
existing compensation contracts, in itself, as a basis for finding 
recovery to be impracticable, because issuers can amend those contracts 
to accommodate recovery.\182\
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    \182\ We note that some have suggested that issuers may be able 
to amend their by-laws to implement their recovery policies. See, 
e.g., Robert E. Scully Jr, Executive Compensation, the Business 
Judgment Rule, and the Dodd-Frank Act: Back to the Future for 
Private Litigation?, The Federal Lawyer, January 2011, pp 39-41.
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    In our view, the only criteria that should be considered are 
whether the direct costs of enforcing recovery would exceed the 
recoverable amounts or whether recovery would violate home country law. 
Before concluding that it would be impracticable to recover any amount 
of excess incentive-based compensation based on enforcement costs,\183\ 
the issuer would first need to make a reasonable attempt to recover 
that incentive-based compensation.\184\ The issuer would be required to 
document its attempts to recover, and provide that documentation to the 
exchange.\185\ As described in Section II.D, below, the issuer also 
would be required to disclose why it determined not to pursue recovery. 
We believe that in this circumstance requiring an attempt to recover is 
both consistent with the no-fault character of Section 10D, and 
necessary for the issuer to justify concluding that recovery of the 
amount at issue would be impracticable. Similarly, before concluding 
that it would be impracticable to recover because doing so would 
violate home country law, the issuer first would need to obtain an 
opinion of home country counsel, not unacceptable to the applicable 
national securities exchange or association, that recovery would result 
in such a violation.\186\ In addition, to minimize any incentive 
countries may have to change their laws in response to this provision, 
the relevant home country law must have been adopted in such home 
country prior to the date of publication in the Federal Register of 
proposed Rule 10D-1.
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    \183\ Only direct costs involving financial expenditures, such 
as reasonable legal expenses, would be considered for this purpose. 
Indirect costs relating to concerns such as reputation or the effect 
on hiring new executive officers would not be taken into account.
    \184\ Proposed Rule 10D-1(b)(1)(iv).
    \185\ Id.
    \186\ Id. The listed issuer would need to provide such opinion 
to the exchange or association.
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    In either case, to prevent potential conflicts of interest, any 
determination that recovery would be impracticable would need to be 
made by the issuer's committee of independent directors that is 
responsible for executive compensation decisions.\187\ In the absence 
of a compensation committee, the determination would need to be made by 
a majority of the independent directors serving on the board. Such a 
determination, as with all determinations under proposed Rule 10D-1, 
would be subject to review by the listing exchange.\188\
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    \187\ Exchange Act Rule 10C-1 mandated that the exchanges adopt 
listing standards to require that directors responsible for 
oversight of executive compensation (whether or not serving as part 
of a formal compensation committee) be independent. Examples of such 
listing standards are Section 303A.05 of the NYSE Listed Company 
Manual and NASDAQ Rule 5605(d), both of which require listed 
companies, with limited exceptions, to have a compensation committee 
composed entirely of independent directors. Listed companies were 
given until the earlier of their first annual meeting of 
shareholders after January 15, 2014 or October 31, 2014 to comply 
with the revised NYSE and Nasdaq independence requirements for 
compensation committee members.
    \188\ Proposed Rule 10D-1(b)(1)(iv).
---------------------------------------------------------------------------

    We believe that the proposed issuer discretion is necessary or 
appropriate in the public interest and consistent with the protection 
of investors because it would save issuers the expense of pursing 
recovery in circumstances where the costs of recovery could exceed or 
be disproportionate to the recoverable amounts, and for foreign private 
issuers, would avoid such issuers having to choose between potential 
de-listing or violating home country laws, either of which could be 
detrimental to shareholders. Further, as discussed below,\189\ we 
propose to require a listed issuer to disclose the reasons why it 
decided not to pursue recovery in particular instances. We believe that 
requiring this disclosure will mitigate potential abuse of this 
discretion.
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    \189\ See Section II.D.1, below.
---------------------------------------------------------------------------

Request for Comment
    51. Is the proposed issuer discretion not to pursue recovery of 
incentive-based compensation consistent with the purpose of Section 
10D? Is the scope of this discretion appropriate? Why or why not?
    52. Should the standard for exercising discretion not to recover be 
limited to the extent to which that recovery is impracticable? Should 
direct costs of recovery be a basis for exercising discretion not to 
recover? If so, what specific costs of recovery should be considered? 
For example, should only direct expenditures to third-parties be 
considered, as proposed? Should we further define what constitutes 
``direct costs''? Should an issuer be permitted to consider indirect 
costs, such as opportunity costs or reputational costs? Should the 
issuer disclose the cost estimates in its Exchange Act annual reports? 
If the cost estimates are not disclosed in the issuer's annual reports, 
should those costs be independently verified?
    53. Should the issuer first be required to make a reasonable 
attempt to recover that compensation, as proposed? If so, should we 
specify what steps to recover excess incentive-based compensation 
should be required or what constitutes a ``reasonable attempt'' to 
recover such compensation? Should this requirement depend on what 
financial reporting metric triggers recovery? Should the issuer be 
required to document its attempts to recover, and provide that 
documentation to the exchange?
    54. Should a listed issuer be permitted to forego recovering 
incentive-based compensation if doing so would violate home country 
law? In this circumstance, should the issuer first be required to 
obtain a legal opinion from home country counsel, as proposed? If not, 
why not? Are there any other conditions that should be met beyond a 
legal opinion from home country counsel before an issuer should be 
permitted to forego recovering incentive-based compensation in these 
circumstances? Should the proposed accommodation apply only to the 
extent that recovery would conflict with home country laws in effect 
before the date of publication of proposed Rule 10D-1 in the Federal 
Register, as proposed? If not, please explain why not. In addition, as 
proposed, the listed issuer would need to provide such opinion to the

[[Page 41163]]

exchange upon request. Should a copy of this opinion be filed with the 
Commission as an exhibit? Why or why not?
    55. Should the determination that recovery would be impracticable 
need to be made by the issuer's committee of independent directors 
responsible for executive compensation decisions, or in the absence of 
such a committee, by a majority of the independent directors serving on 
the board? If not, why not, and who should be authorized to make the 
determination?
    56. Are there other circumstances in which a listed issuer should 
be permitted to not pursue recovery from its former executive officers? 
If so, please explain the circumstances and what, if any, conditions 
should apply.
    57. Could application of the Section 10D recovery policy to current 
or former employees cause an issuer to violate any existing statutory 
or contractual provisions? If so, please specify the applicable 
provisions, how they might make affect recovery, and how an issuer 
could address them to implement recovery.
    58. Would issuers be able to implement their recovery policies with 
respect to existing compensation agreements and arrangements through 
amendments to their by-laws?
c. Board Discretion Regarding Manner of Recovery
    Section 10D does not address whether an issuer's board of directors 
may exercise discretion in the manner in which it recovers excess 
compensation to comply with the listing standards. Commenters suggested 
that the Commission's rule and rule amendments should address whether 
boards may exercise discretion in effecting recovery in two primary 
areas--the amount to be recovered when discretion was exercised in the 
original grant, and the means of recovery.
i. Amount To Be Recovered
    Commenters requested that boards be able to exercise discretion 
with regard to the amount to be recovered when discretion was used in 
determining the original award amount.\190\ For example, some issuers 
use ``pool plans,'' in which the size of the available bonus pool is 
determined based wholly or in part on satisfying a financial reporting 
measure performance goal, but specific amounts granted from the pool to 
individual executives are based on discretion. One commenter 
recommended that the issuer's board of directors have the discretion to 
decide how much to recover from each executive officer, as long as the 
issuer recovers the aggregate erroneously awarded amount.\191\ A 
different commenter stated that the issuer's board should be given the 
same level of discretion to determine the amount to be recovered from 
individual executive officers as was used in making the initial 
compensation decision.\192\ This commenter also suggested that the 
Commission consider situations in which the issuer's board would be 
permitted to settle for less than the full amount when seeking recovery 
under its recovery policy.\193\
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    \190\ See letters from Davis Polk & Wardwell LLP, Center on 
Executive Compensation and Society of Corporate Secretaries and 
Governance Professionals. See Section II.C.3.a, above, regarding the 
amount to be recovered when discretion was used to either increase 
or decrease the original award amount.
    \191\ See letter from Protective Life Corporation.
    \192\ See letter from Center on Executive Compensation.
    \193\ See letter from Center on Executive Compensation.
---------------------------------------------------------------------------

    As proposed, Rule 10D-1 would not limit the amount of compensation 
the board could seek to recover on any other legal basis. However, 
under the proposed rule, issuers' boards of directors would not be 
permitted to pursue differential recovery among executive officers, 
including in ``pool plans,'' where the board may have exercised 
discretion as to individual grants in allocating the bonus pool. In 
this instance, we believe that recovery should be pro rata based on the 
size of the original award rather than discretionary. We believe that 
permitting discretion in these instances would be inconsistent with 
Section 10D's no-fault standard and its goal of preventing executive 
officers from retaining compensation to which they are not entitled 
under the restated financial reporting measure. Additionally, 
permitting discretion in these instances could result in issuers 
selectively applying recovery policies to former executive officers, 
which we believe also would be inconsistent with Section 10D's purpose.
    Moreover, consistent with Section 10D's emphasis on preventing 
executive officers from retaining compensation that they received and 
to which they were not entitled under the issuer's restated results, 
and as described above, we are not proposing that issuers be permitted 
to settle for less than the full recovery amount unless impracticable 
from a cost standpoint. In that circumstance, the same conditions would 
apply as for a determination to forgo recovery.\194\
---------------------------------------------------------------------------

    \194\ See Section II.C.3.b, above.
---------------------------------------------------------------------------

ii. Means of Recovery
    In addition, several commenters recommended that boards of 
directors be able to exercise discretion on how to accomplish recovery 
under the recovery policy required by the proposed listing 
standards.\195\ One commenter suggested that boards may decide to 
recover the excess compensation over time or from future pay,\196\ 
while another commenter recommended that issuers recover erroneously 
paid compensation first from current compensation owing, and then from 
executive officers' after-tax funds.\197\ One commenter recommended 
that recovery of an incentive-based compensation award that has been 
earned but not paid should be accomplished through forfeiture of the 
award, while recovery in all other cases should be accomplished solely 
by the executive officer's repayment.\198\ Several commenters suggested 
cancellation of unvested equity and non-equity awards or offsetting 
against amounts otherwise payable by the issuer to the executive 
officer, such as deferred compensation, as possible recovery 
methods.\199\
---------------------------------------------------------------------------

    \195\ See letters from Davis Polk & Wardwell LLP, Center on 
Executive Compensation, Pay Governance LLC, Society of Corporate 
Secretaries and Governance Professionals, Stuart R. Lombardi and 
Protective Life Corporation.
    \196\ See letter from Davis Polk & Wardwell LLP.
    \197\ See letter from Frederic W. Cook & Co., Inc.
    \198\ See letter from Meridian Compensation Partners, LLC.
    \199\ See letters from Center on Executive Compensation, Society 
of Corporate Secretaries and Governance Professionals and Protective 
Life Corporation.
---------------------------------------------------------------------------

    We recognize that the appropriate means of recovery may vary by 
issuer and by type of compensation arrangement. Consequently, we 
believe issuers should be able to exercise discretion in how to 
accomplish recovery. Nevertheless, in exercising this discretion, we 
believe that issuers should act in a manner that effectuates the 
purpose of the statute--to prevent executive officers from retaining 
compensation that they received and to which they were not entitled 
under the issuer's restated results. Regardless of the means of 
recovery utilized, we believe that issuers should recover excess 
incentive-based compensation reasonably promptly, as undue delay would 
constitute non-compliance with an issuer's policy as required.
Request for Comment
    59. How and under what circumstances, if any, should the board of 
directors be able to exercise discretion regarding the amount to be 
recovered? What steps should the board

[[Page 41164]]

of directors be required to take, if any, before exercising any 
permitted discretion about the amount to be recovered from individual 
executive officers?
    60. Are there any material tax considerations relevant to whether 
an issuer should be able to exercise discretion as to the amount of 
recovery? If so, please explain.
    61. Would the exercise of discretion by an issuer's board of 
directors on the amount to be recovered where discretion was used in 
determining the original award amount (e.g., in a pool plan) be 
consistent with the purpose of Section 10D? If so, how?
    a. If an issuer uses a pool plan in which achievement of a 
financial reporting measure determines the aggregate amount of the 
bonus pool and the bonus pool is insufficient after giving effect to 
the restatement, how should the issuer determine the amount to be 
recovered? Should this decision be left to the board of directors or 
compensation committee? Should recovery be on a pro rata basis?
    62. Should an issuer's board of directors be able to exercise 
discretion regarding the means of recovery, as proposed? If so, how and 
under what circumstances should the board be able to exercise 
discretion regarding the means of recovery? Are there any steps the 
board should be required to take before it exercises any permitted 
discretion regarding the means of recovery?
    63. Should any of the principles discussed in this section be 
codified?
    64. Should deferred payment arrangements be permitted when an 
executive officer otherwise is unable to repay excess incentive-based 
compensation? If so, should the time period over which repayment may be 
deferred be limited?
    65. If recovery does not occur reasonably promptly, this would 
constitute non-compliance with an issuer's policy. Should there be an 
explicit window of time within which an issuer must have recovered 
excess incentive-based compensation from an executive beyond which the 
failure to recover would not be considered ``reasonably prompt''? Why 
or why not? If so, what should that time period be?
    66. Should an issuer be permitted to recover excess incentive-based 
compensation by netting incentive-based compensation overpayments with 
incentive-based compensation underpayments that result from restating 
financial statements for multiple periods during the three-year 
recovery period? For example, suppose an issuer's restatement for a 
material error in revenue recognition results in a shift in revenue 
from the most recent year to an earlier year in the three-year period, 
such that an incentive payment in the earlier year would have been 
greater under the restatement. Should the issuer be permitted to 
recover the excess incentive-based compensation in the later year by 
crediting the earlier ``underpayment''? Why or why not? Should the 
conclusion be different from the situation where the executive officer 
received incentive-based compensation due to the achievement of a 
cumulative performance goal for the three-year period based on the 
financial reporting measure? Why or why not?
    67. One commenter suggested that we specifically authorize or 
approve of the use of a nonqualified deferred compensation plan (e.g., 
a ``holdback plan'' or ``bonus bank'') to aid in the recovery of 
erroneously awarded incentive-based compensation.\200\ Would these or 
other mechanisms aid in the recovery of such compensation? Why or why 
not?
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    \200\ See letter from Clark Consulting.
---------------------------------------------------------------------------

4. Compliance With Recovery Policy
    Under the proposed rule and rule amendments, an issuer would be 
subject to delisting if it does not adopt and comply with its 
compensation recovery policy.\201\ The proposed rule and rule 
amendments do not specify the time by which the issuer must complete 
the recovery of excess incentive-based compensation. Rather, under 
proposed Rule 10D-1, an exchange would determine whether the steps an 
issuer is taking constitute compliance with its recovery policy. In 
making this assessment, an exchange would need to determine, among 
other things, whether the issuer was making a good faith effort to 
promptly pursue recovery.
---------------------------------------------------------------------------

    \201\ Under the proposed rule and rule amendments, it would also 
be subject to delisting if it does not disclose its compensation 
recovery policy in accordance with Commission rules.
---------------------------------------------------------------------------

Request for Comment
    68. Should Rule 10D-1 specify the time by which the issuer must 
complete the recovery of excess incentive-based compensation required 
by the listing standards?
    69. Should Rule 10D-1 provide an objective standard to determine 
whether an issuer is complying with its recovery policy? For example, 
if the issuer has not recovered a certain percentage of excess 
incentive-based compensation within a certain time period after a 
restatement that triggers application of the policy, should it be 
deemed non-compliant? If so, what percentages or time periods should be 
used, and why?
    70. Alternatively, should Rule 10D-1 provide a standard that 
includes different subjective criteria, or both subjective and 
objective criteria, to determine whether an issuer is complying with 
its recovery policy? If so, what standard should be used and why?
    71. Are there procedures that should be considered to assess 
compliance with an issuer's policies and procedures concerning recovery 
of excess incentive-based compensation? If so, what are they? Should an 
issuer be required to disclose those policies and procedures? Should 
there be an independent third-party assessment of an issuer's 
compliance with those policies and procedures?
    72. Could proposed Rule 10D-1 be revised to better ensure 
compliance with the obligation to recover? If so, how?

D. Disclosure of Issuer Policy on Incentive-Based Compensation

    Section 10D(b)(1) requires exchanges and associations to adopt 
listing standards that call ``for disclosure of the policy of the 
issuer on incentive-based compensation that is based on financial 
information required to be reported under the securities laws.'' 
Sections 10D(a) and (b) require that the Commission adopt rules 
requiring the exchanges to prohibit the listing of any security of an 
issuer that does not develop and implement a policy providing for such 
disclosure.
    Commenters noted that Section 10D(b)(1) could be read either to 
require disclosure about the issuer's policy on incentive-based 
compensation generally, or, instead, to require disclosure only about 
the issuer's recovery policy with regard to such compensation. One 
commenter \202\ requested that the Commission address how the 
disclosure required by Section 10D(b)(1) would relate to the recovery 
policy disclosure already provided in an issuer's CD&A.\203\ Another 
commenter recommended implementing Section 10D(b)(1)'s disclosure 
requirement by mandating that CD&A include the type of disclosure 
currently addressed but not mandated under Item 402(b)(2)(viii) of 
Regulation S-K, to the extent that such policies relate to financial

[[Page 41165]]

information required to be reported under the securities laws.\204\
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    \202\ See letter from Baker, Donelson, Bearman, Caldwell & 
Berkowitz, PC.
    \203\ Item 402(b)(2)(viii) provides as an example of information 
that may be material information to be disclosed under CD&A 
``[r]egistrant policies and decisions regarding the adjustment or 
recovery of awards or payments if the relevant registrant 
performance measures upon which they are based are restated or 
otherwise adjusted in a manner that would reduce the size of an 
award or payment.''
    \204\ See letter from ABA Business Law Section.
---------------------------------------------------------------------------

    A different commenter recommended that the Commission not interpret 
Section 10D(b)(1) as creating a new disclosure requirement for 
incentive-based compensation or, if the Commission does adopt a 
separate disclosure requirement, that it allow the requirement to be 
satisfied by identifying any types of incentive-based compensation that 
are based on financial information that is required to be reported 
under the securities laws.\205\ This commenter further recommended that 
the Commission allow an issuer to present any required disclosure on 
its general corporate Web site in view of the information about 
incentive-based compensation that is currently required in proxy 
materials under Item 402 of Regulation S-K.
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    \205\ See letter from Compensia, Inc.
---------------------------------------------------------------------------

    Other commenters sought disclosure of issuers' clawback decisions. 
One commenter recommended public disclosure of an issuer's decision 
whether or not to pursue recovery as a means to prevent abuse of any 
permitted discretion.\206\ A different commenter stated that in 
addition to disclosing the existence of a clawback policy, listed 
issuers should be required to disclose whether or not recovery has been 
initiated and completed, along with details of the sums recovered and 
identity of executives from whom compensation was recovered, as a 
prophylactic against firms that restate but do not meet their 
obligation to recover funds.\207\
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    \206\ See letter of Stuart R. Lombardi.
    \207\ See AFL-CIO Joint Letter, suggesting that this disclosure 
be in the Form 8-K.
---------------------------------------------------------------------------

    In part, because Section 10D(b)(1) comes under the Section 10D(b) 
heading ``Recovery of Funds,'' we construe its disclosure requirement 
to mean disclosure of the listed issuer's policy related to recovery of 
erroneously awarded compensation. This approach would permit an 
assessment of a listed issuer's compliance with the mandatory recovery 
policy, while avoiding a potential duplication of the existing 
disclosure requirements applicable to incentive-based compensation. The 
proposed disclosure requirements are intended to inform shareholders 
and the listing exchange as to both the substance of a listed issuer's 
recovery policy and how the listed issuer implements that policy in 
practice.
    While the specific language of Sections 10D(a) and (b) may be 
ambiguous, we believe that it is intended to require listed issuers to 
adopt, comply with, and provide disclosure about their compensation 
recovery policies. Accordingly, proposed Rule 10D-1 would call for the 
listing standards to include among the new requirements that listed 
issuers disclose their recovery policies.\208\ Implementing the 
disclosure requirement as an element of the listing standards would 
permit exchanges to commence de-listing proceedings for issuers that 
fail to make the required disclosure, as well as those that fail to 
adopt recovery policies or fail to comply with their terms.
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    \208\ Proposed Rule 10D-1(b)(1).
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    Further, to provide consistent disclosure across exchanges, 
proposed Rule 10D-1 would provide that the required disclosure about 
the issuer's recovery policy must be filed in accordance with the 
disclosure requirements of the federal securities laws. These 
requirements would be implemented by the proposed amendments to 
Regulation S-K and relevant forms described below. Structuring the 
provision in this manner would assure that, in addition to making the 
disclosure a condition to listing, it would be subject to Commission 
oversight to the same extent as other disclosure required in Commission 
filings.
    Finally, to facilitate verification of compliance by the exchanges, 
the listing standards of each exchange would require that listed 
issuers record their compensation recovery policies in writing, and 
these recovery policies would be filed with the Commission, as 
described immediately below.
1. Listed U.S. Issuers
    The first of the proposed disclosure requirements would amend Item 
601(b) of Regulation S-K to require that a listed issuer file its 
recovery policy as an exhibit to its annual report on Form 10-K.\209\ 
For this purpose, an issuer would be ``a listed issuer'' if it had a 
class of securities listed on an exchange registered pursuant to 
Section 6 of the Exchange Act or an association registered pursuant to 
Section 15A of the Exchange Act at any time during its last completed 
fiscal year. Because the disclosure is keyed to the statutorily 
mandated listing requirement, we would apply this disclosure 
requirement to all listed issuers and do not propose to apply it to 
issuers who do not have a listed class of securities.
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    \209\ Proposed Item 601(b)(96) of Regulation S-K. The Form 20-F 
Instructions as to Exhibits would be amended correspondingly to add 
new Instruction 17. Similarly, Form 40-F would be amended to add new 
paragraph (17(a)) to General Instruction B. Form N-CSR would be 
amended to renumber Item 12 (Exhibits) as Item 13 and add new 
paragraph (a)(3) to that item for those registered management 
investment companies that would be subject to the requirements of 
proposed Rule 10D-1.
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    Although not specifically required by the Act, to further implement 
Section 10D(b)(1), we are also using our discretionary authority to 
propose to amend Item 402 of Regulation S-K to require listed issuers 
to disclose how they have applied their recovery policies. Proposed 
Item 402(w) of Regulation S-K would apply if at any time during its 
last completed fiscal year either a restatement that required recovery 
of excess incentive-based compensation pursuant to the listed issuer's 
compensation recovery policy was completed or there was an outstanding 
balance of excess incentive-based compensation from the application of 
that policy to a prior restatement. In this circumstance, the listed 
issuer would be required to provide the following information in its 
Item 402 disclosure:
     For each restatement, the date on which the listed issuer 
was required to prepare an accounting restatement, the aggregate dollar 
amount of excess incentive-based compensation attributable to such 
accounting restatement and the aggregate dollar amount of excess 
incentive-based compensation that remains outstanding at the end of its 
last completed fiscal year; \210\
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    \210\ Proposed Instruction 4 to Item 402(w) would provide that 
if the aggregate dollar amount of excess incentive-based 
compensation has not yet been determined, the listed issuer would 
disclose this fact and explain the reasons.
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     The estimates used to determine the excess incentive-based 
compensation attributable to such accounting restatement, if the 
financial reporting measure related to a stock price or total 
shareholder return metric;
     The name of each person subject to recovery of excess 
incentive-based compensation attributable to an accounting restatement, 
if any, from whom the listed issuer decided during the last completed 
fiscal year not to pursue recovery, the amount forgone for each such 
person, and a brief description of the reason the listed issuer decided 
in each case not to pursue recovery; and
     The name of, and amount due from, each person from whom, 
at the end of its last completed fiscal year, excess incentive-based 
compensation had been outstanding for 180 days or longer since the date 
the issuer determined the amount the person owed.
    As proposed, the disclosure would show a listed issuer's activity 
to recover excess incentive-based compensation

[[Page 41166]]

during its last completed fiscal year. We believe this disclosure would 
inform shareholders' voting and investment decisions and help exchanges 
ensure compliance with their listing standards. All listed issuers 
would be subject to Item 402(w) disclosure.\211\ The proposed 
disclosure would be included along with the listed issuer's other Item 
402 disclosure in annual reports on Form 10-K and any proxy and consent 
solicitation materials that require executive compensation disclosure 
pursuant to Item 402 of Regulation S-K.\212\ As proposed, a listed 
issuer that complies with its Item 402(w) disclosure requirements would 
not need to disclose any incentive-based compensation recovery pursuant 
to Item 404(a).\213\ With respect to registered management investment 
companies subject to proposed Rule 10D-1, information mirroring the 
proposed Item 402(w) disclosure would be included in annual reports on 
Form N-CSR and in proxy statements and information statements relating 
to the election of directors.\214\
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    \211\ See proposed Instruction 1 to Item 402(w), defining the 
term ``listed registrant; and proposed Instruction 2 to Item 402(w) 
defining the term ``compensation recovery policy.''
    \212\ Proposed Instruction 5 to Item 402(w).
    \213\ Proposed Instruction 5.a.iii to Item 404(a) of Regulation 
S-K. Item 404(a) requires a description of any transaction, since 
the beginning of the issuer's last fiscal year, or any currently 
proposed transaction, in which the issuer was or is to be a 
participant and the amount involved exceeds $120,000, and in which 
any related person had or will have a direct or indirect material 
interest. For registered management investment companies, see 
proposed Instruction 1 to Item 22(b)(20) of Schedule 14A 
(information provided pursuant to Item 22(b)(20) is deemed to 
satisfy the requirements of paragraphs (b)(8) and (b)(11) of Item 22 
with respect to the recovery of erroneously awarded compensation 
pursuant to Rule 10D-1(b)(1)).
    \214\ Proposed Item 12 of Form N-CSR; proposed Item 22(b)(20) of 
Schedule 14A. We are also proposing to amend General Instruction D 
to Form N-CSR to permit registered management investment companies 
subject to proposed Rule 10D-1 to answer the information required by 
proposed Item 12 by incorporating by reference from the company's 
definitive proxy statement or definitive information statement.
---------------------------------------------------------------------------

    Since our proposal would apply to any current or former executive 
officer to recovery, rather than only the ``named executive officers'' 
whose compensation is subject to discussion in CD&A, we propose this 
disclosure requirement as a separate item rather than as an amendment 
to CD&A. If the listed issuer is required to provide CD&A under Item 
402 of Regulation S-K, however, the listed issuer could choose to 
include the disclosure required by proposed Item 402(w) in its CD&A 
discussion of its recovery policies and decisions pursuant to Item 
402(b)(2)(viii) of Regulation S-K. Such a practice could benefit 
investors by disclosing all compensation recovery information in a 
single location in the filing.
    We also considered implementing Section 10D(b)(1)'s disclosure 
requirement by mandating that CD&A include the type of disclosure 
currently addressed but not mandated under Item 402(b)(2)(viii) of 
Regulation S-K, to the extent that such policies relate to financial 
information required to be reported under the securities laws. This 
approach, however, would always locate the disclosure in CD&A, a 
section that requires discussion of the compensation awarded to, earned 
by, or paid to the smaller group of ``named executive officers.'' 
Further, smaller reporting companies, emerging growth companies and 
foreign private issuers are not required to provide CD&A in their 
filings and proposed Item 402(w) disclosure would be required in some 
filings that do not require CD&A disclosure.\215\ In addition, the 
disclosure called for by CD&A is not limited to recovery triggered by 
the restatement of a financial reporting measure, but instead 
encompasses other adjustments that would reduce the size of an award or 
payment, including with respect to an award based on a strategic or 
operational measure.\216\
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    \215\ Smaller reporting companies and emerging growth companies 
are not required to provide CD&A in accordance with the scaled 
disclosure requirements contained in Item 402 of Regulation S-K. See 
Item 402(l) of Regulation S-K and Section 102(c) of the JOBS Act. 
Foreign private issuers and filers under the multijurisdictional 
disclosure system (``MJDS'') who file annual reports on Form 20-F or 
Form 40-F, respectively, are not subject to Item 402 of Regulation 
S-K and are not required to provide CD&A. See Form 20-F and Form 40-
F. Similarly, foreign private issuers electing to use U.S. issuer 
registration and reporting forms are not required to provide CD&A 
because they will be deemed to comply with Item 402 by providing the 
information required by Items 6.B and 6.E of Form 20-F, with more 
detailed information provided if otherwise made publicly available 
or required to be disclosed by the issuer's home jurisdiction or a 
market in which its securities are listed or traded. See Item 
402(a)(1) of Regulation S-K.
    In addition, Form N-CSR and Schedule 14A do not require 
registered investment companies to provide CD&A disclosure. 
Currently, registered investment companies are not subject to Item 
402 disclosure. We are proposing that registered management 
investment companies subject to proposed Rule 10D-1 would provide 
information mirroring the proposed Item 402(w) disclosure in annual 
reports on Form N-CSR pursuant to proposed Item 12 of that form, and 
in proxy statements and information statements pursuant to proposed 
Item 22(b)(20) of Schedule 14A.
    \216\ Item 402(b)(2)(viii) of Regulation S-K: ``Registrant 
policies and decisions regarding the adjustment or recovery of 
awards or payments if the relevant registrant performance measures 
upon which they are based are restated or otherwise adjusted in a 
manner that would reduce the size of an award or payment.''
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    We are also proposing amendments to the Summary Compensation Table 
disclosure requirements. A new instruction to the Summary Compensation 
Table would require that any amounts recovered pursuant to a listed 
issuer's erroneously awarded compensation recovery policy reduce the 
amount reported in the applicable column for the fiscal year in which 
the amount recovered initially was reported, and be identified by 
footnote.\217\ For example, if a listed issuer reported that in 2016 
its Principal Executive Officer earned $1 million in non-equity 
incentive plan award compensation, and in 2017 a restatement of 2016 
financial statements resulted in recovery of $300,000 of that 
incentive-based compensation, the 2017 Summary Compensation Table would 
revise the 2016 reported amount to $700,000, with footnote disclosure 
of the $300,000 recovered. The Summary Compensation Table ``total'' 
column would also be revised the same way. The new instruction would 
apply in any filing requiring Summary Compensation Table disclosure 
covering the affected fiscal year, including in Securities Act 
registration statements.
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    \217\ Proposed Instruction 5 to Item 402(c), and proposed 
Instruction 5 to Item 402(n).
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    We are proposing that the disclosure required by proposed Item 
402(w) be provided in interactive data format using XBRL using block-
text tagging.\218\ The interactive data would have to be provided as an 
exhibit to the definitive proxy or information statement filed with the 
Commission and as an exhibit to the annual report on Form 10-K.\219\ 
Issuers would be required to prepare their interactive data using the 
list of tags the Commission specifies and submit them with any 
supporting files the EDGAR Filer Manual prescribes.\220\ This 
requirement generally would apply to all listed issuers.\221\ We 
believe requiring the data to be tagged would lower the cost to 
investors of collecting this information, and would permit data to be 
analyzed more quickly by shareholders, exchanges and other end-users 
than if the data was provided in a non-machine readable format.
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    \218\ Data becomes interactive when it is labeled or ``tagged'' 
using a computer markup language such as XBRL that software can 
process for analysis.
    \219\ Proposed Item 25 of Schedule 14A and proposed Item 
601(b)(97) of Regulation S-K.
    \220\ The EDGAR Filer Manual is available at: http://www.sec.gov/info/edgar/edmanuals.htm.
    \221\ See n. 229, below.
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2. Listed Foreign Issuers
    Foreign private issuers, including Canadian issuers using the MJDS, 
would be required to provide the same information called for by Item 
402(w) in, and to file their erroneously awarded

[[Page 41167]]

compensation policies as an exhibit to, the annual reports they file 
with the Commission pursuant to Section 13(a) of the Exchange Act.\222\ 
We propose to require foreign private issuers, including MJDS filers, 
to disclose the information in annual reports they file on Form 20-F, 
Form 10-K \223\ and Form 40-F, as applicable. Because securities 
registered by these listed issuers are exempt from Section 14(a) of the 
Exchange Act,\224\ they would not be required to disclose the 
information in any proxy or consent solicitation materials with respect 
to their securities.
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    \222\ A foreign private issuer required to file annual reports 
with the Commission pursuant to Section 13(a) or Section 15(d) of 
the Exchange Act may file on Form 20-F or, if it elects to use the 
registration and reporting forms that U.S. issuers use, on Form 10-
K. MJDS filers are those eligible Canadian reporting issuers that 
file registration statements and reports with the Commission in 
accordance with the requirements of the MJDS. MJDS filers file 
annual reports with the Commission pursuant to Section 13(a) or 
Section 15(d) of the Exchange Act on Form 40-F.
    \223\ If a foreign private issuer elects to use the registration 
and reporting forms that U.S. issuers use and files its annual 
report on Form 10-K, it is deemed to comply with Item 402 of 
Regulation S-K, an express form requirement of Form 10-K, by 
complying with Item 402(a)(1) of Regulation S-K. Therefore, we are 
also proposing to amend Item 402(a)(1) of Regulation S-K to include 
proposed Item 6.F of Form 20-F, which calls for the same disclosure 
as proposed Item 402(w).
    \224\ See Exchange Act Rule 3a12-3 (stating that securities 
registered by a foreign private issuer, as defined in Rule 3b-4, 
shall be exempt from sections 14(a), 14(b), 14(c), 14(f) and 16 of 
the Exchange Act).
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    Form 20-F is used as either the registration statement or annual 
report for foreign private issuers under the Exchange Act.\225\ The 
proposals would amend Item 402(a)(1) to add proposed Item 6.F of Form 
20-F to the list of mandatorily required executive compensation 
disclosures for foreign private issuers.\226\ As proposed, Item 6.F 
would mirror the disclosure requirements of Item 402(w). In addition, a 
listed foreign private issuer that provides the disclosure required by 
Item 6.F of Form 20-F would not need to provide Item 7.B \227\ 
disclosure of any individual excess incentive-based compensation 
recovery transaction otherwise subject to Item 7.B.\228\ We are 
proposing a similar amendment to Form 40-F to add Paragraph (17) of 
General Instruction B to mirror the disclosure requirements of Item 
402(w). As discussed above, listed issuers would generally be required 
to tag this disclosure in an interactive data format.\229\
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    \225\ Form 20-F also sets forth disclosure requirements for 
registration statements filed by foreign private issuers under the 
Securities Act. Effective in 2000, the Commission incorporated in 
Form 20-F the International Equity Disclosure Standards, which were 
published by the International Organization of Securities 
Commissions (IOSCO). Release No. 33-7745 (Sept. 28, 1999) [64 FR 
53900]. The disclosure requirements for related party transactions 
are set forth in Item 7.B of Form 20-F.
    \226\ The amendment would require a foreign private issuer that 
elects to provide domestic Item 402 disclosure to provide Item 
402(w) disclosure in its annual report.
    \227\ Item 7.B requires a description of related party 
transactions for foreign private issuers.
    \228\ Proposed Instruction 4 to Item 7.B of Form 20-F.
    \229\ In general, foreign private issuers are required to submit 
Interactive Data Files, as defined in Rule 11 of Regulation S-T, to 
the Commission with their financial statements; however, those 
foreign private issuers that prepare their financial statements in 
accordance with International Financial Reporting Standards (IFRS) 
as issued by the International Accounting Standards Board are not 
required to submit Interactive Data Files until the Commission 
specifies on its Web site a taxonomy for use by such foreign private 
issuers in preparing their Interactive Data Files. See Interactive 
Data to Improve Financial Reporting, Release No. 33-9002 (Jan. 30, 
2009) at n. 94 http://www.sec.gov/rules/final/2009/33-9002.pdf. See 
also Letter to the Center for Audit Quality (Apr. 8, 2011) at http://www.sec.gov/divisions/corpfin/cf-noaction/2011/caq040811.htm. We 
anticipate that foreign private issuers that do not yet submit a 
data file with their financial statements would have a similar 
accommodation for submitting proposed Item 6.F disclosure in a 
tagged format.
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Request for Comment
    73. Is the proposed approach of having the listing standard require 
an issuer to disclose its compensation recovery policy an appropriate 
means to implement Sections 10D(a) and 10D(b)(1)?
    74. Would it be preferable to implement the disclosure requirement 
only through issuer disclosure requirements? Alternatively, would it be 
preferable to make the disclosure requirement solely a listing standard 
requirement? If so, please explain why.
    75. Should a listed issuer be required, as proposed, to file as an 
exhibit to its Exchange Act annual report its policy regarding the 
recovery of incentive-based compensation that is based on or derived 
from financial information required to be reported under the securities 
laws? Are there better ways to disclose the policy? Should the policy 
be included in the text of the Exchange Act annual report?
    76. Would proposed Item 402(w) and the proposed amendment to Item 
404 elicit the appropriate level of detail about how issuers have 
applied their recovery policies? Should listed issuers be required to 
disclose the names of executive officers from whom recovery has been 
forgone, the amounts forgone and the reason the listed issuer decided 
not to pursue recovery? Should listed issuers be required to disclose 
the names of executive officers from whom, as of the end of the last 
completed fiscal year, excess incentive-based compensation had been 
outstanding for 180 days or longer since the date the issuer determined 
the amount the person owed? If not, are there different disclosures 
that should be required?
    77. Should an issuer also be required to disclose the basis of the 
determination of the amount of excess incentive-based compensation and 
any critical estimates used in determining the amounts? Should a listed 
issuer also be required to disclose the process or procedures by which 
it will seek to recover excess incentive-based compensation for amounts 
in which it is seeking recovery? Why or why not? If not, what should be 
disclosed and why?
    78. As proposed, Item 402(w) disclosure would be required if at any 
time during the last completed fiscal year either a restatement was 
completed that required recovery pursuant to the listed issuer's 
compensation recovery policy, or there was an outstanding balance of 
excess incentive-based compensation based on application of that policy 
to a prior restatement. Should the disclosure proposed in Item 402(w) 
be required in both these circumstances? If not, please explain why. 
Will it be clear if a restatement was completed during a fiscal year, 
such that disclosure would be required? If not, what guidance should we 
provide? Alternatively, should listed issuers be required to disclose 
every restatement in Item 402(w)--even if recovery of excess incentive-
based compensation is not required?
    79. Should Item 402(w) disclosure be required even after an issuer 
has been delisted if it has not recovered all compensation under the 
policy?
    80. Would the proposed Item 402(w) disclosure properly track any 
amount of incentive-based compensation subject to recovery through the 
duration of the recovery obligation until that amount either is 
recovered or the listed issuer concludes that recovery would be 
impracticable? If not, how should we revise the disclosure requirement 
to better track such amounts?
    81. Is there any additional information that would be important to 
investors that should be disclosed?
    82. Should the disclosure proposed by Item 402(w) of Regulation S-K 
be required only in annual reports and proxy and consent solicitations, 
as proposed? If not, please explain why. Should the disclosure of a 
listed issuer's application of its recovery policy be implemented by 
amending the executive compensation disclosure requirements of Item 
402, as proposed? Alternatively, should it be implemented

[[Page 41168]]

by amending the Item 407 corporate governance disclosure requirements, 
or by adopting a new Item of Regulation S-K? If so, please explain why.
    83. Should a listed issuer only be required to provide the 
disclosure proposed by Item 402(w) in a report to its listing exchange 
or association, rather than in its annual reports and proxy and consent 
solicitations? If detailed notification is provided to its exchange or 
association, what type of disclosure, if any, should be made in a 
listed issuer's Commission filings? Alternatively, should a listed 
issuer be required to provide the proposed Item 402(w) disclosure and, 
in addition, be required to make a separate notification to its 
exchange or association?
    84. How would the proposed Item 402(w) disclosure be used by 
institutional and retail investors, investment advisers, and proxy 
advisory firms in making voting decisions and recommendations on 
matters such as director elections and executive compensation?
    85. Should we require that the disclosure required by proposed Item 
402(w) be tagged in XBRL format, as proposed? Should we require a 
different format, such as, for example, eXtensible Markup Language 
(XML)? Would tagging these disclosures enhance the ability of 
shareholders and exchanges to assess issuers' compliance with their 
recovery policies? Alternatively, instead of requiring that either of 
these disclosures be tagged, should tagging this disclosure be 
optional?
    86. Is the burden to implement the proposed tagging requirements 
comparatively greater for smaller reporting companies and emerging 
growth companies than for other issuers, such that we should exempt 
them or provide them a phase-in period for this requirement? If so, 
please explain the differential burden and how long a phase-in period 
it would justify.
    87. We anticipate that foreign private issuers would not be 
required to submit an electronic data file with proposed Item 6.F 
disclosure until they submit financial statement information in an 
electronic data file. Is there a reason to require this information to 
be tagged before financial statement information is available in an 
electronic data file? What would the relative costs and benefits be of 
filing this information for the first time together or filing them 
separately?
    88. Is the proposed instruction to Item 404(a), which would exclude 
a transaction involving recovery of excess incentive-based compensation 
that is disclosed pursuant to Item 402(w) from disclosure as a related 
party transaction, appropriate? Why or why not?
    89. In the Summary Compensation Table, should any amount recovered 
pursuant to a listed issuer's recovery policy reduce the amount 
reported in the applicable column for the fiscal year in which the 
amount recovered initially was reported, as proposed? For example, with 
respect to equity awards, should the then-probable grant date fair 
value reported be reduced by the portion of that grant date fair value 
attributable to the number of shares or options recovered? Should this 
disclosure be required in any filing containing Summary Compensation 
Table disclosure? Should we require similar reductions in amounts 
reported in compensation tables required for registered management 
investment companies? Why or why not? Are there any special 
considerations relating to registered management investment companies 
that make disclosing this information more or less useful than similar 
disclosure by operating companies? If so, please describe.
    90. Our rules permit emerging growth companies and smaller 
reporting companies to provide scaled disclosure of certain 
requirements. Should the proposed disclosure rules for incentive-based 
compensation recovery policies be scaled for these companies? If so, 
please explain why and in what manner.
    91. Is the disclosure proposed to be included in annual reports on 
Form N-CSR and proxy statements and information statements that mirrors 
the proposed disclosure in Item 402(w) appropriate for registered 
management investment companies subject to the rule? Should it be 
modified and, if so, how? Is it appropriate to include disclosure in 
both Form N-CSR reports and proxy statements and information 
statements? Should we, as proposed, amend General Instruction D to 
permit registered management investment companies to answer proposed 
Item 12 of Form N-CSR by incorporating by reference information from 
definitive proxy statements and definitive information statements? Why 
or why not? Should the proposed disclosure appear elsewhere in addition 
to, or in lieu of, reports on Form N-CSR and proxy and information 
statements, and, if so, where (e.g., the Statement of Additional 
Information)? Should we require that registered management investment 
companies tag these disclosures in XBRL format, as proposed? Why or why 
not? Are there any special considerations relating to registered 
management investment companies that make tagging this information more 
or less useful than similar tagging by operating companies? If so, 
please describe.
    92. Should listed foreign private issuers, including MJDS filers, 
be exempt from the requirement to provide disclosure about compensation 
recovery policies? If so, please explain why.

E. Indemnification and Insurance

    State indemnification statutes, indemnification provisions in an 
issuer's charter, bylaws, or general corporate policy and coverage 
under directors' and officers' liability insurance provisions may 
protect executive officers from personal liability for costs incurred 
in a successful defense against a claim or lawsuit resulting from the 
executive officer's service to the issuer.\230\ Commenters requested 
clarification about whether issuers may indemnify executive officers 
whose compensation is recovered due to no fault of their own.\231\ If 
the Commission does not prohibit such arrangements, these commenters 
asserted that issuers should be required to disclose the existence of 
these agreements in their proxy statements and other filings.
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    \230\ In the context of Securities Act registration statements, 
a registrant is required to ``state the general effect of any 
statute, charter provisions, by-laws, contract or other arrangements 
under which any controlling persons, director or officer of the 
registrant is insured or indemnified in any manner against liability 
which he may incur in his capacity as such.'' Item 702 of Regulation 
S-K.
    \231\ See letters from Towers Watson and Baker, Donelson, 
Bearman, Caldwell & Berkowitz, PC.
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    We believe that indemnification arrangements may not be used to 
avoid or nullify the recovery required by Section 10(D). Section 10D's 
listing standard requirement that ``the issuer will recover'' is 
inconsistent with indemnification because a listed issuer does not 
effectively ``recover'' the excess compensation from the executive 
officer if it has an agreement, arrangement or understanding that it 
will mitigate some or all of the consequences of the recovery.\232\
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    \232\ See Cohen v. Viray, 622 F.3d 188, 195 (2d Cir. 2010) 
(holding that an indemnification agreement cannot be used to release 
chief executive officer and chief financial officer from liability 
to repay compensation under Section 304 of SOX, in part because 
``indemnification cannot be permitted where it would effectively 
nullify a statute''); see, also Senate Report at 136 (``[I]t is 
unfair to shareholders for corporations to allow executives to 
retain compensation that they were awarded erroneously.''). To the 
extent that an issuer indemnifies an executive officer, arranges for 
or provides insurance protecting against the risk that incentive-
based compensation will be recovered pursuant to the issuer's 
recovery policy, whether directly by purchasing this coverage or 
indirectly by increasing the executive compensation to facilitate 
the executive's purchase of this coverage, the executive officer 
retains the excess compensation to which he or she was not entitled.

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[[Page 41169]]

    Congress designed the recovery policy required by Section 10D to 
apply on a no-fault basis, requiring listed issuers to develop and 
implement a policy to recover ``any compensation in excess of what 
would have been paid to the executive officer had correct accounting 
procedures been followed.'' \233\ Indemnification arrangements that 
permit executive officers to retain compensation that they were not 
entitled to receive based on restated financial statements 
fundamentally undermine the purpose of Section 10D.\234\
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    \233\ See Senate Report at 136.
    \234\ Cf. First Golden Bancorporation v. Weiszmann, 942 F.2d 
726, 729 (10th Cir. 1991) (finding any attempt by a corporate 
insider to seek indemnity against liability for short-swing profits 
under Section 16(b) of the Exchange Act void as against public 
policy where Congress had a clear intent to provide a ``catch-all, 
prophylactic remedy, not requiring proof of actual misconduct.'').
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    We further believe that Section 29(a) of the Exchange Act would 
render any indemnification agreement unenforceable to the extent that 
the agreement purported to relieve the issuer of its obligation under 
Section 10(D), the proposed rule and rule amendments, and a resulting 
listing standard to recover erroneously-paid incentive compensation. 
Section 29(a) provides that ``[a]ny condition, stipulation, or 
provision binding any person to waive compliance with any provision of 
this title or of any rule or regulation thereunder, or of any rule of a 
self-regulatory organization, shall be void.'' \235\ As courts have 
noted, ``by its terms, Section 29(a) `prohibits waiver of the 
substantive obligations imposed by the Exchange Act.' . . . . The 
underlying concern of this section is `whether the [challenged] 
agreement weakens [the] ability to recover under the Exchange Act.' '' 
\236\ Thus, we believe that Section 29(a) would not permit an 
indemnification agreement to undermine an issuer's right and obligation 
to recover excess incentive-based compensation.\237\
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    \235\ 15 U.S.C. 77cc. National securities exchanges and national 
securities associations are self-regulatory organizations. 15 U.S.C. 
78c(a)(26).
    \236\ AES Corp. v. The Dow Chemical Company, 325 F.3d 174, 179 
(3d Cir. 2003) (quoting Shearson/American Express, Inc. v. McMahon, 
482 U.S. 220, 228, 230 (1987)).
    \237\ See Cohen v. Viray, 622 F.3d at 195 (citing Section 29(a) 
in rejecting indemnification against SOX Sec.  304 liability); 
Allied Artists Pictures Corp. v. Giroux, 312 F. Supp. 450 (S.D.N.Y. 
1970) (Section 29(a) rendered general release given by corporation 
to former chairman ``unenforceable as a matter of law'' in action by 
corporation to recover short-swing profits action under Section 
16(b) of the Exchange Act).
---------------------------------------------------------------------------

    For these reasons, Rule 10D-1, as proposed, would prohibit a listed 
issuer from indemnifying any executive officer or former executive 
officer against the loss of erroneously awarded compensation.\238\ 
Further, while an executive officer may be able to purchase a third-
party insurance policy to fund potential recovery obligations, the 
indemnification prohibition would prohibit an issuer from paying or 
reimbursing the executive for premiums for such an insurance policy. 
For the reasons stated above, we believe that indemnification and 
insurance premium payment or reimbursement arrangements would frustrate 
Section 10D's ultimate purpose of preventing an executive officer from 
retaining compensation ``that the executive would not have received if 
the accounting was done properly and was not entitled to.'' \239\
---------------------------------------------------------------------------

    \238\ Proposed Rule 10D-1(b)(1)(v).
    \239\ See Senate Report at 135.
---------------------------------------------------------------------------

Request for Comment
    93. Should we require the exchanges to adopt listing standards that 
would prohibit issuers from indemnifying executive officers and/or 
funding the purchase of insurance to protect against the risk that an 
executive officer will be subject to the issuer's recovery policy, as 
proposed?
    94. Should such listing standards also prohibit issuers from 
indemnifying executive officers' litigation expenses in recovery 
actions?
    95. As noted above, the anti-indemnification provisions of Rule 
10D-1 would prohibit agreements, arrangements or understandings that 
directly or indirectly mitigate some or all of the consequences of 
recovery. Will the exchanges and issuers be able to distinguish between 
payments that are made to mitigate the effect of a recovery and those 
that are paid as compensation in the ordinary course of business?
    96. Should we define ``indemnification'' for purposes of the 
recovery under Section 10D? If so, how should it be defined? Should it 
require that there be an agreement on the part of the indemnitor in 
advance of the event for which the indemnitee is being indemnified?

F. Transition and Timing

    We received a number of comments regarding timing and transition 
issues. Commenters generally advocated for prospective application of 
the recovery policy required by the listing standard. Commenters who 
addressed the application of Section 10D to former executive officers 
expressed concern about retroactive application to persons who were 
executive officers before Section 10D was enacted.\240\ Some commenters 
recommended specific dates after which incentive-based compensation 
should be subject to recovery, such as the enactment date of the 
Act,\241\ the effective date of the final implementing rules,\242\ the 
effective date of the listing standards approved by the 
Commission,\243\ or the date the issuer implements the listing 
standard.\244\
---------------------------------------------------------------------------

    \240\ See letters from Baker, Donelson, Bearman, Caldwell & 
Berkowitz, PC; Davis Polk & Wardwell; and Towers Watson.
    \241\ See letter from Compensia, Inc.
    \242\ See letter from Davis Polk & Wardwell LLP.
    \243\ See letter from Center on Executive Compensation.
    \244\ See letter from ABA Business Law Section.
---------------------------------------------------------------------------

    Commenters also expressed concerns regarding how the recovery 
policy would affect existing compensation contracts and 
agreements.\245\ Commenters asserted that issuers may be unable to 
apply recovery policies retroactively to arrangements in which 
compensation already has been granted or earned, or to compensation 
provided pursuant to pre-existing employment agreements.\246\ One 
commenter recommended that the Commission establish a grandfathering 
rule that would exempt incentive-based compensation awards granted 
before the effective date of the Commission's final rules implementing 
Section 10D.\247\ Another commenter asked whether the recovery policy 
would apply to compensation paid from the date the policy is effective, 
regardless of contract terms, and when issuers would be required to 
make their recovery policies first enforceable.\248\
---------------------------------------------------------------------------

    \245\ See letters from Baker, Donelson, Bearman, Caldwell & 
Berkowitz, PC, American Benefits Council and Towers Watson.
    \246\ See letters from ABA Business Law Section; American 
Benefits Council; and Davis Polk & Wardwell.
    \247\ See letter from American Benefits Council.
    \248\ See letter from Towers Watson.
---------------------------------------------------------------------------

    Additionally, some commenters suggested that the Commission provide 
for delayed compliance after the effective date of proposed Rule 10D-1 
or approval of the listing standards, during which time issuers could 
develop and implement a recovery policy and make necessary plan 
amendments. These commenters recommended a 12-month period following 
Commission approval of the listing standards,\249\ or a one-year period 
after the issuance of final rules,\250\ for issuers to develop and 
implement their recovery policies and make any necessary plan 
amendments.
---------------------------------------------------------------------------

    \249\ See letter from Center on Executive Compensation.
    \250\ See letter from American Benefits Council.
---------------------------------------------------------------------------

    We propose that each exchange file its proposed listing rules no 
later than 90

[[Page 41170]]

days following publication of the final adopted version of Rule 10D-1 
in the Federal Register, and that its rules be effective no later than 
one year following that publication date,\251\ and that each listed 
issuer shall adopt the recovery policy required by this section no 
later than 60 days following the date on which the exchanges' rules 
become effective.\252\ We also propose that each listed issuer be 
required to recover all erroneously awarded incentive-based 
compensation received by executive officers and former executive 
officers as a result of attainment of a financial reporting measure 
based on or derived from financial information for any fiscal period 
ending on or after the effective date of Rule 10D-1 and that is 
granted, earned or vested on or after the effective date of Rule 10D-1 
pursuant to the issuer's recovery policy.\253\ Finally, we propose that 
a listed issuer be required to file the required disclosures in the 
applicable Commission filings required on or after the date on which 
the exchanges rules become effective.\254\
---------------------------------------------------------------------------

    \251\ Proposed Rule 10D-1(a)(2)(i).
    \252\ Proposed Rule 10D-1(a)(2)(ii).
    \253\ Id.
    \254\ Id.
---------------------------------------------------------------------------

    In light of the statutory purpose of Section 10D, we think it is 
appropriate to require exchanges to adopt listing standards that 
require issuers to comply with recovery policies that apply to 
incentive-based compensation that is based on or derived from financial 
information for periods that end on or after the effective date of Rule 
10D-1. Issuer compliance would be required whether such incentive-based 
compensation is received pursuant to a pre-existing contract or 
arrangement, or one that is entered into after the effective date of 
the exchange's listing standard.
Request for Comment
    97. Is the proposed schedule for exchanges to file their proposed 
listing rules and have them effective following the effective date of 
proposed Rule 10D-1 workable and appropriate? Similarly, is the 
proposal to require each listed issuer to adopt the required recovery 
policy within 60 days following the effective date of the exchanges' 
listing rules workable and appropriate? If not, what other schedule 
should apply?
    98. Should the Commission provide that the recovery policy will 
apply to require recovery of all erroneously awarded incentive-based 
compensation received by a current or former executive officer on or 
after the effective date of Rule 10D-1 that results from attaining a 
financial reporting measure based on or derived from financial 
information for periods that end on or after the effective date of Rule 
10D-1, as proposed? Alternatively, should the recovery policy apply to 
incentive-based compensation received by an executive officer on or 
after the effective date of the exchange's listing standard that 
results from attaining a financial reporting measure based on or 
derived from financial information for periods that end on or after the 
effective date of Rule 10D-1? If neither of these alternatives, what 
date(s) would be more appropriate and why? Should the Commission 
consider the date of compensation agreements and the ability of issuers 
to modify those agreements as part of the transition? If so, how?
    99. Is there anything the Commission should do to address the 
potential effect proposed Rule 10D-1 will have on existing compensation 
plans and employment agreements that do not contemplate recovery under 
a policy required by the rule and rule amendments implementing Section 
10D? To what extent will issuers need to amend their existing 
compensation plans and employment agreements to provide for the 
application of the recovery policy? Should the recovery policy only 
apply to new compensation plans and employment agreements entered into 
after the effective date of the exchange's listing standard? Why or why 
not?
    100. As proposed, an exchange may not list an issuer that it has 
delisted or that has been delisted from another exchange for failing to 
comply with its recovery policy until it comes into compliance with 
that policy.\255\ In this circumstance, should the exchange rules 
prohibit the issuer from obtaining a new listing at the same or a 
different exchange? Why or why not? If so, for how long?
---------------------------------------------------------------------------

    \255\ Proposed Rule 10D-1(b)(1)(vi), described in Section 
II.C.2.c, above.
---------------------------------------------------------------------------

    101. Are there sufficient enforcement mechanisms to ensure 
compliance with the listing standard? Why or why not?

General Request for Comment

    We request and encourage any interested person to submit comments 
on any aspect of our proposals, other matters that might affect the 
amendments, and any suggestions for additional changes. With respect to 
any comments, we note that they are of greatest assistance to our 
rulemaking initiative if accompanied by supporting data and analysis of 
the issues addressed in those comments and by alternatives to our 
proposals, where appropriate.

III. Economic Analysis

    As discussed above, Section 954 of the Dodd-Frank Act amends the 
Exchange Act to include new Section 10D, which requires the Commission 
to direct the exchanges and associations to prohibit the listing of 
issuers that do not develop and implement policies to recover certain 
incentive-based compensation. The policies must provide that, in the 
event that the issuer is required to prepare an accounting restatement 
due to material noncompliance with any financial reporting requirement 
under the securities laws, the issuer will recover any compensation in 
excess of what would have been paid under the accounting restatement 
from any of its current or former executive officers who received 
incentive-based compensation during the three-year period preceding the 
date of the required restatement. Section 10D also calls for the 
listing standards to require each issuer to develop and implement a 
policy providing for disclosure of the issuer's policy on incentive-
based compensation that is based on financial information required to 
be reported under the securities laws. We are proposing a new rule and 
rule amendments to satisfy the statutory mandates of Section 10D.
    We have performed an analysis of the main economic effects that may 
flow from the rule and rule amendments being proposed today. We 
consider the economic impact--including the costs and benefits and the 
impact on efficiency, competition, and capital formation--of the 
proposed rule requirements on issuers and other affected parties, 
relative to the baseline discussed below.\256\ We also consider the 
potential costs and benefits of reasonable alternative means of 
implementing Section 10D. Where practicable, we have attempted to 
quantify the effects of the proposed rule and rule amendments; however, 
in certain cases, we are unable to do so

[[Page 41171]]

because we lack the data necessary to provide a reasonable estimate.
---------------------------------------------------------------------------

    \256\ Section 3(f) of the Exchange Act and Section 2(c) of the 
Investment Company Act require us, when engaging in rulemaking that 
requires us to consider or determine whether an action is necessary 
or appropriate in the public interest, to consider, in addition to 
the protection of investors, whether the action will promote 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f); 15 U.S.C. 80a-2(c). Further, Section 23(a)(2) of the 
Exchange Act requires us, when proposing rules under the Exchange 
Act, to consider the impact that any new rule would have on 
competition and to not adopt any rule that would impose a burden on 
competition that is not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    We request comment on all aspects of the economic effects, 
including the costs and benefits of the proposals and possible 
alternatives. We also request comment on any effect the proposed 
requirements may have on efficiency, competition and capital formation. 
We appreciate comments that include both qualitative information and 
data quantifying the costs and the benefits identified in the analysis 
or alternative implementations of the proposed rule and rule 
amendments.

A. Baseline

    The proposed rule and rule amendments require national securities 
exchanges and national securities associations to establish listing 
standards that would require each issuer to implement and disclose a 
policy providing for the recovery of erroneously paid incentive-based 
compensation. Consistent with Section 10D, the proposed rule and rule 
amendments require that the recovery of incentive-based compensation be 
triggered in the event the issuer is required to prepare an accounting 
restatement due to material noncompliance with any financial reporting 
requirement under the securities laws. In order to reduce the 
likelihood of a material accounting error, executive officers may have 
an enhanced incentive to ensure that greater care is exerted in 
preparing accurate financial reports, or a reduced incentive to engage 
in inappropriate accounting practices for the purpose of increasing 
incentive-based compensation awarded to them.\257\ While these 
incentives could result in high-quality financial reporting that would 
benefit investors, they may also alter operating decisions of executive 
officers or divert resources away from activities that may involve more 
complex accounting judgments.
---------------------------------------------------------------------------

    \257\ We note that not all executive officers affected by the 
proposed rule and rule amendments may have the ability to directly 
affect the financial reporting of the issuer.
---------------------------------------------------------------------------

    The proposed requirement that an issuer implement a recovery policy 
would introduce uncertainty about the amount of incentive-based 
compensation the executive officer will be able to retain. As a result, 
executive officers may demand that incentive-based compensation 
comprise a smaller portion of their pay packages, or that they receive 
a greater total amount of compensation, to account for the possibility 
that the awarded incentive-based compensation may be reduced due to 
future recovery. With these possible changes to the pay packages of 
executive officers, overall executive compensation may become less 
sensitive to the performance of the issuer, and the interests of the 
executive officers could diverge from those of the shareholders. 
Further, to the extent that executive officers respond negatively to 
the expected effects of the compensation recovery policies developed 
and implemented by issuers, the proposed rule and rule amendments may 
cause affected issuers to be less able to attract and retain executive 
talent, when competing for that talent against unlisted companies. We 
note that there may be other factors affecting the ability of an issuer 
to attract and retain executive talent. Further, the incremental effect 
of the proposed rule and rule amendments is mitigated to the extent 
that the labor markets for executives at listed issuers and at unlisted 
issuers do not overlap.
    To assess the economic impact of the proposed rule and rule 
amendments, we are using as our baseline the current state of the 
market without a requirement for listed issuers to implement and 
disclose a compensation recovery policy consistent with Section 10D.
    The proposed rule and rule amendments would dictate listing 
standards that require the recovery of excess incentive-based 
compensation that is based on financial reporting measures, including 
stock price and total shareholder return (``TSR''). Performance-based 
compensation can be either short-term or long-term, and each type can 
potentially be tied to different measures of performance. One study 
\258\ found that, in the short-term incentive plans of chief executive 
officers (CEOs) at S&P 1500 companies in 2012, the three most common 
financial reporting measures used as performance metrics were earnings 
(36 percent), revenue (27 percent), and operating income (26 percent). 
In contrast, in long-term incentive plans, the three most common 
financial reporting measures used to compensate CEOs were TSR (48 
percent), earnings (31 percent), and revenue (17 percent).\259\ While 
earnings also was frequently used as a performance measure in long-term 
incentive plans, TSR was the most frequent metric used for such plans. 
The use of TSR was far less prevalent in short-term incentive plans, 
where only 10 percent of plans used it.\260\ Based on Commission staff 
analysis of 145 randomly sampled issuers drawn from the full population 
of firms (both domestic and foreign) that filed an annual proxy 
statement in calendar year 2013, we estimate that approximately 21 
percent of issuers used stock price and/or TSR as an element of their 
performance-based compensation.\261\
---------------------------------------------------------------------------

    \258\ See Equilar Measuring Short-Term and Long-Term Performance 
in 2012 (May 28, 2013), available at http://www.equilar.com/publications/26-measuring-short-term-and-long-term-performance-in-2012.html.
    \259\ See Equilar Measuring Short-Term and Long-Term Performance 
in 2012 (May 28, 2013).
    \260\ Performance-based compensation may be tied to multiple 
measures of performance. The average number of performance measures 
to evaluate performance in the short-term and long-term is 1.8 and 
1.7, respectively. See Equilar Measuring Short-Term and Long-Term 
Performance in 2012 (May 28, 2013).
    \261\ We estimated the percentage of issuers that use stock 
price and/or TSR as performance metrics based on Commission staff 
analysis of information disclosed in annual proxy statements (DEF 
14A). The sample comprises 145 proxy filers, which represents about 
3 percent of the total number of DEF 14A filers in calendar year 
2013. Staff manually examined the CD&A in each of the 145 proxy 
statements to find that 21 percent of the 145 randomly sampled 
issuers disclosed the use of stock price and/or TSR as compensation 
performance metrics in 2013. Another 30 percent of the 145 randomly 
sampled issuers do not disclose whether they use compensation 
performance metrics; however, if these companies use stock price 
and/or TSR as a compensation performance metric, it is likely not a 
material element of their compensation because Item 402 of 
Regulation S-K calls for disclosure in the CD&A if a performance 
target is a material element of compensation policies and practices.
---------------------------------------------------------------------------

    Under the proposed rule and rule amendments, the trigger for the 
recovery of excess incentive-based compensation would be when the 
issuer is required to prepare an accounting restatement as the result 
of a material error that affects a financial reporting measure based on 
which executive officers received incentive-based compensation. Hence, 
not all accounting restatements would trigger a recovery of 
compensation that was earned as a result of meeting performance 
measures. Using incentive-based compensation tied to revenue as an 
example, in order for that compensation to be required to be recovered, 
there would have to be a material accounting error that affects 
revenue. Based on one recent study, only 15 percent of all Item 4.02-
reported accounting restatements made between 2005 and 2012 were due to 
errors involving revenue.\262\ If the issuers that

[[Page 41172]]

had a material accounting error in revenue had been subject to the 
proposed rule requirements, those issuers that awarded incentive-based 
compensation tied to the restated revenue or other measures that are 
affected by the restatement of revenue would be required to recover the 
incentive-based compensation paid to executive officers.\263\
---------------------------------------------------------------------------

    \262\ See Scholz, S. 2013. ``Financial Restatement: Trends in 
the United States: 2003-2012.'' Center for Audit Quality, available 
at: http://thecaq.org/reports-and-publications/financial-restatement-trends-in-the-united-states-2003-2012/financial-restatement-trends-in-the-united-states-2003-2012. In referring to 
findings of the study, we use the phrase Item 4.02-reported 
accounting restatement when the issuer filed an Item 4.02 to Form 8-
K in connection with such restatement. The study characterizes these 
as ``4.02 restatements'' and observes that the filing of Item 4.02 
to Form 8-K is required when an accounting error renders previously-
filed financial statement unreliable. The study also comments that 
these are generally more serious than other restatements, which it 
refers to as ``non-4.02 restatements.''
    \263\ Incentive-based compensation tied to financial reporting 
measures that are affected by more reported items on the financial 
statements is more likely to be recovered. For example, incentive-
based compensation tied to earnings or operating income is more 
likely to be recovered because material accounting errors that 
involve either revenue or expenses could impact these measures and 
thereby trigger a required recovery. Between 2005 and 2012, 52 
percent of significant restatements involved operating expenses. See 
Scholz, S. 2013. ``Financial Restatement: Trends in the United 
States: 2003-2012.'' Center for Audit Quality.
---------------------------------------------------------------------------

    Further, the incidence of events where incentive-based compensation 
would be required to be recovered is affected by the number of 
restatements based on material errors that occur. A recent study 
reports that between 2005 and 2012 there was an average of 531 Item 
4.02-reported accounting restatements per year, but the incidence of 
accounting restatements steadily declined over this period.\264\ In 
calendar year 2012, there were 255 Item 4.02-reported accounting 
restatements, which represent approximately three percent of the 
population of issuers that potentially could have had an Item 4.02-
reported accounting restatement.\265\ This suggests that an event that 
would require an issuer to recover compensation (i.e., payment of 
incentive-based compensation tied to a financial reporting measure and 
occurrence of a material accounting error) would be relatively 
infrequent.\266\
---------------------------------------------------------------------------

    \264\ See Scholz, S. 2013. ``Financial Restatement: Trends in 
the United States: 2003-2012.'' Center for Audit Quality.
    \265\ In calendar year 2012, approximately 8,000 registrants 
filed annual reports on Form 10-K and would be required to file Item 
4.02 to Form 8-K. We note that the proposed rule and rule amendments 
would affect a subset of registrants subject to reporting on Form 8-
K (i.e., the listed issuers).
    \266\ These estimates are based on historical rates and types of 
restatements, which may not be indicative of future rates and types 
of restatements.
---------------------------------------------------------------------------

    The proposed rule and rule amendments would require exchanges to 
apply the compensation recovery requirement to all listed issuers, 
including emerging growth companies (EGCs), smaller reporting companies 
(SRCs), foreign private issuers (FPIs), and controlled companies. We 
estimate that proposed Rule 10D-1 would be applicable to 4,845 
registrants.\267\ We estimate that, of those 4,845 registrants, there 
are 706 SRCs, 376 EGCs, 511 FPIs (filing annual reports on Form 20-F), 
and 128 MJDS issuers (filing annual reports on Form 40-F). There are a 
limited number of registered management investment companies that also 
would be affected by the proposed rule and rule amendments. We estimate 
that there are approximately seven registered management investment 
companies that are listed issuers and are internally managed, that may 
have executive officers who receive incentive-based compensation.
---------------------------------------------------------------------------

    \267\ We estimate the number of issuers subject to the proposed 
rule based upon Commission staff analysis of issuers that filed 
annual reports on Form 10-K, Form 20-F, or Form 40-F pursuant to 
Section 12(b) of the Exchange Act in the period from 7/1/2013 to 6/
30/2014, regardless of the fiscal year of the filing. The staff used 
text analysis of an issuer's Form 10-K to determine if the issuer is 
an SRC. The staff performed a similar analysis of an issuer's Form 
10-K and registration statement to determine if the issuer is an 
EGC. Examining filings in this manner involves a certain degree of 
error, and it is possible for issuers to be misclassified. Hence all 
numbers in this analysis should be taken as estimates.
---------------------------------------------------------------------------

    As outlined in the table below, we estimate that approximately 23 
percent of all filers currently disclose some form of an executive 
compensation recovery policy.\268\ We further estimate that 
approximately four percent of SRCs, two percent of EGCs, three percent 
of FPIs, and one percent of MJDS issuers disclose some form of a 
recovery policy.
---------------------------------------------------------------------------

    \268\ We estimate the number of issuers that have disclosed some 
form of recovery policy based on Commission staff analysis of 
information disclosed in Form 10-K, Form 20-F, Form 40-F, and an 
issuer's annual proxy statement (DEF 14A). Staff used text analysis 
and keyword searches similar to those of Babenko, Bennett, Bizjak, 
and Coles in their working paper Clawback Provisions (2012) 
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2023292. Examining filings in this manner 
involves a certain degree of error, and it is possible for issuers 
to be misclassified. Hence all numbers in this analysis should be 
taken as estimates.

----------------------------------------------------------------------------------------------------------------
                                                                Number of                          Percent of
                                                               filers that        Number of        filers that
                                                               disclose a      filers affected     disclose a
                                                             recovery policy       (total)       recovery policy
----------------------------------------------------------------------------------------------------------------
All affected filers (total)...............................             1,116             4,845              23.0
SRCs......................................................                29               706               4.1
EGCs......................................................                 9               376               2.4
FPIs......................................................                17               511               3.3
MJDS......................................................                 1               128               0.8
All other filers..........................................             1,060             3,124              33.9
----------------------------------------------------------------------------------------------------------------

    We note that larger issuers are more likely to have already 
implemented and disclosed a recovery policy. Using the staff estimates 
discussed above, as of June 30, 2014, approximately 64 percent (305 
issuers) of the issuers that comprise the S&P 500 and approximately 50 
percent (713 issuers) of the issuers that comprise the S&P 1500 report 
having a recovery policy of some form.\269\
---------------------------------------------------------------------------

    \269\ A report by Equilar finds that the prevalence of recovery 
policies in Fortune 100 companies has increased from less than 18 
percent in 2006 to 84 percent in 2011 and more than 89 percent in 
2013. See Equilar Clawback Policy Report (2013), available at http://info.equilar.com/rs/equilar/images/equilar-2013-clawbacks-policy-report.pdf. This increasing trend in the implementation of recovery 
policies is supported by Babenko, Bennett, Bizjak, and Coles in 
their working paper Clawback Provisions (2012).
---------------------------------------------------------------------------

    In addition to the issuers referenced above, some issuers may have 
experience with recovering executive compensation given existing 
provisions of law concerning the recovery of such compensation under 
certain circumstances. Section 304 of SOX contains a recovery provision 
that is triggered when a restatement is the result of issuer 
misconduct. This provision applies only to CEOs and chief financial 
officers (``CFOs'') and the amount of required recovery is limited to 
compensation received in the 12-month period following the first public 
issuance or filing with the Commission of the improper financial 
statements.\270\ In addition, the Interim Final Rules under Section 111 
of EESA, as amended by ARRA, required institutions receiving assistance 
under TARP to mandate that Senior Executive Officers and the next 
twenty most highly compensated employees repay compensation if awards 
based on statements of earnings, revenues, gains,

[[Page 41173]]

or other criteria were later found to be materially inaccurate.\271\ As 
discussed above, relative to either SOX or EESA, the compensation 
recovery requirement of the proposed rule and rule amendments has a 
different scope because it would affect any current or former executive 
officer of all listed issuers and would be triggered when the issuer is 
required to prepare an accounting restatement due to material 
noncompliance of the issuer with any financial reporting requirement 
under securities laws, regardless of issuer or executive misconduct or 
the role of the executive in preparing the financial statements. 
Finally, we note that currently issuers other than SRCs, EGCs, and FPIs 
are required to disclose in the CD&A, if material, their policies and 
decisions regarding adjustment or recovery of named executive officers' 
compensation if the relevant performance measures are restated or 
adjusted in a manner that would reduce the size of an award or 
payment.\272\
---------------------------------------------------------------------------

    \270\ See 15 U.S.C. 7243.
    \271\ Under EESA a ``Senior Executive Officer'' is defined as an 
individual who is one of the top five highly paid executives whose 
compensation is required to be disclosed pursuant to the Securities 
Exchange Act of 1934. See Department of Treasury, TARP Standards for 
Compensation and Corporate Governance; Interim Final Rule (June 15, 
2009), available at http://www.gpo.gov/fdsys/pkg/FR-2009-06-15/pdf/E9-13868.pdf.
    \272\ See Item 402(b)(2)(viii).
---------------------------------------------------------------------------

    Many of the issuers that disclose having recovery policies do not 
require misconduct on the part of the executive to trigger 
recovery.\273\ In a review by Commission staff \274\ of a random sample 
of 104 issuers with disclosed recovery policies, 51 issuers (49 
percent) did not require misconduct on the part of the executive, 34 
issuers (33 percent) required misconduct on the part of the executive, 
and 19 issuers (18 percent) did not specify. By contrast, the proposed 
rule and amendments would require all listed issuers to have a recovery 
policy that applies to any material accounting error, without regard to 
misconduct.
---------------------------------------------------------------------------

    \273\ In a sample of 2,326 companies in the Corporate Library 
database, DeHaan et al. (2013) find that 39 percent had compensation 
recovery policies that did not require executive misconduct in order 
to be triggered. DeHaan, Hodge, and Shevlin Does Voluntary Adoption 
of a Clawback Provision Improve Financial Reporting Quality? 
Contemporary Accounting Research 30 (2013) 1027-1062.
    \274\ In the staff review, 104 issuers out of the 1,116 issuers 
that disclosed a recovery policy in the period 7/1/2013 to 6/30/2014 
were randomly selected for an in depth examination of their recovery 
policies. Each recovery policy disclosure was read, or if the 
recovery policy was incorporated by reference, the original 
disclosure was read. Staff examined each policy for (1) which 
employees were covered, (2) what type of compensation was at risk 
for recovery, (3) how much of that compensation was at risk for 
recovery, (4) what type of event or events triggered a recovery 
action, (5) if misconduct was required for a recovery action, and 
(6) the timing of the window for which compensation was at risk for 
recovery. The characterization of these policies, as set forth 
below, is based on limited information available from public filings 
and may involve some interpretation of otherwise ambiguous terms and 
conditions. Hence, all numbers presented should be taken as 
estimates.
---------------------------------------------------------------------------

    There appears to be considerable variation in the coverage of 
employees subject to recovery under currently disclosed recovery 
policies.\275\ Under the proposed rule and rule amendments, a listed 
issuer's compensation recovery policy would require recovery of excess 
incentive-based compensation received by an individual who served as an 
executive officer of the issuer at any time during the performance 
period for that incentive-based compensation. As a result, in some 
cases recovery would be required from individuals who may be former 
executive officers either at the time they receive the incentive-based 
compensation or at the date when the listed issuer is required to 
prepare an accounting restatement. In a review by Commission staff of 
the random sample of 104 issuers with disclosed recovery policies noted 
above, the recovery policies of 82 issuers (79 percent) applied to any 
current executive officer; and only three of those 82 issuers had 
recovery policies that applied to former executive officers.\276\ 
Therefore, the majority of issuers examined disclose having recovery 
policies that require compensation recovery from a narrower range of 
individuals than a recovery policy that would comply with the proposed 
rule requirements.
---------------------------------------------------------------------------

    \275\ As of 2013 approximately 61 percent of S&P Fortune 100 
companies had recovery policies that applied to key executives and 
employees including named executive officers; approximately 13 
percent applied to all employees; approximately seven percent 
applied to just the CEO and/or CFO; and the remainder did not have a 
recovery policy or did not specify coverage. See Equilar Clawback 
Policy Report (2013).
    \276\ Of the remaining 22 issuers in the sample, the recovery 
policies of two applied to CEOs, two applied to both the CEO and 
CFO, one applied to the COO, and 17 did not specify to whom the 
recovery policy applied. From the current disclosure in public 
filings, the staff generally could not determine whether the 
definition of ``executive officers'' that issuers use for purposes 
of their compensation recovery policies is consistent with the 
definition of ``executive officer'' in the proposed rule and rule 
amendments. A subset of issuers specified that only named executive 
officers were covered, while others specified senior executives, 
executive officers, or employees vice-president and above. For 
purposes of this baseline discussion, we include these employees in 
the category ``executive officer.''
---------------------------------------------------------------------------

    The type and scope of compensation subject to recovery in currently 
disclosed recovery policies also appears to vary across issuers. In the 
staff's review of a random sample of 104 issuers that disclosed 
recovery policies, the recovery policies of 64 issuers (62 percent) 
applied to any form of performance-based compensation, and thus would 
satisfy the requirements of the proposed rule in this regard. Further, 
out of the 104 issuers with disclosed recovery policies, 29 issuers (28 
percent) specified that only the excess performance-based compensation 
was subject to recoupment, while 47 issuers (45 percent) specified that 
all of the performance-based compensation was potentially 
recoverable.\277\ Considered together, 76 of the 104 issuers (73 
percent) examined may already have a recovery policy that covers excess 
incentive-based compensation as would be required by the proposed rule 
and rule amendments.
---------------------------------------------------------------------------

    \277\ As discussed above, the characterization of these policies 
is based on limited information available from public filings and 
may involve some interpretation of otherwise ambiguous terms and 
conditions. Hence, all numbers presented should be taken as 
estimates.
---------------------------------------------------------------------------

    Moreover, 94 issuers (90 percent) specified either a look-back 
period of three years or did not specify a look-back period, which we 
interpret as having a potentially indefinite look-back period. 
Accordingly, a majority of the current policies the staff reviewed have 
a look-back period that is the same length or longer than the look-back 
period required in a recovery policy that would comply with the 
proposed rule requirements. We note, however, that due to the limited 
disclosure available in public filings, the staff was unable to 
determine if the start and end dates of the look-back window would 
cover the proposed required look-back period in the proposed rule. The 
results of this random sample indicate that, for issuers with disclosed 
recovery policies, the majority may already include look-back 
provisions consistent with the requirements under the proposed rule and 
rule amendments.
    In summary, the staff's review of the disclosed recovery policies 
of 104 issuers found:

------------------------------------------------------------------------
        Proposed requirements                  Existing policies
------------------------------------------------------------------------
The recovery policy is ``no fault''    51 of the 104 policies examined
 in nature                              do not require misconduct on the
                                        part of the executive.

[[Page 41174]]

 
Former executive officers are covered  101 of the 104 policies examined
                                        do not disclose that former
                                        executive officers are covered.
Excess incentive-based compensation    64 of the 104 policies examined
 based on attainment of a financial     apply to any form of performance-
 reporting measure is recoverable       based compensation. 76 of the
                                        104 policies examined may
                                        already allow for excess
                                        incentive-based compensation to
                                        be recovered.
Policy has a three year look-back      94 of the 104 policies examined
 period                                 may already have a look-back
                                        period of three years or longer.
------------------------------------------------------------------------

B. Analysis of Potential Economic Effects

    The discussion below analyzes the economic effects of the proposed 
rule and rule amendments, including the anticipated costs and benefits 
as well as the likely impact on efficiency, competition, and capital 
formation. For purposes of this analysis, we address the potential 
economic effects resulting from the statutory mandate and from our 
exercise of discretion together, recognizing that it is often difficult 
to separate the costs and benefits arising from these two sources. 
Below we discuss the potential effects of the proposed rule and rule 
amendments on financial reporting quality, on executive compensation 
packages, on listed issuers, and on U.S. exchanges. We also discuss the 
potential effects arising from the proposed rule's prohibition on 
indemnification and payment or reimbursement of premiums for insurance 
against recovery.
1. Potential Effects on Financial Reporting
    In seeking to maximize the value of their financial investments, 
shareholders rely on the financial reporting quality of issuers to make 
informed investment decisions about the issuer's securities. High-
quality financial reporting should provide shareholders with an 
accurate estimate of the issuer's performance and should be informative 
about its firm value.\278\ An accounting restatement due to material 
noncompliance with any financial reporting requirement under the 
securities laws may cause shareholders to question the accuracy of 
those estimates and may lead shareholders and other prospective 
investors to substantially revise their beliefs about the issuer's 
financial performance and prospects with potentially significant 
effects on firm value.
---------------------------------------------------------------------------

    \278\ For purposes of this economic analysis, high-quality 
financial reporting means when financial disclosure is informative 
about the actual performance of the issuer.
---------------------------------------------------------------------------

    While incentive-based compensation is typically intended to provide 
incentives to executives to maximize the value of the enterprise, thus 
aligning their incentives with shareholders, it may also provide 
executives with incentives that conflict with shareholders' reliance on 
high-quality financial reporting. In particular, when setting the 
compensation for executives, the board of directors of an issuer may 
seek to align the interests of executives with those of the 
shareholders by tying executive compensation to financial reporting 
measures that the board believes will have a positive effect on firm 
value. To the extent that executives are in a position to affect the 
preparation of financial statements, this approach can, however, create 
the incentive for executives to influence the preparation of financial 
statements and related filings in ways that appear to achieve those 
measures. For example, certain financial performance measures require 
estimates and judgments, and if those estimates and judgements are 
influenced by the performance incentives that are part of the executive 
compensation packages, then the reported performance of the issuer may 
not reflect actual enhancement to firm value.
    In some instances, executives might have incentives to pursue 
impermissible accounting methods under GAAP that result in a material 
misstatement of financial performance.\279\ This potential for 
deliberate misreporting raises a principal-agent problem that is 
detrimental for shareholders.\280\ Although civil and criminal 
penalties already create disincentives to deliberate misreporting, the 
recovery requirements under the proposed rule and rule amendments would 
reduce the financial benefits to executive officers who choose to 
pursue impermissible accounting methods, and thus may add another 
disincentive to engage in deliberate misreporting. The magnitude of 
this effect would likely depend on the particular circumstances of an 
issuer.
---------------------------------------------------------------------------

    \279\ We also note that some estimates and judgments permissible 
under GAAP may allow executives to realize higher compensation, 
without resulting in a material misstatement of financial 
performance and thus without triggering recovery consistent with 
Section 10D.
    \280\ Among other decisions, executives must decide the extent 
of internal resources and personal attention to devote to achieving 
high-quality financial reporting and assuring that the financial 
disclosure is informative about the performance of the issuer. Given 
that the expected costs and benefits associated with any level of 
investment decision in financial reporting quality would ultimately 
be reflected in the issuer's firm value, in absence of a principal-
agent problem, executives would likely decide to allocate the value 
maximizing amount of resources to producing high-quality financial 
statements and, as a result, the level of information value of the 
financial reporting would likely be optimal. A principal-agent 
problem, however, reduces the executive's incentive to allocate the 
appropriate amount of resources to produce high-quality financial 
statements, which reduces the information value of financial 
reporting.
---------------------------------------------------------------------------

    The proposed rule and rule amendments may also provide executives 
with an increased incentive to take steps to reduce the likelihood of 
inadvertent misreporting. Most directly, the executive may have the 
ability to reduce the uncertainty in her compensation by devoting more 
resources to the production of high-quality financial reporting, 
thereby reducing the likelihood of a material accounting error. For 
example, an executive could devote more labor or internal capital to 
strengthening internal controls over financial reporting. One study 
\281\ found that, after the implementation of a recovery policy, an 
auditor is less likely to report a material weakness in an issuer's 
internal controls over financial reporting, which is consistent with 
issuers devoting more resources to internal controls over financial 
reporting.
---------------------------------------------------------------------------

    \281\ See Chan, Chen, Chen, and Yu The effects of firm-initiated 
clawback provisions on earnings quality and auditor behavior Journal 
of Accounting and Economics 54 (2012) 180-196.
---------------------------------------------------------------------------

    Executives may also take other steps to reduce the likelihood of an 
inadvertent misreporting. An executive could change the business 
practices of the issuer, thereby affecting the opportunity for a 
material accounting error to arise. For example, an executive could 
simplify delivery terms of a project or a transaction in order to use 
accounting standards that are more straightforward to apply and perhaps 
require fewer accounting judgments,

[[Page 41175]]

which may reduce the likelihood of material accounting errors.\282\ 
Taking steps such as these does not necessarily affect the selection of 
the project or transaction the issuer chooses to undertake (although it 
could, as discussed below), but could result in greater investor 
confidence in the quality of financial reporting and information value 
of the financial statements, and thus have a positive impact on capital 
formation.\283\
---------------------------------------------------------------------------

    \282\ For example, the executive could make accounting judgments 
on loan loss reserves or expected returns on sales with complicated 
returns criteria that are less likely to result in an accounting 
restatement.
    \283\ An academic study shows that, when market competition is 
weak, the information environment affects the expected returns of 
equity securities. In particular, when financial disclosure quality 
is low, as measured by scaled accruals quality, companies with low 
market competition, as measured by the number of shareholders of 
record, have a higher expected return. All else being equal, higher 
expected returns make raising capital more costly for the company. 
See Armstrong, Core, Taylor, and Verrecchia When Does Information 
Asymmetry Affect the Cost of Capital Journal of Accounting Research 
Vol. 49 No. 1 March 2011. The academic literature has developed a 
measure of the quality of financial reporting denoted accruals 
quality. This measure quantifies how well accruals are explained 
either by the cash flow from operations (past, current, and future 
periods) or accounting fundamentals. For details on the construction 
and interpretation of the measure see Dechow and Dichev The Quality 
of Accruals and Earnings: The Role of Accrual Estimation Errors The 
Accounting Review, Vol. 77, Supplement 2002 pp. 35-39; and Francis, 
LaFond, Olsson, and Schipper The market pricing of accruals quality 
Journal of Accounting and Economics 29 (2005) 295-327.
---------------------------------------------------------------------------

    As a result of the proposed rule and rule amendments, we believe 
that the increased incentives to generate high-quality financial 
reporting may improve the overall quality of financial reporting. An 
increase in the quality of financial reporting could result in 
increased informational efficiency, enhanced investor confidence that 
may result in greater market participation, and a reduced cost of 
raising capital, thereby facilitating capital formation. While we lack 
the data to quantify the potential benefits to shareholders from a 
reduced likelihood of a material accounting error, evidence suggests 
that penalties imposed by the market for accounting restatements are 
likely to be substantial.\284\ For example, one recent study \285\ 
found that over the period 2005 to 2012 the market value of equity of 
the average issuer declined by 2.3 percent upon announcement of a 
significant financial restatement.\286\
---------------------------------------------------------------------------

    \284\ These penalties would likely include both revaluation and 
reputational effects, where the two types of effects are often 
difficult to separate.
    \285\ See Scholz, S. 2013. ``Financial Restatement: Trends in 
the United States: 2003-2012.'' Center for Audit Quality.
    \286\ In the 2005-2012 period, the average issuer paid 
approximately 0.48 percent of its market value of equity to all 
named executive officers in the form of non-salary compensation 
during that time period. Non-salary compensation data is from 
Standard and Poor's Executive Compensation database which tracks 
compensation for the companies currently or previously in the S&P 
1500 index. Moreover, this comparison is inexact, because the 
proposed rule would require the recovery of only excess incentive-
based compensation, and not all non-salary compensation, thereby 
reducing the percentage of market value paid to executives. The 
proposed rule and rule amendments would however, also require a 
recovery policy that applies to more than just the named executive 
officers, thereby increasing the percentage of market value paid to 
executives.
---------------------------------------------------------------------------

    More broadly, the availability of more informative or accurate 
information regarding the financial performance of issuers would also 
have the effect of increasing the efficient allocation of capital among 
corporate issuers. Because investors would be better informed about the 
potential investment opportunities at any given point in time, they 
would be more likely to allocate their capital according to its highest 
and best use. This would benefit all issuers, even those whose 
financial reporting would not be affected by the proposed rule 
requirements on exchanges' listing standards. In particular, issuers 
whose financial reporting is unaffected may have better access to 
capital by virtue of investors being able to make more informed 
comparisons between them and issuers whose financial reporting would 
become more accurate as a result of the proposed rule 
requirements.\287\ In contrast, without the proposed rule and rule 
amendments, investors may improperly assess the value of the issuers 
whose financial reporting is based on erroneous information, which 
could result in an inefficient allocation of capital, inhibiting 
capital formation and competition.
---------------------------------------------------------------------------

    \287\ See Bushee and Leuz Economic consequences of SEC 
disclosure regulation: evidence from the OTC bulletin board Journal 
of Accounting and Economics 39 (2005) 233-264.
---------------------------------------------------------------------------

    We are aware, however, that these potential benefits of the 
proposed rule and rule amendments are not without associated costs. 
Under the proposed rule and rule amendments, the increased allocation 
of resources to the production of high-quality financial reporting may 
divert resources from other activities that may be value enhancing. 
Moreover, while the increased incentive to produce high-quality 
financial reporting and thus reduce the likelihood of material 
accounting errors should increase the informational efficiency of 
investment opportunities, it may also encourage executives to forgo 
value-enhancing projects if doing so would decrease the likelihood of a 
financial restatement.\288\ For example, when choosing among investment 
opportunities for the issuer, executives may have less incentive to 
pursue those projects that would require more complicated accounting 
judgments, so as to reduce the likelihood of an unintentional but 
material accounting error.\289\ That is, the proposed rule and rule 
amendments may create an incentive for an executive to forgo projects 
for which it is more difficult to generate high-quality financial 
reporting.\290\ This could have an adverse impact on the value of the 
issuer to the extent that the foregone projects would have resulted in 
greater value than those that were ultimately chosen.
---------------------------------------------------------------------------

    \288\ Projects that increase the volatility of cash flows from 
operations, the volatility of sales revenue, or percentage of soft 
assets have been associated with an increased likelihood of an SEC 
enforcement action (specifically, the likelihood of an issuer being 
the subject of a SEC Accounting and Auditing Enforcement Release). 
See Dechow and Dichev The Quality of Accruals and Earnings: The Role 
of Accrual Estimation Errors The Accounting Review, Vol. 77, 
Supplement 2002 pp. 35-39; Dechow, Ge, Larson, and Sloan Predicting 
Material Accounting Misstatements Contemporary Accounting Research 
Vol. 28 No. 1 (Spring 2011).
    \289\ For example, the issuer could select projects that do not 
add to the complexity of the required reporting systems, or select 
projects that have a shorter performance period and therefore may 
involve less difficult accounting judgments about the expected 
future costs.
    \290\ Babenko et al find that after the implementation of a 
compensation recovery policy, issuers spend less on research and 
development, file for fewer patents, and hold more cash. This is 
consistent with executives changing their project selection policy 
as the result of implementing a compensation recovery policy. See 
Babenko, Bennett, Bizjak, and Coles Clawback Provisions Working 
Paper (2015). We note, however, that the determination of whether or 
not to select a particular project is likely related to many 
characteristics of the project. These characteristics could include 
the value the project creates, the cash flows the project returns in 
the near term, and the strategic objectives of the issuer.
---------------------------------------------------------------------------

    One study suggests that a compensation recovery policy could result 
in an increased likelihood of an executive making suboptimal operating 
decisions in order to affect specific financial reporting measures as a 
result of the decreased incentive to use accounting judgments to affect 
those financial reporting measures.\291\ For example, if an executive 
is under pressure to meet an earnings target, rather than manage 
earnings through

[[Page 41176]]

accounting judgments, an executive may elect to reduce or defer to a 
future period research and development or advertising expenses. This 
could improve reported earnings in the short-term, but could result in 
a suboptimal level of investment that adversely affects performance in 
the long run. The study also documents that the propensity of 
executives to undertake such actions may be particularly high in 
issuers that are characterized as having strong growth 
opportunities.\292\ The incentive to use operating decisions to affect 
financial reporting measures could be partially mitigated to the extent 
that the board's compensation committee would expect this behavior 
after the implementation of a recovery policy and construct metrics 
that take into account the possibility of such actions. They might also 
design internal controls to detect such actions, such as rigorous 
budget variance analyses.
---------------------------------------------------------------------------

    \291\ Chan, Chen, Chen, and Yu document that after the 
implementation of a compensation recovery policy issuers reduce 
accruals manipulation but increase real transaction management. They 
further document that the increase in real transaction management 
results in improved short-term performance, as measured by changes 
in return on assets, but diminished long-term performance. In the 
context of their study, real transaction management is when 
executive officers structure operating decisions to affect reported 
financial performance. See Chan, Chen, Chen, and Yu The effects of 
firm-initiated clawback provisions on earnings quality and auditor 
behavior Journal of Accounting and Economics 54 (2012) 180-196.
    \292\ Id.
---------------------------------------------------------------------------

    Under the proposed rule and rule amendments, if it appears that 
previously filed financial statements may contain a material accounting 
error, there may also be an incentive for issuers or individual 
executives (to the extent they are in a position to do so) to cause the 
company to delay investigating the error or to characterize as 
immaterial an accounting error that would otherwise be properly 
characterized as material. The incentive to delay is present because 
only excess incentive-based compensation received in the three fiscal 
years prior to the determination of a material accounting error is 
subject to recovery under the proposed rule and rule amendments.\293\ 
The incentive to characterize an accounting error as immaterial that 
would otherwise properly be characterized as material is present 
because compensation recovery is only required after the conclusion a 
material accounting error exists.\294\ To the extent that these 
incentives discourage the timely and accurate reporting of material 
accounting errors, it could result in loss of confidence in financial 
information disclosures by investors and hinder capital formation.
---------------------------------------------------------------------------

    \293\ For example, suppose that in November 2015 an issuer with 
a fiscal year ending in December suspects that there is a material 
accounting error in its financial statements. Further, suppose that 
the executives of the issuer had received a large incentive-based 
compensation award in 2012. If the issuer investigates immediately 
and concludes in November 2015 that there was a material accounting 
error, then incentive-based compensation received in 2012 is at risk 
for recovery. The issuer might choose to delay its investigation 
until 2016 in order to avoid this result.
    \294\ See Files, Swanson, and Tse Stealth Disclosure of 
Accounting Restatements The Accounting Review 84 (2009), 1495-1520; 
Myers, Scholz, and Sharp Restating Under the Radar? Determinants of 
Restatement Disclosure Choices and the Related Market Reactions 
Working Paper (2013), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1309786&download=yes.
---------------------------------------------------------------------------

    These incentives to delay the conclusion that a restatement is 
necessary or to mischaracterize material accounting errors are 
mitigated, however, by several factors. For example, the proposed 
definition of the date on which an issuer is required to prepare an 
accounting restatement, which is the date on which the issuer 
concludes, or reasonably should have concluded, that the issuer's 
previously issued financial statements contain a material error would 
provide an objective basis for assessing when the required three year 
look-back period begins. Moreover, the potential for the issuer and 
individual executives to incur additional legal liability, including 
potential criminal prosecution, for the deliberate or negligent delay 
in investigating and reporting a material accounting error or 
mischaracterization of an accounting error, combined with the 
likelihood that such conduct would be detected,\295\ may offset the 
incentives arising from the required three year look-back period prior 
to the determination of a material accounting error.
---------------------------------------------------------------------------

    \295\ Outside auditors' oversight may play as an additional 
mitigating factor.
---------------------------------------------------------------------------

2. Potential Effects on Executive Compensation
    When setting the compensation for executives, the board of 
directors of an issuer frequently incorporates into the total 
compensation package a payout that is tied to one or more measures of 
the issuer's performance. The purpose of tying compensation to 
performance is to provide an incentive for executives to maximize the 
value of the enterprise, thus aligning their incentives with other 
shareholders. The proportion of the pay package that relies on 
performance incentives generally depends on factors such as the level 
of risk inherent in the issuer's business activities, the issuer's 
growth prospects, and the scarcity and specificity of executive talent 
needed by the issuer. It also may reflect personal preferences 
influenced by characteristics of the executive such as age, wealth, and 
aversion to risk. In particular, the executive's risk aversion may make 
pay packages with strong performance incentives undesirable because of 
the less predictable payments. These factors contribute not only to the 
magnitude of the expected compensation, but also to how an executive 
views and responds to the compensation.\296\
---------------------------------------------------------------------------

    \296\ Executives typically have personal preferences regarding 
the form of compensation received. To the extent that executives 
have different levels of risk aversion, they can arrive at different 
personal valuations of the same performance-based compensation 
package. Hence, more risk-averse executives may require additional 
compensation when paid in the form of less certain performance-based 
compensation.
---------------------------------------------------------------------------

    We anticipate that the requirements of the proposed rule and rule 
amendments could meaningfully affect the size and composition of the 
compensation packages awarded to executives of listed issuers. As noted 
above, risk averse executives prefer predictable compensation, and the 
mandatory implementation of a recovery policy that meets the 
requirements of the proposed rule and rule amendments would introduce 
an additional source of uncertainty in the compensation of the 
executive. Moreover, because the mandated recovery policy would be 
required to be ``no-fault'' in nature, the occurrence of a material 
accounting error would require executives to return excess incentive-
based compensation even if they had no role in the material accounting 
error. A recovery policy would, therefore, introduce uncertainty in the 
amount of incentive-based compensation that executives will ultimately 
retain, with those executives less directly involved with financial 
reporting incurring relatively more uncertainty.
    For executives who already have established compensation packages, 
the proposed rule and rule amendments may create an incentive to 
negotiate changes to their composition.\297\ In particular, because of 
the increased uncertainty, risk averse executives may lower the value 
that they attach to the incentive-based component of their pay and may 
as a result demand an offset to bear the increased uncertainty. The 
offset could come in the form of a smaller portion of pay being 
comprised of incentive-based compensation,\298\ which could weaken 
incentive alignment, i.e., pay-for-performance sensitivity,\299\ or 
through an increase in expected total compensation, which would come at 
a greater cost to the

[[Page 41177]]

issuer.\300\ Research suggests that as a result of bearing this new 
source of uncertainty the total compensation of executives would 
increase.\301\ The extent of any such increase would depend on the 
structure and conditions of the labor market for executives as well as 
other economic factors, including the negotiating environment and 
particular preferences of executives.
---------------------------------------------------------------------------

    \297\ See letters from Stuart R. Lombardi and Towers Watson.
    \298\ We note that, if the offset comes as a reduced weight 
placed on incentive-based compensation, the recoverable funds if a 
material accounting error occurs would be reduced.
    \299\ Pay-for-performance sensitivity is a measure of incentive 
alignment used in academic research. The measure captures the 
correlation of an executive officer's compensation with changes in 
shareholder wealth. See, e.g., Jensen and Murphy, Journal of 
Political Economy, Vol. 98, No. 2 (Apr., 1990), pp. 225-264.
    \300\ Increased expected total compensation could come in the 
form of an increase in base salary, incentive-based compensation, or 
other compensation. While increasing the incentive-based component 
of an executive's compensation package increases the variability of 
the executive's compensation beyond the additional variability due 
to the recovery policy, the issuer may find this to be the least 
costly way to compensate the executive. For example, an issuer may 
choose to increase the incentive-based compensation component, 
instead of increasing base salary, because the executive's current 
base salary is near the limit for tax deductibility under 162(m) of 
the Internal Revenue Code and an increase in base salary may 
therefore not be tax deductible.
    \301\  See DeHaan, Hodge, and Shevlin Does Voluntary Adoption of 
a Clawback Provision Improve Financial Reporting Quality? 
Contemporary Accounting Research 30 (2013) 1027-1062; Babenko, 
Bennett, Bizjak, and Coles Clawback Provisions Working Paper (2012).
---------------------------------------------------------------------------

    Notably, under a recovery policy that implements the proposed rule 
requirements, incentive-based compensation tied to stock price metrics 
such as TSR is included within the scope of compensation that may be 
subject to recovery. The stock price of an issuer incorporates investor 
expectations of cash flows and future earnings of that issuer and can 
be materially impacted by inaccurate reporting of financial 
information. In particular, inaccurate financial information could lead 
investors to incorrectly estimate future cash flows and potential 
earnings of the issuer with concurrent effects on the valuation of its 
stock. If the receipt of incentive-based compensation by executives is 
tied to stock price, then executives could receive erroneously awarded 
compensation and a subsequent accounting restatement due to material 
noncompliance with a financial reporting requirement could trigger 
recovery of such compensation tied to stock price.
    While the economic effects associated with the inclusion of stock 
price and TSR within the scope of financial reporting measures would be 
the same as for the proposed rule and rule amendments in general, we 
discuss below the more specific effects stemming from this inclusion. 
Specifically, in the case of stock price and TSR, where the amount of 
erroneously awarded compensation is not subject to mathematical 
recalculation directly from the information in an accounting 
restatement, the cost of recovering incentive-based compensation may be 
higher. The significance of these costs would depend on the size and 
financial condition of the issuer, as well as the board's approach to 
determining the amount, if any, of excess incentive-based compensation 
to be recovered following a material accounting error. Since the 
proposed rule would require that this amount be based on a reasonable 
estimate of the effect of the accounting restatement on the financial 
reporting measure, a reasonable estimate of the ``but for'' price of 
the stock (i.e., the stock price that would have been if financial 
statements originally had been presented as later restated) must be 
first determined.\302\
---------------------------------------------------------------------------

    \302\ See Section II.C.3.a for a discussion of the determination 
of the recoverable amount.
---------------------------------------------------------------------------

    To reasonably estimate the ``but for'' price of the stock, there 
are a number of possible methods with different levels of complexity of 
the estimations and related costs.\303\ One such method, which is often 
used in accounting fraud cases to determine the effects of corrective 
disclosure on the market price of an issuer's stock, is an ``event 
study.'' An event study captures the market's view of the valuation 
impact of an event or disclosure. In the case of a restatement, the 
event study estimates the drop in the stock price attributed to the 
announcement \304\ that restated financial information is required, 
separate from any change in the stock price due to market factors. An 
event study therefore measures the net-of-market drop in the stock 
price,\305\ which is a key input to establish the ``but for'' price at 
which the security is presumed to have traded in the absence of the 
inaccurate financial statements. In the context of an event study, to 
determine the net-of-market drop in the stock price, certain decisions 
have to be made, such as determining the appropriate proxy for the 
market return and statistical adjustment method (i.e., a model to 
account for the potential difference in risk between the company and 
market); the model estimation period; the date and time that investors 
learned about the restatement; and the length of time it took for 
investors to incorporate the information from the restatement into the 
issuer's stock price. If designed appropriately, the implementation of 
a robust event study method would include an evaluation of the various 
design choices that are anchored on objective and commonly accepted 
practices by the industry and relevant literature.\306\ The effects of 
these design choices may vary from case to case. Some of the potential 
choices may have no effect on the results while other choices may 
significantly drive the results and could generate considerable 
latitude in calculating a reasonable estimate of the excess amount of 
incentive-based compensation that was erroneously awarded.
---------------------------------------------------------------------------

    \303\ The complexity of a particular methodology involves a 
trade-off between the potential for more precise estimates of the 
``but for'' price and the assumptions and expert judgments required 
to implement such methodology.
    \304\ Event studies can have multiple event dates. For example 
an event study can measure the stock price impact attributed to the 
announcement that amended filings are required, as well as the stock 
price impact attributed to when the actual amended filings are made 
available for the investors to examine.
    \305\ Over the 2005-2012 period, the average stock price 
reaction to restatements disclosed under Item 4.02 of Form 8-K was 
negative 2.3 percent. See Scholz, S. 2013. ``Financial Restatement: 
Trends in the United States: 2003-2012.'' Center for Audit Quality. 
This study documents a substantial drop in the number and severity 
of restatements in the years following the enactment of SOX. The 
study includes 4,246 restatements reported by U.S. and foreign 
filers registered with the Commission from 2005 to 2012 on Form 8-K 
under Item 4.02. The number of restatement announcements peaked in 
2006 (940), soon after implementation of SOX Section 404 internal 
control reporting. In subsequent years, the number of Item 4.02 
restatements declined significantly, with 255 reported in 2012, a 
reduction of approximately 73 percent from the 2006 peak year. 
Restatement periods are shorter in later years, declining from an 
average 29 months in 2006 to 18 months in 2012.
    \306\ The complexity of an event study depends on the 
circumstances of the event and the particular approach taken. For 
example, one event study could use a broad market index in 
estimating a market model, while another event study could use a 
more tailored index that may take into account industry specific 
price movements but would require judgments on the composition of 
the issuers in the more tailored index. For further discussion on 
the complexities of event studies see Mitchell, M. and J. Netter, 
``The Role of Financial Economics in Securities Fraud Cases: 
Applications at the Securities and Exchange Commission,'' The 
Business Lawyer, vol 49, Feb 1994, p. 565; Kothari, S.P, and J. 
Warner, ``Econometrics of Event Studies,'' Handbook of Corporate 
Finance: Empirical Corporate Finance (Elsevier/North-Holland), 2004; 
and Campbell, John Y., A. Lo, and A. C. MacKinlay, The Econometrics 
of Event Studies, NJ: Princeton University Press, 1997.
---------------------------------------------------------------------------

    Under any reasonable methodology, calculating the ``but for'' price 
can be complicated when stock prices are simultaneously affected by 
information other than the announcement of a restatement on the event 
date. Confounding information potentially affecting an issuer's stock 
price on the event date could include other plans released by the 
issuer related to potential corporate actions (e.g., mergers, 
acquisitions, or capital raising), announcements of non-restatement 
related performance indicators, and news related to macro-economic 
events (e.g., news about the industry the issuer operates in, changes 
to the state of the

[[Page 41178]]

economy, and information about expected inflation). Because an issuer 
has influence over the timing of the release of issuer-specific 
information, the issuer has the ability to complicate the estimation of 
a reasonable ``but for'' price. For example, if an accounting 
restatement is expected to have a negative effect on an issuer's stock 
price, the executive has an incentive and often the ability to 
contemporaneously release positive information in an attempt to 
mitigate any reduction in the issuer's stock price. The strategic 
release of confounding information may make it more difficult for 
investors to evaluate the effect of the restatement on the performance 
of the issuer.
    The proposed rule and rule amendments do not require an event study 
to calculate a reasonable estimate of the excess incentive-based 
compensation tied to stock price to be recovered after a material 
accounting error. Instead, the proposed rule and rule amendments would 
permit an issuer to use any reasonable estimate of the effect of the 
restatement on stock price and TSR. In addition, the proposed rule and 
rule amendments allow the board of directors to forego recovery if the 
aggregate direct costs of seeking recovery from a current or former 
executive officer would exceed the amount of excess incentive-based 
compensation to be recovered. We note that an issuer would need to 
incur the direct costs associated with implementing a methodology to 
reasonably estimate the ``but for'' price prior to determining whether 
any amount of incentive-compensation is required to be recovered under 
the proposed rule and rule amendments. In choosing a methodology to 
derive a reasonable estimate of the effect of the accounting 
restatement on stock price and/or TSR, issuers would likely weigh the 
costs of implementing any methodology against the complexity of the 
``but for'' price estimate and the potential need to justify that 
estimate, under their unique facts and circumstances.
    Some issuers may decide to use a methodology that is testable, 
supported by published literature, or follows procedures that derive 
from objective standards because such a methodology may reduce the 
likelihood that the reasonableness of the amount of excess incentive-
based compensation required to be recovered would be challenged by 
interested parties, including the executives subject to recovery and 
the exchanges that are required to ensure that the proposed rule and 
rule amendments are enforced as a listing standard. The implementation 
of such methodology may be complex because it would likely include 
extensive checks of the assumptions and design choices made to generate 
the estimate of the ``but for'' price. If these issuers have a 
reasonable basis to believe that some amount of incentive-based 
compensation is required to be recovered, they may decide to retain an 
expert for the implementation of such methodology and determination of 
the ``but for'' price.
    If an issuer chooses to retain an expert, the monetary costs that 
would be incurred to estimate the ``but for'' price and subsequent 
calculation of the amount of excess incentive-based compensation 
required to be recovered could be substantial. In these circumstances, 
we expect that the determination of the ``but for'' price would require 
a significant number of hours of work by highly skilled experts. In 
addition, once a ``but for'' price is estimated, the determination of 
the amount of excess incentive-based compensation could involve complex 
calculations and assumptions that may require additional hours of work 
by the expert.\307\ To establish a proxy for billing rates of experts 
who have specialized knowledge in financial economics, we examined 
expert witness fees by areas of expertise. For example, based on survey 
responses from 21 financial experts, SEAK, Inc. 2014 Survey of Expert 
Witness Fees reports that the hourly fee for case review/preparation 
ranges from $175 to $800 with an average fee of $337 per hour.\308\
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    \307\ For example, if an executive receives at-the-money options 
as a form of incentive-based compensation, where the number of 
options is based on the current stock price, the issuer may 
determine that a reasonable estimate of the amount to be recovered 
involves recalculating both the number of options awarded as well as 
the value of those options that would have been issued at a 
different strike price.
    \308\ See SEAK, Inc. 2014 Survey of Expert Witness Fees, 
available at: http://store.seak.com/2014-survey-of-expert-witness-fees/.
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    Other issuers may decide to use a methodology that results in less 
complex implementations to estimate the ``but for'' price \309\ 
because, for example, by using simpler implementations, issuers may 
already be in a position to determine with reasonable confidence that, 
after taking into account a reasonable range of variation in the ``but 
for'' price, no amount of incentive-based compensation tied to stock 
price and/or TSR was erroneously awarded to executive officers in the 
first place and consequently no recovery is required. If an issuer 
chooses to implement a less complex methodology, the determination of 
the ``but for'' price and subsequent calculation of the amount of 
excess incentive-based compensation required to be recovered would 
entail a significantly lower number of hours of work that can be likely 
performed internally without retaining an expert.
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    \309\ For example, issuers may use historical estimates of beta 
that are publicly available on several sources to substitute for a 
more complex estimation of the market model. The beta estimate of a 
stock captures the correlation of that stock's return with the 
return of the overall market over a certain period of time.
---------------------------------------------------------------------------

    Under any methodology, the variation in assumptions used to 
determine a reasonable estimate of the ``but for'' price (e.g., 
determining a proxy for market returns; the date and time that 
investors learned about the restatement; and the length of time it took 
for investors to incorporate the information from the restatement into 
the issuer's stock price) and of the amount of excess incentive-based 
compensation may increase the level of perceived uncertainty that risk 
averse executives attach to the incentive-based component of their pay. 
This uncertainty may in turn make it more costly and difficult for 
issuers to retain executive officers' talent, when competing for that 
talent against unlisted companies. We note that there may be other 
factors affecting the ability of an issuer to attract and retain 
executive talent. Further, the incremental effect of the proposed rule 
and rule amendments is mitigated to the extent that the labor markets 
for executives at listed issuers and at unlisted issuers do not 
overlap.
    The significant complications of establishing a reasonable estimate 
of the ``but for'' price, in conjunction with the likely monetary costs 
incurred to calculate it, make it difficult to assess the relative 
costs and benefits accruing to an issuer from enforcing a recovery 
policy that covers compensation based on stock price and/or TSR. These 
uncertainties also could undermine issuers' incentives to enforce their 
recovery policies and make it more difficult for exchanges to monitor 
compliance.\310\ This effect may be partially or entirely mitigated by 
the requirement for issuers to provide documentation to the relevant 
exchange of any reasonable estimates used or attempts to recover 
compensation, which will assist exchanges in monitoring compliance and 
incentivize

[[Page 41179]]

issuers to carefully document the considerations that went into the 
determination to enforce (or not enforce) their recovery policy. On 
balance, we think other aspects of the proposed rule and rule 
amendments, such as the ability to use reasonable estimates and the 
board's discretion not to pursue recovery when the direct enforcement 
costs would exceed the amount to be recovered, may serve to mitigate 
these costs; however, below we request comment on this aspect of the 
proposed rule and rule amendments to help us better understand its 
economic effects.
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    \310\ Due to the discretion that an issuer may have in choosing 
both the method and the assumptions underlying the method to 
estimate a ``but for'' price, it may be difficult for an exchange to 
determine if the ``but for'' price resulted in a reasonable estimate 
of the excess incentive-based compensation required to be recovered. 
This may make it more difficult for exchanges to monitor compliance.
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    Notably, incentive-based compensation as defined in the proposed 
rule and rule amendments would not include base salary; compensation 
tied to operational metrics that are not financial reporting measures; 
or compensation awarded solely at the issuer's discretion. These forms 
of compensation would not be subject to recovery under a policy that 
meets the proposed rule requirements. These exclusions may create the 
incentive to shift compensation from forms that are subject to recovery 
to forms that are not subject to such recovery. This would apply to 
both re-negotiated compensation packages as well as newly instituted 
ones. The incentive to shift compensation away from forms that are 
subject to a recovery policy may affect the level of incentive 
alignment between executive interests and shareholder interests in 
terms of the enhancement of firm value, which depends on how well 
performance metrics used as triggers in compensation contracts capture 
the relationship between an executive's effort to enhance firm value 
and the actual enhancement of firm value.
    The incentive to substitute away from incentive-based compensation 
tied to financial reporting measures may result in base salary or 
performance-based compensation tied to operational metrics being a 
larger portion of the executive officer's compensation package. This 
could reduce pay-for-performance sensitivity and may reduce the 
correlation between the executive officer's effort to enhance value and 
executive compensation if these alternative metrics are poor 
substitutes for financial reporting measures. In addition, as a result 
of the proposed rule and rule amendments, an issuer's board of 
directors may use increased discretion in setting compensation awards, 
since compensation that is solely awarded at the discretion of the 
board, such as bonuses, would not be subject to recovery under the 
proposed rule and rule amendments. Issuers may adjust compensation 
policies to be more dependent on the discretion of the board, which may 
make it more difficult for investors to understand the incentives of 
executives and may result in lower pay-for-performance 
sensitivity.\311\
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    \311\ If the issuer transitions to compensation that is not 
payable on account of the attainment of one or more performance 
goals, such as compensation payable solely at the discretion of the 
board of directors, the issuer may lose the ability to deduct a 
portion of executive compensation under Section 162(m) of the 
Internal Revenue Code. This may mitigate the incentive for companies 
to transition compensation away from performance-based metrics.
---------------------------------------------------------------------------

    The implementation of a mandatory recovery policy may also make it 
less costly overall to use incentive-based compensation. Without a 
recovery policy, as noted above, a compensation package with 
significant incentive-based compensation components based on financial 
reporting measures may provide incentives for an executive to engage in 
conduct that could result in inaccurate financial reporting. If a 
recovery policy encourages business practices and accounting judgments 
that are less likely to result in a material accounting error, the 
benefits to the issuer of having higher quality financial reporting 
could more than offset the additional compensation executives require 
to bear the increased uncertainty about the compensation they expect to 
ultimately retain.\312\
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    \312\ A voluntarily implemented recovery policy may not reduce 
the expected cost of issuing incentive-based compensation because of 
insufficient incentive for board members to enforce the recovery 
after a material restatement. The proposed rule, which conditions 
initial and continued listing of securities on compliance with the 
recovery policy, substantially increases the incentives of board 
members to enforce the policy.
---------------------------------------------------------------------------

    The proposed rule and rule amendments may have effects on the 
competition among issuers for executive officers. By increasing 
uncertainty and reducing the perceived value of the expected incentive-
based compensation of an executive, companies where the proposed rule 
and rule amendments apply (i.e., listed issuers) may have more 
difficulty attracting talented executives and, as such, may be at a 
comparative disadvantage to companies that are not covered (i.e., 
unlisted issuers and private companies). It is unclear to what extent 
the labor market for executives at listed issuers and the labor market 
for executives at unlisted issuers and private companies overlap. The 
more these labor markets are segmented, the lower the comparative 
disadvantage potentially imposed by the proposed rule requirements.
3. Additional Potential Effects on Listed Issuers
    We anticipate several effects of the proposed rule and rule 
amendments on listed issuers. Although we believe some issuers have 
already implemented recovery policies broadly consistent with the 
proposed rule requirements, the most immediate outcome of the proposed 
rule and rule amendments would be the establishment of listing 
standards that would result in issuers implementing recovery policies 
consistent with Section 10D. Under such recovery policies, an immediate 
benefit for a listed issuer would be the recovery of incentive-based 
compensation that was erroneously paid to executive officers, which 
would then be available for the issuer to invest in productive assets 
that may generate value for shareholders. Although recovery of 
erroneously paid compensation would provide an immediate benefit for 
issuers and shareholders, we note that, in many cases, these funds are 
not likely to be significant in the context of the issuer's business 
operations, and thus this effect may not be as consequential as the 
other, more indirect effects that we discussed above on financial 
reporting quality and executive compensation packages.\313\
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    \313\ Based on an analysis of executive compensation using 
Standard & Poor's Compustat and Executive Compensation databases, in 
fiscal year 2013 non-salary compensation for all named executive 
officers combined was 0.4 percent of net income. This represents an 
upper bound for the amount of incentive-based compensation for named 
executive officers. This number does not include current and former 
executive officers that would be covered by the proposed rule but 
are not named executive officers.
---------------------------------------------------------------------------

    We also anticipate direct benefits to flow from the disclosure of 
the recovery policy that are separate from any pecuniary recovery 
following an accounting restatement. Currently, an issuer could have a 
compensation recovery policy but choose not to disclose the existence 
or the terms of that policy. Under the proposed rule and rule 
amendments, the issuer's recovery policy would be required to be filed 
as an exhibit to the issuer's annual report on Form 10-K, 20-F or 40-F 
or, for registered management investment companies, on Form N-CSR. The 
proposed rule and rule amendments also require the disclosure be 
provided in interactive data format using XBRL. This may facilitate the 
extraction and analysis of the information contained in the disclosure 
across a large number of issuers or, eventually, over several years. 
This requirement would impose additional costs and burdens on issuers,

[[Page 41180]]

but despite these costs, some shareholders and prospective investors 
may benefit from the data tagging requirement to the extent that it is 
helpful in extracting the tagged information across large number of 
filings.
    With this information investors would have a better understanding 
of the incentives of the issuer's executive officers, owing to more 
complete disclosure of the issuer's compensation policies, including 
its recovery policy. Moreover, while all listed issuers would be 
required to adopt and comply with a recovery policy satisfying the 
requirements of the proposed rule and rule amendments, issuers would 
have the choice to implement recovery policies that are more extensive 
than these requirements. For example, issuers may choose to establish 
more stringent recovery policies (e.g., a longer look-pack period, more 
forms of compensation subject to recovery, or more individuals covered) 
to provide a positive signal to the market regarding their approach to 
executive compensation. If variation in the scope of issuers' recovery 
policies emerges across issuers, disclosure of those policies may 
improve allocative efficiency by allowing investors to make more 
informed investment decisions based on a better understanding of the 
incentives of the executives. The requirement to publish recovery 
policies may make such variation more likely to emerge.\314\
---------------------------------------------------------------------------

    \314\ In the absence of a mandatory requirement for issuers to 
implement and disclose a recovery policy, investors may be uncertain 
about whether the implementation of a voluntary recovery policy by 
an issuer is a credible signal of the issuer's approach to executive 
compensation. By increasing the likelihood of a recovery policy 
being enforced, the proposed rules and rule amendments may make the 
signal more credible and allow issuers to differentiate themselves 
based on variation in the scope of a recovery policy.
---------------------------------------------------------------------------

    Further, if at any time during the last completed fiscal year a 
listed issuer's recovery policy required that issuer to recover excess 
incentive-based compensation, the proposed rule and rule amendments 
would require the issuer to disclose details of the recovery efforts 
under proposed Item 402(w) of Regulation S-K. These disclosures would 
allow existing and prospective shareholders to observe whether issuers 
are enforcing their recovery policies consistent with Section 10D. This 
would also help exchanges monitor compliance. Similarly, the 
requirement to disclose instances in which the board does not pursue 
recovery and its reasons for doing so (i.e., because the expense of 
enforcing recovery rights would exceed the recoverable amount or 
because the recovery would violate a home country's laws), would permit 
shareholders to be aware of the board's actions in this regard and thus 
potentially hold board members accountable for their decisions.
    There are a number of direct costs for issuers resulting from the 
proposed rule and rule amendments. As part of the implementation of a 
recovery policy that meets the proposed rule requirements, issuers 
would likely incur legal and consulting fees to develop policies that 
comply with the proposed requirements and to modify the compensation 
packages of executive officers to conform to those policies. Moreover, 
even those issuers that already have recovery policies would likely 
incur some costs to revise those policies to comply with the proposed 
rule requirements. We note, however, that those issuers that currently 
have recovery policies similar to the proposed rule requirements likely 
would not incur significant additional costs. While we do not have the 
data to quantify the implementation costs, we expect that these costs 
will vary with the complexity of the compensation practices of the 
issuer as well as the number of executive officers the recovery policy 
will apply to. In addition to these implementation costs, issuers also 
would incur direct costs to provide the required disclosures about 
their compensation recovery policies, including costs to tag the 
required disclosure in XBRL format, as described above. For purposes of 
our Paperwork Reduction Act (PRA) Analysis, we estimate that the 
proposed disclosure requirement would impose a minimal internal burden 
of approximately one hour. If an issuer is required to recover 
erroneously awarded compensation, the issuer would incur a direct cost 
to prepare and disclose the information required by proposed Item 
402(w) (and for registered management investment companies, new Item 12 
to Form N-CSR and Item 22(b)(20) of Schedule 14A) and the corresponding 
narrative. For purposes of our PRA, we estimate that proposed 
disclosure requirement would impose a burden of approximately 21 
hours.\315\
---------------------------------------------------------------------------

    \315\ See Section IV.C, below, for a more extensive discussion 
of these disclosure burdens, including the monetization and 
aggregation across issuers of these direct costs.
---------------------------------------------------------------------------

    There would also be costs attendant upon any recovery actions taken 
under the new mandated recovery policy. The proposed rule and rule 
amendments would require a recovery policy to recover excess 
compensation that was paid based on the achievement of a financial 
reporting measure that was later restated. The issuer would likely face 
costs to calculate the amount to be recovered. This could be done 
internally or the issuer could choose to retain an accountant or other 
expert to calculate this amount. The costs of calculating the amount to 
be recovered likely will vary depending on the nature of the 
restatement, the type of compensation involved and the periods 
affected. Given this variation, it is difficult to derive a precise 
estimate of these costs; however, we believe that if outside 
professionals are retained to assist with the calculations, they will 
likely charge between $200 and $400 per hour for their services.\316\ 
Whatever the precise costs, we note they are likely to be significantly 
less than the costs associated with performing the restatement itself.
---------------------------------------------------------------------------

    \316\ Staff estimate is based on wage information compiled by 
the U.S. Bureau of Labor Statistics, Occupational Employment 
Statistics for the Financial Analyst occupation. As of May 2014, the 
median hourly wage for a financial analyst was $37.80 and the 90th 
percentile hourly wage was $74.36. The hourly wage is multiplied by 
a factor of 5.35 to account for bonuses, employee benefits, and 
overhead.
---------------------------------------------------------------------------

    Depending on the circumstances, there may be other costs associated 
with enforcing the mandatory recovery policy. For example, the issuer 
may incur costs to trace specific shares to determine if the executive 
sold shares that were awarded based on an erroneous financial reporting 
measure. If the current or former executive officer is unwilling to 
return excess incentive-based compensation, the issuer may incur legal 
expenses to pursue recovery through litigation or arbitration. If the 
aggregate direct costs incurred to seek recovery from an executive or 
former executive officer would exceed the erroneously paid incentive-
based compensation, the proposed rule and rule amendments would allow 
discretion on the part of the board of directors in determining whether 
to pursue recovery. This discretion may mitigate the direct costs of 
enforcement to issuers. Finally, if an issuer does not take action when 
required under its recovery policy, then the issuer may also incur 
costs associated with the listing exchange's proceedings to delist its 
securities.
    These effects of the proposed rule and rule amendments may vary 
across different types of listed issuers. In particular, the effects of 
implementing a recovery policy could be greater (or lower) on SRCs, 
relative to non-SRCs, to the extent that SRCs use a higher (or lower) 
proportion of incentive-based compensation than other issuers.

[[Page 41181]]

Analysis by Commission staff finds evidence that SRCs, on average, use 
a lower proportion of performance-based compensation than non-SRCs, 
suggesting a lower potential impact of the proposed rule and rule 
amendments on SRCs.\317\ However, there is also evidence that companies 
that are typically required to restate financial disclosures are 
generally smaller than those that are not required to restate financial 
disclosures, suggesting that there could be a greater incidence of 
recoveries at SRCs.\318\ One academic study suggests that the 
likelihood of reporting a material weakness in internal controls over 
financial reporting decreases as the size of the issuer increases.\319\ 
This may imply that, relative to non-SRCs, the proposed rule and rule 
amendments may cause executives at SRCs to devote proportionately more 
resources to the production of high-quality financial reporting. 
Finally, to the extent that implementation of the proposed rule and 
rule amendments entails fixed costs, SRCs, because of their smaller 
size, would incur a greater proportional compliance burden than larger 
issuers.
---------------------------------------------------------------------------

    \317\ Commission staff analyzed the composition of total 
compensation paid to all named executive officers whose compensation 
was reported in the Summary Compensation Table for 50 randomly 
selected SRCs and 50 randomly selected non-SRCs in fiscal year 2013. 
Staff found that, on average, SRCs pay 60 percent of total 
compensation in base salary versus 36 percent for non-SRCs; SRCs pay 
13 percent of total compensation in stock awards versus 27 percent 
for non-SRCs; and SRCs pay 5 percent of total compensation in non-
equity incentive plan compensation versus 16 percent for non-SRCs. 
Since the Summary Compensation Table does not provide sufficient 
information to determine if stock awards or non-equity incentive 
plan compensation would constitute ``incentive-based compensation'' 
as defined in the proposed rule, these differences should be taken 
as maximum estimated differences of incentive-based compensation for 
named executives. Staff did not find significant differences between 
SRCs and non-SRCs in the percent of compensation paid as a bonus, in 
option awards, in nonqualified deferred compensation, or in other 
compensation. We also note that the proposed rule covers a broader 
set of employees than the named executives required to report within 
the Summary Compensation Table.
    \318\ See Scholz, S. 2013. ``Financial Restatement: Trends in 
the United States: 2003-2012.'' Center for Audit Quality.
    \319\ See Doyle, Ge, and McVay Determinants of weaknesses in 
internal control over financial reporting Journal of Accounting and 
Economics 44 (2007) 193-223.
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    The proposed rule and rule amendments also may affect EGCs 
differently than non-EGCs. Relative to non-EGCs, EGCs can be 
characterized as having higher expected growth in the future and 
potentially higher risk investment opportunities.\320\ As such, 
relative to non-EGCs, the market valuations of EGCs may be driven more 
by future prospects than by the value of current assets. As discussed 
previously, a recovery policy could reduce the incentive of an 
executive officer to invest in certain value-enhancing projects that 
may increase the likelihood of a material accounting error. The reduced 
incentive of executive officers could have a greater adverse effect for 
EGCs, relative to non-EGCs, to the extent that executives at EGCs are 
more likely to forgo value-enhancing growth opportunities as a result 
of the proposed rule and rule amendments, which as discussed above, may 
have a larger impact on the market value of equity of EGCs, relative to 
non-EGCs. However, EGCs also tend to be smaller than non-EGCs,\321\ 
which may imply that EGCs have a higher likelihood of an accounting 
restatement and a higher likelihood of reporting a material weakness in 
internal controls over financial reporting. Similar to SRCs, this may 
imply that, relative to non-EGCs, the proposed rule and rule amendments 
may cause executives at EGCs to devote proportionately more resources 
to the production of high-quality financial reporting.
---------------------------------------------------------------------------

    \320\ In an analysis of 270 EGCs with fiscal year 2013 data 
available in the Standard & Poor's Compustat and the CRSP monthly 
stock returns databases, Commission staff found that on average EGCs 
have higher research and development expenses as a percent of total 
assets. Further, on average EGCs have a lower book-to-market ratio, 
which is indicative of shareholders expecting higher than average 
growth in the future. For this analysis staff set book-to-market to 
the 0.025 and 0.975 percentile for values outside of that range; 
staff set research and development to the 0.975 percentile for 
values about that level; and staff restricted the analysis to 
companies that issued common equity and were listed on NYSE, NYSE 
MKT, or NASDAQ.
    \321\ Using the same dataset referenced in note 322 above, staff 
found that the average market capitalization of EGCs is 
approximately $1.08 billion while the average market capitalization 
of non-EGCs is approximately $6.09 billion. Staff also found that 
the smallest EGCs tend to be similar in market capitalization to the 
smallest non-EGCs, with the 10th percentile of the distributions of 
the market capitalization of EGCs and non-EGCs being approximately 
$48 million and $45 million, respectively. Conversely, staff found 
that the largest EGCs tend to have substantially lower market 
capitalizations than the largest non-EGCs, with the 90th percentile 
of the distributions of the market capitalization of EGCs and non-
EGCs being approximately $2.49 billion and $11.59 billion.
---------------------------------------------------------------------------

4. Potential Effects on U.S. Exchanges
    Proposed Rule 10D-1 would affect U.S. exchanges by requiring them 
to adopt listing standards that prohibit the initial or continued 
listing of an issuer that does not comply with the proposed rule and 
rule amendments. The requirement places a direct burden on exchanges to 
amend applicable listing standards. This burden could involve deploying 
legal and regulatory personnel to develop listing standards that comply 
with the proposed rule requirements. Moreover, the exchanges are likely 
to incur some costs associated with tracking the compliance of each 
issuer. We anticipate these costs to be minimal as exchanges likely 
already have robust compliance tracking systems and personnel that are 
dedicated to ensuring listing standards are met. Finally, if an issuer 
chooses not to implement a recovery policy or does not take action when 
required under its recovery policy, the exchanges would incur costs to 
enforce the listing standards required by the proposed rule and rule 
amendments. This would also result in a loss of the revenue associated 
with the delisted issuer.
    In the event that issuers alter their decisions regarding where to 
list due to the proposed rule and rule amendments, revenue of U.S. 
exchanges may be affected. For example, there could be revenue effects 
for U.S. exchanges if issuers choose to list their securities on a 
foreign exchange without such a compensation recovery policy 
requirement. More generally, if the mandated listing requirements are 
perceived to be particularly burdensome for listed issuers, this could 
adversely impact the competitive position of U.S. exchanges vis-
[agrave]-vis those foreign exchanges that do not enforce similar 
listing standards. However, given the costs associated with 
transferring a listing and the broad applicability of the proposed rule 
to securities listed on U.S. exchanges, we do not believe it is likely 
that the proposed rule requirements would compel a typical issuer in 
the short-term to find a new trading venue not subject to these 
requirements. The proposed rule and rule amendments may result in a 
loss of potential revenue to exchanges to the extent that issuers, who 
would have decided to list on an exchange in the absence of the 
proposed rule requirements, choose to forgo listing or delay listing 
until the issuers' circumstances change.\322\ The magnitude of this 
effect on exchanges is not quantifiable given the absence of data. It 
could be significant because the loss in potential revenue from the 
total number of issuers that have chosen to forgo or delay listing 
aggregates over

[[Page 41182]]

time, thus having lasting impact on the exchanges' revenue.
---------------------------------------------------------------------------

    \322\ We note that capital formation could be hindered if an 
issuer chooses to forgo or delay listing because of the proposed 
rule and rule amendments and the alternative methods of raising 
capital result in less liquid securities being issued or less 
thorough disclosures being required. We also note that other factors 
may affect the decision for an issuer to list and any effect from 
the proposed rule and rule amendments would be incremental to these 
other factors.
---------------------------------------------------------------------------

    While we believe the typical issuer is unlikely to transfer listing 
in the short-term as a result of the proposed rule and rule amendments, 
the potential response of foreign issuers is less clear. On one hand, 
by virtue of listing on a U.S. exchange, a foreign issuer has 
demonstrated willingness to list outside of the issuer's home country. 
The issuer presumably chose to list on a U.S. exchange because the 
particular U.S. exchange is an advantageous trading venue for the 
issuer's securities. Although the direct costs are not expected to be 
substantial, the proposed rule and rule amendments would increase the 
compliance burden on listed issuers and could thereby potentially 
reduce the advantage of listing on a U.S. market. As a result, foreign 
issuers could choose to delist from U.S. exchanges. Further, foreign 
issuers that are not currently listed on U.S. exchanges, but are 
considering listing on a non-home country exchange, may choose to list 
on a foreign exchange because of the increased burden of our proposed 
rule and rule amendments. At the same time, we understand that many 
foreign issuers list on a U.S. exchange to signal their high quality, 
which is achieved by subjecting themselves to more rigorous corporate 
governance rules and regulations. As a result, many foreign issuers may 
gain the ability to raise capital at a reduced cost compared to their 
home market by listing on U.S. exchanges. Hence, some foreign issuers 
seeking access to U.S. capital markets may view the requirements as 
beneficial. Therefore, the revenue effect on U.S. exchanges resulting 
from the behavior of foreign issuers is unclear, because while some 
foreign issuers may choose to delist as a result of the proposed rule 
and rule amendments, others may choose to list because of them.
    Finally, the proposed rule and rule amendments apply to all issuers 
who list securities on a national securities exchange. As such there 
are unlikely to be competitive effects between national securities 
exchanges due to all national securities exchanges being affected by 
the proposed rule requirements.
5. Indemnification and Insurance
    The benefits discussed above would result from an executive's 
changes in behavior as a result of incentive-based compensation being 
at risk for recovery should a material accounting error occur. These 
benefits would be substantially undermined if the issuer were able to 
indemnify the executive for the loss of compensation. Moreover, 
shareholders would bear the cost of providing such indemnification. 
Therefore, the proposed rule and rule amendments expressly prohibit 
listed issuers from indemnifying executives against the loss of 
erroneously awarded compensation or paying or reimbursing executives 
for insurance premiums to cover losses incurred under the recovery 
policy.
    Although reimbursement of insurance premiums by issuers would be 
prohibited, the insurance market may develop a policy that would allow 
an executive, as an individual, to purchase insurance against the loss 
of incentive-based compensation when the material accounting error is 
not attributable to the executive. In that event, an executive would be 
able to hedge the risk that results from a recovery policy. If an 
executive purchased this type of insurance policy, the benefits of the 
issuer's recovery policy could be reduced to the extent that insurance 
reduces the executive's incentive to ensure accurate financial 
reporting. However, to the extent an insurance policy does not cover 
losses resulting from the recovery of compensation attributed to a 
material accounting error that resulted from inappropriate actions by 
the insured executive, then incentives would remain for the executive 
to ensure accurate financial reporting.
    The development of this type of private insurance policy for 
executives would also have implications for issuers. Overall, it could 
make it less costly for an issuer to compensate an executive after 
implementing a recovery policy. Without insurance, an issuer that 
implemented a recovery policy would likely have to adjust compensation 
to account for the loss in expected incentive-based compensation in 
addition to the increased uncertainty in incentive-based compensation. 
If an active insurance market develops such that the executive could 
hedge against the uncertainty caused by the recovery policy, then 
market-determined compensation packages would likely increase to cover 
the cost of such policy. While the proposed rule and rule amendments 
explicitly prohibit issuers from reimbursing an executive for the cost 
of such insurance policy, a market-determined compensation package 
would likely account for the hedging cost and incorporate it into the 
base salary of the executive's compensation. This increase would likely 
be less than the increase in the market-determined compensation 
packages if an insurance policy was unavailable because a risk averse 
executive would no longer need to bear recovery policy induced 
uncertainty.

C. Alternatives

    Below we discuss possible alternatives to the proposed rule and 
rule amendments we considered and their likely economic effects.
1. Exemptions for Certain Categories of Issuers
    We considered exempting (or permitting the exchanges to exempt) 
SRCs and EGCs from proposed Rule 10D-1. As discussed above, the 
proposed rule and rule amendments may impose certain disproportionate 
costs on SRCs and EGCs. However, SRCs and EGCs may have an increased 
likelihood of reporting a material accounting error and may be more 
likely to report a material weakness in internal controls over 
financial reporting, due to their smaller size relative to non-SRCs and 
non-EGCs. As such, we believe the benefits of the proposed rule and 
rule amendments may be particularly salient for these categories of 
issuers. For these reasons, SRCs or EGCs would not be exempt from the 
proposed rule and rule amendments.
    One commenter suggested that we consider exempting FPIs, arguing 
that home countries would generally have a greater interest in 
determining whether issuers should have recourse against 
executives.\323\ As discussed previously in the context of foreign 
issuers generally, the potential effect of the proposed rule and rule 
amendments on FPIs is difficult to predict. On the one hand, due to the 
potential differences in home country law, the proposed rule 
requirements may be especially burdensome for FPIs relative to non-
FPIs.\324\ On the other hand, there is evidence that many FPIs may be 
listing on U.S. exchanges in part in order to credibly signal to 
investors their willingness and ability to be subjected to stricter 
governance standards.\325\ While FPIs may face a relatively higher 
burden from the proposed rule and rule amendments, they also may 
experience a relatively higher benefit.
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    \323\ See letter from the American Bar Association.
    \324\ We note that if recovery of excess incentive-based 
compensation would violate home country law, the proposed rule and 
rule amendments permit the board of directors discretion to forgo 
recovery as impracticable, subject to certain conditions.
    \325\ See Doidge, Karolyi, and Stulz Why Do Foreign Firms Leave 
U.S. Equity Markets? The Journal of Finance, Vol. LXV, No. 4, August 
2010.
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2. Excluding Incentive-Based Compensation Tied to Stock Price
    As discussed above, the proposed rule and rule amendments may 
result in

[[Page 41183]]

issuers incurring significant costs to recover incentive-based 
compensation tied to stock price. If incentive-based compensation tied 
to stock price were excluded from the proposed rule and rule 
amendments, issuers would not incur the costs associated with recovery. 
However, a significant component of the total performance-based 
compensation would be excluded from the scope of the proposed rule and 
rule amendments without generating the related potential benefits. In 
addition, the exclusion of performance-based compensation tied to stock 
price would provide issuers with an incentive to shift compensation 
away from forms subject to recovery to forms tied to market-based 
metrics such as stock price and TSR that would not be subject to 
recovery.
    The economic effect of any incentive to shift away from 
compensation subject to recovery is difficult to predict due to the 
nature of incentive-based compensation tied to stock price. On one 
hand, incentive-based compensation tied to metrics that are market-
based, such as stock price or TSR, could be highly correlated with the 
interests of shareholders and therefore may be beneficial to 
shareholders. On the other hand, because market-based measures may be 
influenced by factors that are unrelated to the performance of the 
executive officer, these metrics may not fully capture or represent the 
effort and actions taken by the executives. In particular, market-based 
measures incorporate expectations about future earnings, which may not 
be closely tied to the executive officer's current performance. In 
contrast, the use of accounting-based measures, such as those derived 
from revenue, earnings, and operating income, can be tailored to match 
a specific performance period and provide direct measures of financial 
outcomes.\326\ To this end, accounting-based measures of performance--
although not directly tied to issuer value enhancement--may better 
capture the effect of an executive's actions during the relevant 
performance period. Therefore, if incentive-based compensation tied to 
stock price was excluded, the incentive to substitute away from 
accounting-based measures to market-based measures of performance may 
result in compensation that is less tied to the consequences of an 
executive's actions during the performance period.
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    \326\ Six of the eight most frequently used metrics to award 
compensation in short-term incentive plans were accounting-based 
measures. Those measures are earnings, revenue, operating income, 
EBITDA, cash flow, and return on capital. See Equilar Measuring 
Short-Term and Long-Term Performance in 2012.
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    The optimal compensation package likely contains a mix of 
incentive-based compensation tied to market-based measures and 
accounting-based measures. Empirically, the use of market-based 
performance metrics is more prevalent in long-term incentive plans than 
in short-term incentive plans.\327\ Using market-based measures of 
performance in short-term incentive plans may be undesirable for the 
executive in that the stock price may be volatile and may not reflect 
the executive's efforts to enhance firm value in the performance 
period. The relatively higher use of market-based measures in long-term 
incentive plans could reflect that in the long-term the executive's 
efforts to enhance firm value may be more likely to be incorporated in 
the market value of the firm. Short-term and long-term performance-
based compensation may act as complements, with the different 
performance measures used to award each type reflecting the 
compensation committee's effort to align the executive's interests with 
those of the shareholders. The exclusion of incentive-based 
compensation tied to stock price may affect the relative mix of short-
term and long-term performance-based compensation, or the performance 
measures that each type is linked to, and as such a recovery policy may 
have large economic effects through a change in the incentives of the 
executive.
---------------------------------------------------------------------------

    \327\ See Equilar Measuring Short-Term and Long-Term Performance 
in 2012.
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3. Other Alternatives Considered
    One commenter suggested that the Commission specifically authorize 
the use of a nonqualified deferred compensation plan (e.g., a 
``holdback plan'' or ``bonus bank'') to aid in the recovery of 
erroneously awarded incentive-based compensation.\328\ A bonus bank 
would likely reduce the enforcement costs of recovering erroneously 
awarded incentive-based compensation. On the other hand, a bonus bank 
may further augment any increase in compensation necessary to offset 
the expected cost to the executive of a recovery policy. This is due to 
the executive not having access to the funds she has earned and having 
to delay consumption that would otherwise be possible. Further, as the 
commenter acknowledged, a bonus bank implicitly makes the executive a 
creditor to the issuer, resulting in reduced risk-taking incentives for 
the executive. While for some companies reduced risk-taking incentives 
may be value increasing, for other companies reduced risk-taking 
incentives may be value decreasing. Further, by making the executive a 
creditor to the issuer, a bonus bank reduces the incentive alignment 
between equity holders and the executive officer.
---------------------------------------------------------------------------

    \328\ See letter from Clark Consulting.
---------------------------------------------------------------------------

    One commenter suggested that the Commission also require issuers to 
recover a proportionate amount of the compensation tied to qualitative 
variables or board judgment after a material accounting error.\329\ 
Relative to the proposed rule and rule amendments, this alternative 
implementation would reduce the incentive to alter the composition of 
an executive's compensation package to more heavily weight qualitative 
variables or board judgment, while increasing the incentive to more 
heavily weight base salary as well as performance-based compensation 
tied to metrics other than financial reporting measures. To the extent 
that performance compensation based on qualitative variables and board 
judgment allows the board to compensate the executive officer for 
performance that is otherwise difficult to measure, the reduced weight 
on this form of performance-based compensation could make it more 
difficult for the board to align the executive officer's interests with 
those of the shareholders. On the other hand, reduced weight on this 
form of performance-based compensation could make it easier for 
shareholders to understand the incentives of the executive officer. 
Because a greater amount of performance-based compensation would be at 
risk for recovery, implementing this alternative implementation could 
also increase the amount of expected compensation the executive officer 
would require in order to voluntarily bear the increased uncertainty.
---------------------------------------------------------------------------

    \329\ See letter from AFL-CIO.
---------------------------------------------------------------------------

D. Request for Comment

    We request data to quantify the costs and benefits described 
throughout this release. We seek estimates of these costs and benefits, 
as well as any costs and benefits not already identified, that may 
result from the adoption of the proposed rule and rule amendments. We 
also request qualitative feedback on the nature of the economic 
effects, including the benefits and costs, we have identified and any 
benefits and costs we may have overlooked.
    To assist in our consideration of the economic effects of the 
proposed rule and rule amendments, we request comment on the following:

[[Page 41184]]

    1. We request comment on all aspects of the economic effects, 
including the costs and benefits of the proposed rule and rule 
amendments, and identification and assessment of any effects not 
discussed herein. In addition, we seek estimates and views regarding 
these costs and benefits for particular types of issuers, including 
SRCs, EGCs, FPIs, registered management investment companies, and 
issuers that only have listed debt or preferred equity securities, as 
well as the costs or benefits for any other types of issuers that may 
result from the adoption of these proposed amendments.
    2. What, if any, effects on financial reporting or executive 
compensation practices might arise from the requirement for listed 
issuers to recover erroneously awarded incentive-based compensation as 
proposed?
    3. Would proposed Rule 10D-1 lead to higher quality financial 
reporting? If so, explain how this would occur, and how the rule might 
be revised to mitigate any adverse unintended consequences?
    4. Would proposed Rule 10D-1 incentivize listed issuers to conclude 
that a material error is not material in order to avoid recovery of 
incentive-based compensation? Would the proposed rule and rule 
amendments incentivize listed issuers to delay investigating or 
reporting a material error?
    5. What is the likely effect of the requirement on executive 
compensation practices of listed companies, and how would this effect 
likely vary according to the issuer's size or line of business?
    6. What is the likely burden that listed issuers would incur to 
modify the compensation packages of executive officers?
    7. What would be the burden if issuers were required to recover 
only the amount of excess incentive-based compensation tied to 
accounting-based performance metrics? Would the burden be different in 
the case of recovery of excess incentive-based compensation tied to 
market-based performance metrics? What are the benefits of each 
approach?
    8. What implementation issues, if any, would issuers encounter in 
conducting an event study or otherwise establishing the ``but-for'' 
price?
    9. What is the cost of establishing a ``but for'' price and 
determining the amount of excess incentive-based compensation to be 
recovered? What factors affect the determination of reasonable 
estimates of the ``but for'' price and of this amount? Would issuers 
seek expert help in making such determinations? If so, what would be 
the costs to issuers of retaining such experts?
    10. Would it be more difficult for exchanges to monitor compliance 
with the proposed rule and rule amendments for compensation tied to 
market-based performance metrics? Is the documentation required to 
support the analyses of the issuer sufficient for compliance 
monitoring? If not, what other documentation should be required?
    11. Would there be any significant transition costs imposed on 
listed issuers as a result of the proposals, if adopted? Please be 
detailed and provide quantitative data or support, as practicable.
    12. How is this rulemaking likely to affect the market for 
executive officers?
    13. What is the likely effect of this rulemaking on the decision to 
be a listed issuer in the United States, and how does this effect vary 
according to the size or line of business of the issuer?
    14. Are there additional alternatives to the proposals we should 
consider that would satisfy the requirements of new Section 10D of the 
Exchange Act? If so, please describe.

IV. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed rule and rule amendments contain 
a ``collection of information'' within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\330\ The Commission is submitting the 
proposed rule and rule amendments to the Office of Management and 
Budget (``OMB'') for review in accordance with the PRA.\331\ An agency 
may not conduct or sponsor, and a person is not required to comply 
with, a collection of information unless it displays a currently valid 
OMB control number. The titles for the collections of information are: 
\332\
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    \330\ 44 U.S.C. 3501 et seq.
    \331\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \332\ The paperwork burden from Regulation S-K is imposed 
through the forms that are subject to the requirements in those 
regulations and is reflected in the analysis of those forms. To 
avoid a Paperwork Reduction Act inventory reflecting duplicative 
burdens and for administrative convenience, we assign a one-hour 
burden to Regulation S-K.
---------------------------------------------------------------------------

    ``Regulation S-K'' (OMB Control No. 3235-0070);
    ``Regulation 14A and Schedule 14A'' (OMB Control No. 3235-0059);
    ``Regulation 14C and Schedule 14C'' (OMB Control No. 3235-0065);
    ``Form 10-K'' (OMB Control No. 3235-0063);
    ``Form 20-F'' (OMB Control No. 3235-0288);
    ``Form 40-F'' (OMB Control No. 3235-0381);
    ``Rule 20a-1 under the Investment Company Act of 1940, 
Solicitations of Proxies, Consents, and Authorizations'' (OMB Control 
No. 3235-0158); and
    ``Form N-CSR'' under the Securities Exchange Act of 1934 and under 
the Investment Company Act of 1940, Certified Shareholder Report of 
Registered Management Investment Companies'' (OMB Control No. 3235-
0570).
    Regulation S-K was adopted under the Securities Act and the 
Exchange Act. Regulations 14A and 14C and the related schedules, Form 
10-K, Form 20-F and Form 40-F were adopted under the Exchange Act. Rule 
20a-1 was adopted under the Investment Company Act, and Form N-CSR was 
adopted under the Exchange Act and Investment Company Act. The 
regulations, schedules and forms set forth the disclosure requirements 
for proxy and information statements and annual reports filed by 
issuers to help shareholders make informed voting and investment 
decisions. Our proposed rule and rule amendments to existing 
regulations, schedules and forms are intended to implement new Section 
10D of the Exchange Act.
    The hours and costs associated with preparing and filing the forms 
and preparing, filing and sending the schedules constitute reporting 
and cost burdens imposed by each collection of information. Compliance 
with the amendments is mandatory. Responses to the information 
collections will not be kept confidential and there is no mandatory 
retention period for the information disclosed.

B. Summary of Proposed Rule and Rule Amendments

    We are proposing new Rule 10D-1 under the Exchange Act and 
amendments to Items 601, 402 and 404 of Regulation S-K, Schedule 14A, 
Form 20-F, Form 40-F, and Form N-CSR to implement the provisions of 
Section 954 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010, which added Section 10D to the Securities 
Exchange Act of 1934. Section 10D requires the Commission to adopt 
rules directing the exchanges and associations to prohibit the listing 
of any security of an issuer that is not in compliance with Section 
10D's requirements concerning disclosure of the issuer's policy on 
incentive-based compensation and recovery of erroneously awarded 
compensation. In accordance with the statute, proposed Rule 10D-1 
directs the exchanges to establish listing standards that, among other 
things, require each issuer to adopt and comply with a policy

[[Page 41185]]

providing for recovery, under certain circumstances, of incentive-based 
compensation received by current or former executive officers and to 
file all disclosure with respect to that policy in accordance with 
Commission rules.
    To implement Section 10D(b)(1), we are proposing to add new 
disclosure provisions to Items 601 and 402 of Regulation S-K, Schedule 
14A, Form 20-F, Form 40-F, and Form N-CSR. The new disclosure 
provisions would require each listed issuer to file the issuer's 
policy, if applicable, regarding recovery of incentive-based 
compensation from its executive officers as an exhibit to its Exchange 
Act annual report or, in the case of a listed registered management 
investment company, its Form N-CSR annual report. A new instruction to 
the Summary Compensation Table would require that any amounts recovered 
pursuant to the listed issuer's policy reduce the amount reported in 
the applicable column and total column for the fiscal year in which the 
amount recovered initially was reported.
    In addition, if during the last completed fiscal year, either a 
restatement was completed that required recovery of excess incentive-
based compensation pursuant to a listed issuer's recovery policy, or 
there was an outstanding balance of excess incentive-based compensation 
from the application of the policy to a prior restatement, proposed 
Item 402(w) would require the listed issuer to disclose: \333\
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    \333\ See proposed Item 402(w) of Regulation S-K, proposed Item 
6.F of Form 20-F, and proposed Paragraph (17) of Paragraph B of Form 
40-F. We also are proposing to amend the instructions to Items 
404(a) of Regulation S-K so that a listed issuer that complies with 
Item 402(w) disclosure requirements would not need to disclose any 
incentive-based compensation recovery pursuant to those 
requirements. We are also proposing to amend Form N-CSR and Item 22 
of Schedule 14A to require registered management investment 
companies that would be subject to Rule 10D-1 to provide information 
that would mirror the disclosure requirements of proposed Item 
402(w).
---------------------------------------------------------------------------

     For each restatement,
    [cir] The date on which the listed issuer was required to prepare 
an accounting restatement;
    [cir] The aggregate dollar amount of excess incentive-based 
compensation attributable to the restatement;
    [cir] The estimates used to determine the excess incentive-based 
compensation attributable to such accounting restatement, if the 
financial reporting measure related to a stock price or total 
shareholder return metric; and
    [cir] The aggregate dollar amount of excess incentive-based 
compensation that remained outstanding as of the end of the last 
completed fiscal year;
     The name of each person, if any, from whom during the last 
completed fiscal year the listed issuer decided not to pursue recovery, 
the amount forgone from each such person, and a brief description of 
the listed issuer's reasons for not pursuing recovery; and
     The name of, and amount due from, each person from whom, 
at the end of its last completed fiscal year, excess incentive-based 
compensation had been outstanding for 180 days or longer since the date 
the issuer determined the amount the person owed.
    We propose that the same disclosure requirements apply to listed 
U.S. issuers and listed foreign private issuers, including MJDS filers. 
These disclosure requirements would increase the amount of information 
that listed U.S. issuers and listed foreign private issuers must 
compile and disclose in their schedules and forms. For listed U.S. 
issuers, other than registered management investment companies, the 
proposed amendments to Items 402 and 601 of Regulation S-K would 
require additional disclosure in Exchange Act annual reports and proxy 
or information statements filed on Schedule 14A or Schedule 14C 
relating to an annual meeting of shareholders, or a special meeting in 
lieu of an annual meeting, at which directors are to be elected and 
would increase the burden hour and cost estimates for each of those 
forms. For a listed management investment company registered under the 
Investment Company Act of 1940, the proposed amendments to Form N-CSR 
and Schedule 14A would require additional disclosure and would increase 
the burden hour and cost estimates associated with Form N-CSR and Rule 
20a-1, if the registered investment company pays incentive-based 
compensation. For a listed foreign private issuer filing an annual 
report on Form 20-F, Form 40-F or, if a foreign private issuer elects 
to use U.S. registration and reporting forms, on Form 10-K, the 
proposed amendments to those forms and the proposed amendment to Item 
402(a)(1), respectively, would require additional disclosure in annual 
reports and would increase the burden hour and costs estimates for each 
of these forms. The disclosure required by proposed Item 402(w), 
proposed paragraph 22(b)(20) to Schedule 14A, proposed new Item 12 to 
Form N-CSR, and proposed Item 6.F of Form 20-F would be required to be 
block-text tagged in XBRL.

C. Paperwork Reduction Act Burden Estimates

    As proposed, the information a listed U.S. issuer is required to 
compile and disclose regarding its policy on incentive-based 
compensation pursuant to Item 402(w) would supplement information that 
U.S. issuers that are not registered management investment companies, 
smaller reporting companies or emerging growth companies are already 
required to provide elsewhere in their executive compensation 
disclosure, if material. Specifically, these issuers are required to 
provide information relating to the compensation of the named executive 
officers, including policies and decisions regarding the adjustment or 
recovery of awards or payments if the relevant performance measures 
upon which they are based are restated or otherwise adjusted in a 
manner that would reduce the size of an award or payment.\334\ With 
respect to registered management investment companies subject to 
proposed Rule 10D-1, information mirroring the proposed Item 402(w) 
disclosure would be included in annual reports on Form N-CSR and in 
proxy statements and information statements relating to the election of 
directors.\335\ Such information would also supplement existing 
disclosures.
---------------------------------------------------------------------------

    \334\ See Item 402(b)(2)(viii) of Regulation S-K.
    \335\ Proposed Item 12 of Form N-CSR; proposed Item 22(b)(20) of 
Schedule 14A. We are also proposing to amend General Instruction D 
to Form N-CSR to permit registered management investment companies 
subject to proposed Rule 10D-1 to answer the information required by 
proposed Item 12 by incorporating by reference from the company's 
definitive proxy statement or definitive information statement.
---------------------------------------------------------------------------

    Similarly, for a listed foreign private issuer filing an annual 
report on Form 20-F or, if a foreign private issuer elects to use U.S. 
registration and reporting forms, on Form 10-K, the proposed amendments 
would supplement existing disclosures. Currently, Item 7.B of Form 20-F 
requires disclosure of transactions between the issuer and senior 
management of the nature and extent of any transactions that are 
material to the company or related party that are unusual in their 
nature or conditions involving services to which the company was a 
party. Although this disclosure requirement generally would require 
disclosure of the recovery of excess incentive-based compensation, it 
may not elicit the same information required to be provided under the 
proposed rule and rule amendments.
    We arrived at the estimates discussed below by reviewing our burden 
estimates for similar disclosure and

[[Page 41186]]

considering our experience with other tagged data initiatives. We 
believe that the preparation of the information required by proposed 
Item 402(w) and the corresponding narrative disclosure provisions is 
comparable to an issuer's preparation of the disclosure required by the 
amendments to enhance certain aspects of proxy disclosure.\336\ The 
amendments in that release were largely designed to enhance existing 
disclosure requirements. Similarly, we believe that the proposed Item 
402(w) amendments would enhance the disclosure that is already required 
by Item 402 of Regulation S-K and disclosure that is required by 
Section 10D(b)(1). We believe that certain of the information required 
to prepare the new disclosure would be readily available to some U.S. 
issuers because this information, if material, is required to be 
gathered, determined or prepared in order to satisfy the other 
disclosure requirements of Item 402 of Regulation S-K. For other listed 
issuers, we believe that the information required to prepare the new 
disclosure requirement will not impose a significant burden because the 
issuer controls and possesses this information, which is a compilation 
of facts related to an issuer's implementation of its recovery policy 
if during the last completed fiscal year the issuer was required to 
recover excess incentive-based compensation or there was an outstanding 
balance of excess incentive-based compensation not recovered pursuant 
to that policy. In the Proxy Disclosure Enhancements release, we 
estimated that the amendments would impose on average an incremental 
burden of 25 hours for accelerated filers and 17 hours for non-
accelerated filers to prepare their proxy and information statements. 
We believe the proposed disclosure regarding an issuer's policy on 
recovery of erroneously awarded compensation requires less new 
information than the amendments in the Proxy Disclosure Enhancements 
Release. We believe the primary cost elements for issuers preparing the 
proposed disclosure would be determining the types of incentive-based 
compensation awards an issuer grants to executive officers that could 
be subject to recovery under the issuer's recovery policy and, if 
necessary, gathering the information regarding the application and 
implementation of this recovery policy if required by a restatement.
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    \336\ See Release No. 33-9089, Proxy Disclosure Enhancements, 
(Dec. 16, 2009) [74 FR 68334] (``Proxy Disclosure Enhancements''). 
The release adopted amendments to make new or revised disclosures 
about: Compensation policies and practices that present material 
risks to the company; stock and option awards of executives and 
directors; director and nominee qualifications and legal 
proceedings; board leadership structure; the board's role in risk 
oversight; and potential conflicts of interest of compensation 
consultants that advise companies and their boards of directors.
---------------------------------------------------------------------------

    As a result, we estimate that the average incremental burden for an 
issuer to prepare the new narrative disclosure would be 21 hours. This 
estimate includes the time and cost of preparing disclosure that has 
been appropriately reviewed by management, in-house counsel, outside 
counsel and members of the board of directors, as well as block-text 
tagging the data in XBRL format. Because this estimate is an average, 
the burden could be more or less for any particular company, and may 
vary depending on a variety of factors, such as the degree to which 
companies use the services of outside professionals or internal staff 
and resources to tag the data in XBRL. Issuers subject to Item 402(w) 
would provide the required disclosures by either including the 
information directly in Exchange Act annual reports or incorporating 
the information be reference from a proxy statement on Schedule 14A or 
information statement on Schedule 14C. For purposes of our PRA 
estimates, consistent with past amendments to Item 402,\337\ we have 
assumed that all of the burden relating to the new narrative disclosure 
requirements would be associated with Form 10-K, even if registrants 
include the new disclosure required in Form 10-K by incorporating that 
disclosure by reference from the proxy statement on Schedule 14A.\338\
---------------------------------------------------------------------------

    \337\ We took a similar approach in connection with the rules 
for Summary Compensation Table disclosure required by the 2006 
amendments to Item 402. See Executive Compensation and Related 
Person Disclosure, Release No. 33-8732A, n. 326 (Aug. 29, 2006) [71 
FR 53158].
    \338\ Similarly, for purposes of the PRA estimates, we are also 
assuming that all of the burden relating to the new narrative 
disclosure requirements for registered investment companies would be 
associated with Form N-CSR, and therefore, we are not allocating a 
separate burden estimate for Rule 20a-1.
---------------------------------------------------------------------------

    We believe that the requirement to file a listed issuer's recovery 
policy as an exhibit to its annual report pursuant to proposed Item 
601(b)(96) and the corresponding provisions (and for registered 
investment companies, as an exhibit to its annual report on Form N-CSR 
pursuant to proposed Item 13(a)(2) of Form N-CSR) will be minimal. A 
listed issuer will be required simply to file the policy that it 
otherwise would be required to have pursuant to the listing standards 
of the exchange on which it lists securities. We estimate this burden 
to be approximately one hour.
    As a result of the estimates discussed above, we estimate for 
purposes of the PRA that the total incremental burden on all listed 
issuers with respect to the proposed amendments would be 5,961 hours 
for internal company time and $203,700 for the services of outside 
professionals. The total incremental burden for Form 10-K would be 
5,246 hours for internal company time and $138,600 for the services of 
outside professionals.\339\ The total incremental burden for Form N-CSR 
would be 23 hours for internal company time and $2,100 for the services 
of outside professionals.\340\ The total incremental burden for Form 
20-F would be 553 hours for internal company time and $50,400 for the 
services of outside professionals and for Form 40-F would be 139 hours 
for internal company time and $12,600 for the services of outside 
professionals.\341\ For Form 10-K and

[[Page 41187]]

Form N-CSR we estimate that 75% of the burden of preparation is carried 
by the company internally and that 25% of the burden of preparation is 
carried by outside professionals retained by the company at an average 
cost of $400 per hour. For Forms 20-F and 40-F we estimate that 25% of 
the burden of preparation is carried by the company internally and that 
75% of the burden of preparation is carried by outside professionals 
retained by the company at an average cost of $400 per hour. There is 
no change to the estimated burden of Regulation S-K because the burdens 
that this regulation imposes are reflected in our revised estimates for 
the forms. Similarly, there is no change to the estimated burden of 
Schedule 14A, Schedule 14C and Rule 20a-1 because, as noted above, the 
burdens associated with the proposed disclosures are allocated to Form 
10-K and Form N-CSR, respectively.
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    \339\ This includes one hour to file the recovery policy as an 
exhibit to the annual report as well as the burden associated with 
providing Item 402(w) disclosure, when applicable. We estimate the 
number of responses for filing the recovery policy based on the 
number of listed domestic issuers filing annual reports in 2014, or 
4,206 issuers. Proposed Item 402(w) would require disclosure when a 
listed issuer completes a restatement that requires recovery of 
excess incentive-based compensation pursuant to its compensation 
recovery policy or when there is an outstanding balance of excess 
incentive-based compensation from the application of the policy to a 
prior restatement. To estimate the burden associated with this 
disclosure, we looked to the number of listed issuers that filed an 
Item 4.02 Form 8-K (Non-Reliance on Previously Issued Financial 
Statements) in 2014, or 66 issuers. To calculate the total annual 
incremental burden arising from the new narrative disclosure, we 
multiplied the estimated number of annual responses (66) by 21 
burden hours. We note that the number of restatements filed in any 
given year will vary and that, depending on the nature of their 
recovery efforts, certain issuers may be required to provide Item 
402(w) disclosure for more than one year.
    \340\ We estimate seven registered management investment 
companies that are listed issuers and are internally managed that 
may have executive officers who receive incentive-based 
compensation. Of these seven, we assume for PRA purposes that one 
registered management investment company per year will be required 
to prepare the new narrative disclosure required by proposed new 
Item 12 of Form N-CSR. As indicated below, for Form N-CSR, we 
estimate that 75% of the burden of preparation will be carried by 
the registrant internally and the remaining 25% of the burden will 
be carried by outside professionals retained by the company at an 
average cost of $400 per hour. On the basis of the foregoing, we 
estimate an aggregate internal burden hour of 22 hours ((7 
registrants x 1 hour per registrant to file the policy pursuant to 
proposed new Item 13(a)(2)) + (1 registrant x 21 hours per 
registrant to prepare the new narrative disclosure required by 
proposed new Item 12x75%) = 23 hours), and estimate an aggregate 
increase of $2,100 for the services of outside professionals (1 
registrant x 21 hours per registrant to retain outside professionals 
to prepare the new narrative disclosure required by proposed new 
Item 12x25% x $400 per hour) = $2,100).
    \341\ Consistent with our estimates for Form 10-K, we estimate 
the number of responses for filing the recovery policy based on the 
number of listed foreign private issuers and MJDS issuers filing 
annual reports in 2014, or 639 issuers. To estimate the burden 
associated with the disclosure required when a foreign private 
issuer or MJDS issuer is required to pursue recovery pursuant to its 
policy, we looked to the number of listed foreign private issuers 
and MJDS issuers that restated financial statements in 2014, or 8 
foreign private issuers filing on Form 20-F and 2 MJDS issuers 
filing on Form 40-F. To calculate the total annual incremental 
burden arising from the new narrative disclosure, we multiplied the 
estimated number of annual responses (8 and 2, respectively) by 21 
burden hours and allocated the resulting burden estimate to the 
relevant form.
---------------------------------------------------------------------------

    We derived our new burden hour and cost estimates by estimating the 
total amount of time it would take a listed issuer to prepare and 
review the disclosure requirements contained in the final rules. This 
estimate represents the average burden for all listed issuers, both 
large and small. In deriving our estimates, we recognize that the 
burdens will likely vary among individual listed issuers based on a 
number of factors, including the size and complexity of their 
organizations. We believe that some listed issuers will experience 
costs in excess of this average in the first year of compliance with 
the amendments and some issuers may experience less than the average 
costs. A summary of the proposed changes is included in the table 
below.
---------------------------------------------------------------------------

    \342\ The number of responses reflected in the table equals the 
three-year average of the number of schedules and forms filed with 
the Commission and currently reported by the Commission to OMB.

                                                                 Table 1--Calculation of Incremental PRA Burden Estimates \342\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Current      Proposed                                                                       Increase in
                                                                annual        annual        Current     Increase in    Proposed     Current professional    professional   Proposed professional
                                                               responses     responses   burden hours  burden hours  burden hours          costs               costs               costs
                                                                      (A)           (B)           (C)           (D)   (E) = C + D                    (F)              (G)                = F + G
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Form 10-K..................................................          8137          8137    12,198,095         5,246    12,203,089         $1,627,400,000         $138,600         $1,627,538,600
Form 20-F..................................................           942           942       623,021           553       623,795            743,277,230           50.400            743,277,630
Form 40-F..................................................           205           205        22,034           139        22,425             26,440,500           12,600             26,453,100
Form N-CSR.................................................         6,576         6,576       177,799            23       177,822              3,189,771            2,100              3,191,871
                                                            ------------------------------------------------------------------------------------------------------------------------------------
    Total..................................................        15,860        15,860    13,020,949         5,961    13,026,910          2,400,257,501          203,700          2,400,461,201
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D. Solicitation of Comments

    We request comments in order to evaluate: (1) Whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the agency, including whether the information would 
have practical utility; (2) the accuracy of our estimate of the burden 
of the proposed collection of information; (3) whether there are ways 
to enhance the quality, utility and clarity of the information to be 
collected; and (4) whether there are ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.\343\
---------------------------------------------------------------------------

    \343\ We request comment pursuant to 44 U.S.C. 3506(c)(2)(B).
---------------------------------------------------------------------------

    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct the comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should send a copy to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090, with reference to File No. S7-12-15. 
Requests for materials submitted to OMB by the Commission with regard 
to these collections of information should be in writing, refer to File 
No. S7-12-15, and be submitted to the Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 
20549-0213. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this release. Consequently, a comment to OMB is best assured of having 
its full effect if OMB receives it within 30 days of publication.

V. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (SBREFA),\344\ we solicit data to determine whether the 
proposed rule and rule amendments constitute a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in:
---------------------------------------------------------------------------

    \344\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    Commenters should provide empirical data on (1) the potential 
annual effect on the economy; (2) any increase in costs or prices for 
consumers or individual industries; and (3) any potential effect on 
competition, investment or innovation.

VI. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Analysis (``IRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act.\345\ This 
IRFA involves proposals to direct the exchanges and associations to 
prohibit the listing of a security of an issuer that is not in 
compliance with Section 10D's requirements concerning recovery of 
erroneously awarded compensation and to implement disclosure 
requirements related to the recovery of such compensation.
---------------------------------------------------------------------------

    \345\ 5 U.S.C. 603.

---------------------------------------------------------------------------

[[Page 41188]]

A. Reasons for, and Objectives of, the Proposed Action

    We are proposing a new rule and rule amendments to implement the 
provisions of Section 954 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010, which adds Section 10D to the 
Securities Exchange Act of 1934. Section 10D requires the Commission to 
adopt rules directing the exchanges and associations to prohibit the 
listing of any security of an issuer that is not in compliance with 
Section 10D's requirements concerning disclosure of the issuer's policy 
on incentive-based compensation and recovery of erroneously awarded 
compensation. In accordance with the statute, the proposed rule would 
direct the exchanges to establish listing standards that require each 
issuer to adopt and comply with a policy providing for the recovery of 
incentive-based compensation based on financial information required to 
be reported under the securities laws that is received by current or 
former executive officers, and to file all disclosure with respect to 
that policy in accordance with Commission rules.
    The primary objective of the proposed rule and rule amendments is 
to require that all listed issuers have a policy in place to recover 
compensation based on material noncompliance with any financial 
reporting requirement. This policy would require executives to return 
erroneously awarded compensation without the need for shareholders to 
embark on costly litigation.\346\ The disclosure requirements in the 
proposed rule and rule amendments are intended to promote consistent 
disclosure among issuers as to both the substance of a listed issuer's 
recovery policy and how the listed issuer implements that policy in 
practice.
---------------------------------------------------------------------------

    \346\ Senate Report at 135-36.
---------------------------------------------------------------------------

B. Legal Basis

    We are proposing the rule and rule amendments pursuant to Sections 
6, 7, 10, and 19(a) of the Securities Act; Sections 10D, 13, 14, 23(a) 
and 36 of the Exchange Act and Sections 20, 30, and 38 of the 
Investment Company Act of 1940.

C. Small Entities Subject to the Proposed Action

    The proposals would affect, among other entities, exchanges that 
list securities and listed issuers subject to our proxy rules. The 
Regulatory Flexibility Act defines ``small entity'' to mean ``small 
business,'' ``small organization,'' or ``small governmental 
jurisdiction.'' \347\ The Commission's rules define ``small business'' 
and ``small organization'' for purposes of the Regulatory Flexibility 
Act for each of the types of entities regulated by the Commission. 
Exchange Act Rule 0-10(e) provides that the term ``small business'' or 
``small organization,'' when referring to an exchange, means any 
exchange that: (1) Has been exempted from the reporting requirements of 
Exchange Act Rule 601; \348\ and (2) is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization, as defined under Exchange Act Rule 0-10.\349\ No 
exchanges are small entities because none meet these criteria. 
Securities Act Rule 157 \350\ and Exchange Act Rule 0-10(a) \351\ 
define an issuer, other than an investment company, to be a ``small 
business'' or ``small organization'' if it had total assets of $5 
million or less on the last day of its most recent fiscal year and is 
engaged or proposing to engage in an offering of securities which does 
not exceed $5 million. The proposed rule and rule amendments would 
affect small entities that have a class of securities that are 
registered under Section 12(b) of the Exchange Act. We estimate that 
there are approximately 27 listed issuers, other than registered 
investment companies, that may be considered small entities. An 
investment company, including a business development company, is 
considered to be a ``small business'' if it, together with other 
investment companies in the same group of related investment companies, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year.\352\ We believe that certain of the rule and rule 
amendments would affect small entities that are investment companies, 
including business development companies, with a class of securities 
registered under Section 12(b) of the Exchange Act. We estimate that 
there are approximately 13 listed investment companies, including 
business development companies, that may be considered small entities.
---------------------------------------------------------------------------

    \347\ 5 U.S.C. 601(6).
    \348\ 17 CFR 242.601.
    \349\ 17 CFR 240.0-10(e).
    \350\ 17 CFR 230.157.
    \351\ 17 CFR 240.0-10(a).
    \352\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    Under the proposals, the exchanges will be directed to prohibit the 
listing of an equity security of an issuer that does not comply with 
Section 10D's requirements concerning development and implementation of 
a policy requiring recovery of erroneously awarded incentive-based 
compensation, and disclosure of that policy. Large and small entities 
would be subject to the same recovery and disclosure requirements.
    Proposed Rule 10D-1 would require exchanges to adopt listing 
standards that would require a listed issuer (including a small entity) 
to develop and implement a policy providing that, in the event that the 
issuer is required to prepare an accounting restatement due to material 
noncompliance with any financial reporting requirement, the issuer will 
recover from any of its current or former executive officers who 
received incentive-based compensation during the preceding three-year 
period based on the erroneous data, any such compensation in excess of 
what would have been paid under the accounting restatement.
    If during the last completed fiscal year, either a restatement was 
completed that required recovery of excess incentive-based compensation 
pursuant to the listed small entity's compensation recovery policy, or 
there was an outstanding balance of excess incentive-based compensation 
from the application of the policy to a prior restatement, proposed 
Item 402(w) would require the listed small entity to disclose and 
provide in block-text tagged XBRL format:
     For each restatement,
    [cir] The date on which the listed issuer was required to prepare 
an accounting restatement;
    [cir] The aggregate dollar amount of excess incentive-based 
compensation attributable to the restatement; and
    [cir] The aggregate dollar amount of excess incentive-based 
compensation that remained outstanding as of the end of the last 
completed fiscal year;
     The name of each person subject to recovery of excess 
incentive-based compensation attributable to an accounting restatement, 
if any, from whom during the last completed fiscal year the listed 
small entity decided not to pursue recovery, the amount forgone from 
each such person, and a brief description of the listed small entity's 
reasons for not pursuing recovery; and
     The name of, and amount due from, each person from whom, 
at the end of its last completed fiscal year, excess incentive-based 
compensation had been outstanding for 180 days or longer since the date 
the small entity determined the amount the person owed.

In addition, proposed Item 601(b)(96) and the corresponding amendment 
to Form N-CSR would require a listed

[[Page 41189]]

small entity to file, as an exhibit to its Exchange Act annual report 
or, in the case of a listed registered management investment company, 
its Form N-CSR annual report, its policy regarding the recovery of 
erroneously awarded incentive-based compensation.
    The proposals will impose additional requirements on small entities 
in order to comply with the new listing standards and to collect, 
record and report the disclosures. For example, it can reasonably be 
expected that listed small entities would need to engage the 
professional services of attorneys to develop their recovery policies 
and would also need the services of both attorneys and accountants to 
implement those policies in the event of an accounting restatement. 
Such services will likely be needed to compute recoverable amounts, 
especially for incentive-based compensation based on stock price or 
total shareholder return metrics. Small entities also will incur costs 
to tag the required disclosures in XBRL format and may need to engage 
the services of outside professionals to assist with this process.
    Our existing disclosure rules require smaller reporting companies 
to provide compensation information for named executive officers for 
the last two completed fiscal years in the Summary Compensation Table 
pursuant to Item 402(n) of Regulation S-K. We also believe that small 
entities do not typically grant their executive officers complex 
incentive-based compensation awards or use many different types of 
incentive-based compensation awards, which would significantly minimize 
the impact of the proposal, including the proposed reporting 
requirements, on small entities. To the extent a small entity may not 
currently be required to disclose the information the proposals require 
in the event there is a restatement and the restatement requires 
application of the small entity's recovery policy, this information 
should be readily available to the small entity as it controls how it 
implements its recovery policy. Where a small entity may be required to 
disclose this type of information in such filings pursuant to Item 
404(a) of Regulation S-K, the proposed new instruction to Item 404 will 
provide that Item 404 disclosure is not required if the transaction 
involves the recovery of excess incentive-based compensation that is 
disclosed pursuant to Item 402(w).
    In addition, we believe that the impact of the proposals on small 
entities will be lessened because the proposals apply only to listed 
issuers, and the quantitative listing standards applicable to issuers 
listing securities on an exchange, such as market capitalization, 
minimum revenue, and shareholder equity requirements, will serve to 
limit the number of small entities that would be affected.

E. Duplicative, Overlapping or Conflicting Federal Rules

    As noted above, other statutes and rules administered by the 
Commission address the recovery of executive compensation. Section 304 
of SOX provides for recovery of executive compensation when there has 
been material noncompliance of the issuer, as a result of misconduct, 
with any financial reporting measure. In addition, existing CD&A 
disclosure requirements call for disclosure of an issuer's policies and 
decisions regarding recovery of executive compensation in the event of 
an accounting restatement, to the extent material. Outside of the 
federal securities laws, EESA contains an executive compensation 
recovery provision applicable to financial institutions that sell 
troubled assets to the Secretary of the Treasury under TARP. As 
explained above, the proposed rule and rule amendments are generally 
broader in scope, and more specific in detail, than these existing 
provisions. For example, the proposed rule and rule amendments--unlike 
Section 304 of SOX--would require recovery in the event of an 
accounting restatement regardless of issuer misconduct. Similarly, the 
clawback provisions in EESA apply only to financial institutions that 
sold troubled assets to and have not repaid the Treasury, whereas the 
proposed rules apply to all listed issuers. Thus, although there may be 
some overlap between the proposed rule and rule amendments and these 
existing provisions, we do not believe the proposed rule and rule 
amendments would duplicate or conflict with other federal rules or 
statutes.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider alternatives 
that would accomplish our stated objectives, while minimizing any 
significant adverse impact on small entities. In connection with the 
proposed disclosure amendments, we considered the following 
alternatives:
     Clarifying, consolidating or simplifying compliance and 
reporting requirements under the rules for small entities;
     Exempting small entities from all or part of the 
requirements; and
     Establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities.
    In some respects, we have used performance standards in crafting 
the proposals. Specifically:
     Proposed Rule 10D-1 uses a standard-based definition of 
``incentive based compensation'' subject to recovery;
     Proposed Rule 10D-1 provides boards of directors with 
limited discretion to determine whether and how much compensation to 
pursue and broader discretion to determine the means of recovery; and
     Proposed Rule 10D-1 adopts a standard-based approach to 
determining the amount of excess incentive-based compensation subject 
to recovery.
    We believe that high quality financial reporting is important for 
promoting investor confidence in the financial markets. The proposed 
rule and rule amendments would further this objective by requiring that 
all listed issuers have policies requiring the recovery of executive 
compensation that was received based on material noncompliance with 
financial reporting requirements. The disclosure requirements in the 
proposed rule and rule amendments would require clear disclosure of a 
listed issuer's policy on recovery of incentive-based compensation, and 
provide investors with useful information regarding the application of 
that policy. We believe that our proposed rule and rule amendments will 
promote consistent compliance with recovery obligations and related 
disclosure across all listed issuers without unduly burdening small 
entities. We note that the proposal provides issuers flexibility to 
forgo recovery in circumstances where the costs of enforcing recovery 
would exceed the recoverable amounts. This will help to limit costs for 
all issuers subject to the rule, including small entities.
    Although we preliminarily believe that an exemption for small 
entities from coverage of the proposals would not be appropriate, we 
seek comment on whether we should exempt small entities from any of the 
proposed requirements or scale the proposed disclosure amendments to 
reflect the characteristics of small entities and the needs of their 
investors.\353\
---------------------------------------------------------------------------

    \353\ See Sections II.A.1 and II.D, above, and related requests 
for comment.
---------------------------------------------------------------------------

    At this time, we do not believe that different compliance methods 
or timetables for small entities would be appropriate. The proposals 
are intended to further the statutory goal of assuring that executive 
officers do not retain

[[Page 41190]]

incentive-based compensation that they received erroneously. The 
specific disclosure requirements in the proposals will promote 
consistent disclosure among all issuers, including small entities. 
Separate compliance requirements or timetables for small entities could 
interfere with achieving the goals of the statute and our proposals. 
Nevertheless, we solicit comment on whether different compliance 
requirements or timetables for small entities would be appropriate, and 
consistent with the purposes of Section 954 of the Act.\354\
---------------------------------------------------------------------------

    \354\ See Section II.F, above, and related requests for comment.
---------------------------------------------------------------------------

G. Solicitation of Comments

    We encourage the submission of comments with respect to any aspect 
of this Initial Regulatory Flexibility Analysis. In particular, we 
request comments regarding:
     How the proposed rule and rule amendments can achieve 
their objective while lowering the burden on small entities;
     The number of small entities that may be affected by the 
proposed rule and rule amendments;
     Whether small entities should be exempt from the rule and 
rule amendments;
     The existence or nature of the potential impact of the 
proposed amendments on small entities discussed in the analysis; and
     How to quantify the impact of the proposed rule and rule 
amendments.
    Respondents are asked to describe the nature of any impact and 
provide empirical data supporting the extent of the impact. Such 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed rule and rule amendments are 
adopted, and will be placed in the same public file as comments on the 
proposed rule and rule amendments themselves.

VII. Statutory Authority and Text of the Proposed Amendments Amendments

    The amendments contained in this release are being proposed under 
the authority set forth in Sections 6, 7, 10, and 19(a) of the 
Securities Act, Sections 10D, 13, 14, 23(a) and 36 of the Exchange Act, 
and Sections 20, 30, and 38 of the Investment Company Act of 1940.

List of Subjects in 17 CFR Parts 229, 240, 249 and 274

    Reporting and recordkeeping requirements, Securities, Investment 
companies.

Text of the Proposed Amendments

    For the reasons set out in the preamble, the Commission proposes to 
amend title 17, chapter II, of the Code of Federal Regulations as 
follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

0
1. The general authority citation for part 229 is revised to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 777iii, 
77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 
78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 
80a-31(c), 80a-37, 80a-38(a), 80a-39, 80b-11, and 7201 et seq.; and 
18 U.S.C. 1350.
* * * * *
0
2. Section 229.402, as proposed to be amended at 78 FR 60559 [Oct. 1, 
2013] and 80 FR 26329 [May 7, 2015], is further amended by:
0
a. Revising paragraph (a)(1);
0
b. Adding Instruction 5 to paragraph (c);
0
c. Adding Instruction 5 to paragraph (n); and
0
d. Adding paragraph (w).
    The revision and additions read as follows:


Sec.  229.402  (Item 402) Executive compensation.

    (a) * * *
    (1) Treatment of foreign private issuers. A foreign private issuer 
will be deemed to comply with this Item if it provides the information 
required by Items 6.B, 6.E.2 and 6.F of Form 20-F (17 CFR 240.220f), 
with more detailed information provided if otherwise made publicly 
available or required to be disclosed by the issuer's home jurisdiction 
or a market in which its securities are listed or traded, or paragraph 
(17) of General Instruction B of Form 40-F (17 CFR 240.240f), as 
applicable. A foreign private issuer that elects to provide domestic 
Item 402 disclosure shall provide the disclosure required by Item 
402(w) in its annual report or registration statement, as applicable.
* * * * *
    (c) * * *
    Instructions to Item 402(c). * * *
    5. Any amounts recovered pursuant to a listed registrant's 
erroneously awarded compensation recovery policy shall reduce the 
amount reported in the applicable Summary Compensation Table column for 
the fiscal year in which the amount recovered initially was reported as 
compensation, and shall be identified by footnote.
* * * * *
    (n) * * *
    Instructions to Item 402(n). * * *
    5. Any amounts recovered pursuant to the erroneously awarded 
compensation recovery policy of a smaller reporting company that is a 
listed registrant shall reduce the amount reported in its applicable 
Summary Compensation Table column for the fiscal year in which the 
amount recovered initially was reported as compensation, and shall be 
identified by footnote.
* * * * *
    (w) Disclosure of a listed registrant's action to recover 
erroneously awarded compensation. If at any time during the last 
completed fiscal year either a restatement that required recovery of 
excess incentive-based compensation pursuant to the listed registrant's 
compensation recovery policy was completed or there was an outstanding 
balance of excess incentive-based compensation from the application of 
the policy to a prior restatement, the listed registrant shall provide 
the following information:
    (1) For each restatement:
    (i) The date on which the listed registrant was required to prepare 
an accounting restatement, as defined in 17 CFR 240.10D-1(c)(2);
    (ii) The aggregate dollar amount of excess incentive-based 
compensation attributable to such accounting restatement;
    (iii) The estimates that were used in determining the excess 
incentive-based compensation attributable to such accounting 
restatement, if the financial reporting measure related to a stock 
price or total shareholder return metric; and
    (iv) The aggregate dollar amount of excess incentive-based 
compensation that remains outstanding at the end of the last completed 
fiscal year;
    (2) If during the last completed fiscal year the listed registrant 
decided not to pursue recovery from any individual subject to recovery 
of excess incentive-based compensation attributable to an accounting 
restatement, for each such individual, the name and amount forgone and 
a brief description of the reason the listed registrant decided in each 
case not to pursue recovery;
    (3) The name of each individual from whom, as of the end of the 
last completed fiscal year, excess incentive-based compensation had 
been outstanding for 180 days or longer since the date the issuer 
determined the amount the individual owed, and the

[[Page 41191]]

dollar amount of outstanding excess incentive-based compensation due 
from each such individual; and
    (4) The disclosure required to be provided pursuant to this 
paragraph (w) shall appear with, and in the same format as, the rest of 
the disclosure required to be provided pursuant to this Item 402 and, 
in addition, shall be electronically formatted using the eXtensible 
Business Reporting Language (XBRL) interactive data standard in 
accordance with the EDGAR Filer Manual (17 CFR 232.11) as an exhibit to 
definitive Schedule 14A (17 CFR 240.14a-101) or definitive Schedule 14C 
(17 CFR 240.14c-101), as applicable, and Form 10-K (17 CFR 249.310). 
The XBRL format disclosure required to be provided pursuant this 
paragraph (w) must be block-text tagged.
    Instructions to Item 402(w).
    1. A listed registrant is a registrant that had a class of 
securities listed on a national securities exchange registered pursuant 
to section 6 of the Exchange Act (15 U.S.C. 78f) or a national 
securities association registered pursuant to section 15A of the 
Exchange Act (15 U.S.C. 78o-3) at any time during its last completed 
fiscal year.
    2. A compensation recovery policy is the policy required by the 
listing standards adopted pursuant to 17 CFR 240.10D-1.
    3. Excess incentive-based compensation is the erroneously awarded 
compensation computed as provided in 17 CFR 240.10D-1(b)(1)(iii) and 
the applicable listing standards for the listed registrant's 
securities.
    4. For Item 402(w)(1), if the aggregate dollar amount of excess 
incentive-based compensation has not yet been determined, disclose this 
fact and explain the reason(s).
    5. The information required by Item 402(w) must be disclosed only 
in proxy or information statements that call for Item 402 disclosure 
and the listed registrant's annual report on Form 10-K. The information 
required by this Item 402(w) will not be deemed to be incorporated by 
reference into any filing under the Securities Act, except to the 
extent that the listed registrant specifically incorporates it by 
reference.
* * * * *
0
3. Amend Sec.  229.404 by:
0
a. Removing ``or'' at the end of Instruction 5.a.i. to the Instructions 
to Item 404(a);
0
b. Removing the ``.'' and adding in its place ``;or'' in Instruction 
5.a.ii. to the Instructions to Item 404(a); and
0
c. Adding Instruction 5.a.iii. to the Instructions to Item 404(a).
    The addition reads as follows:


Sec.  229.404  (Item 404) Transactions with related persons, promoters 
and certain control persons.

* * * * *
    Instructions to Item 404(a). * * *
    5.a. * * *
    iii. The transaction involves the recovery of excess incentive-
based compensation, as defined in Instruction 3 to Sec.  229.402(w), 
that is disclosed pursuant to Item 402(w) (Sec.  229.402(w)).
* * * * *
0
4. Amend Sec.  229.601 adding paragraphs (96) and (97) to the exhibit 
table in paragraph (a) and adding paragraphs (b)(96) and (97) to read 
as follows:


Sec.  229.601  (Item 601) Exhibits.

    (a) * * *

                                                                      Exhibit Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Securities Act Forms                                      Exchange Act Forms
                                        ----------------------------------------------------------------------------------------------------------------
                                                                      S-4                                F-4           8-K
                                          S-1    S-3    SF-1   SF-3   \1\    S-8    S-11   F-1    F-3    \1\     10    \2\    10-D   10-Q   10-K  ABS-EE
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
                                                                      * * * * * * *
(96) Listed Registrant Policy Relating   .....  .....  .....  .....  .....  .....  .....  .....  .....  .....  .....  .....  .....  .....     X   ......
 to Recovery of Erroneously Awarded
 Compensation..........................
(97) Listed Registrant Compensation      .....  .....  .....  .....  .....  .....  .....  .....  .....  .....  .....  .....  .....  .....     X   ......
 Recovery Disclosure under Item 402(w)
 of Regulation S-K in XBRL Electronic
 Format................................
 
                                                                      * * * * * * *
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ An exhibit need not be provided about a company if: (1) With respect to such company an election has been made under Form S-4 or F-4 to provide
  information about such company at a level prescribed by Form S-3 or F-3; and (2) the form, the level of which has been elected under Form S-4 or F-4,
  would not require such company to provide such exhibit if it were registering a primary offering.
\2\ A Form 8-K exhibit is required only if relevant to the subject matter reported on the Form 8-K report. For example, if the Form 8-K pertains to the
  departure of a director, only the exhibit described in paragraph (b)(17) of this section need be filed. A required exhibit may be incorporated by
  reference from a previous filing.

    (b) * * *
    (96) Listed Registrant Policy Relating to Recovery of Erroneously 
Awarded Compensation. A listed registrant must provide as an exhibit to 
its Exchange Act annual report the policy required by the applicable 
listing standards adopted pursuant to 17 CFR 240.10D-1. For purposes of 
this Item, a listed registrant is a registrant that had a class of 
securities listed on a national securities exchange registered pursuant 
to section 6 of the Exchange Act (15 U.S.C. 78f) or a national 
securities association registered pursuant to section 15A of the 
Exchange Act (15 U.S.C. 78o-3) at any time during its last completed 
fiscal year.
    (97) Listed Registrant Compensation Recovery Disclosure under Item 
402(w) of Regulation S-K in XBRL Electronic Format. The compensation 
recovery disclosure required to be provided by a listed registrant 
under Item 402(w) of Regulation S-K (Sec.  229.402(w)) in electronic 
format using the XBRL interactive data standard in accordance with the 
EDGAR Filer Manual (17 CFR 232.11). The exhibit must be block-text 
tagged.
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
5. The authority citation for part 240 is revised to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., 
and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C.5221(e)(3); 18 U.S.C. 1350; 
and Pub. L. 111-203, 939A, 124 Stat.1376 (2010), unless otherwise 
noted.
* * * * *
0
6. Add Sec.  240.10D-1 to read as follows:


Sec.  240.10D-1--Listing  standards relating to recovery of erroneously 
awarded compensation.

    (a) Pursuant to section 10D(a) of the Act (15 U.S.C. 78j-4(a)):
    (1) National securities exchanges and associations. The rules of 
each national securities exchange registered pursuant to section 6 of 
the Act (15 U.S.C. 78f) and each national securities association 
registered pursuant to section 15A of the Act (15 U.S.C. 78o-3), to the 
extent such national securities association lists securities in an 
automated inter-dealer quotation system must, in accordance with the 
provisions of this section, prohibit the initial or continued listing 
of any security of an issuer that is not

[[Page 41192]]

in compliance with the requirements of any portion of paragraph (b) or 
(c) of this section.
    (2) Implementation. (i) Each national securities exchange and 
national securities association that lists securities must file with 
the Commission, no later than 90 days after publication of this section 
in the Federal Register, proposed rules or rule amendments that comply 
with this section. Such rules or rule amendments that comply with this 
section must be approved by the Commission and be effective no later 
than one year after publication of this section in the Federal 
Register.
    (ii) Each listed issuer shall adopt the recovery policy required by 
this section no later than 60 days following the effective date of the 
listing standard referenced in paragraph (a)(2)(i) of this section. 
Each listed issuer shall comply with that recovery policy for all 
incentive-based compensation received by executive officers on or after 
the effective date of this section that results from attainment of a 
financial reporting measure based on or derived from financial 
information for any fiscal period ending on or after the effective date 
of this section. Each listed issuer shall provide the required 
disclosures in the applicable Commission filings required on or after 
the effective date of the listing standard referenced in paragraph 
(a)(2)(i) of this section.
    (b) Required standards. The requirements of this section are as 
follows:
    (1) Recovery of erroneously awarded compensation. The issuer shall 
adopt and comply with a written policy providing that, in the event 
that the issuer is required to prepare an accounting restatement due to 
the material noncompliance of the issuer with any financial reporting 
requirement under the securities laws, the issuer will recover the 
amount of erroneously awarded incentive-based compensation as provided 
below. The issuer shall file all disclosures with respect to such 
recovery policy in accordance with the requirements of the federal 
securities laws.
    (i) To be subject to the issuer's recovery policy, incentive-based 
compensation:
    (A) Must have been received while the issuer has a class of 
securities listed on a national securities exchange or a national 
securities association; and
    (B) Must have been received by an individual who served as an 
executive officer of the issuer at any time during the performance 
period for that incentive-based compensation.
    (ii) The issuer's recovery policy shall apply to any incentive-
based compensation received during the three completed fiscal years 
immediately preceding the date that the issuer is required to prepare a 
restatement of its previously issued financial statements to correct a 
material error. In addition to these last three completed fiscal years, 
the recovery policy shall apply to any transition period (that results 
from a change in the issuer's fiscal year) within or immediately 
following those three completed fiscal years. However, a transition 
period that comprises a period of nine to 12 months would be deemed a 
completed fiscal year. A ``transition period'' refers to the period 
between the last day of the issuer's previous fiscal year end and the 
first day of its new fiscal year. An issuer's obligation to recover 
excess incentive-based compensation is not dependent on if or when the 
restated financial statements are filed.
    (iii) The amount of incentive-based compensation subject to the 
issuer's recovery policy (the ``erroneously awarded compensation'') 
shall be the amount of incentive-based compensation received that 
exceeds the amount of incentive-based compensation that otherwise would 
have been received had it been determined based on the accounting 
restatement, and shall be computed without regard to any taxes paid. 
For incentive-based compensation based on stock price or total 
shareholder return, where the amount of erroneously awarded 
compensation is not subject to mathematical recalculation directly from 
the information in an accounting restatement:
    (A) The amount shall be based on a reasonable estimate of the 
effect of the accounting restatement on the stock price or total 
shareholder return upon which the incentive-based compensation was 
received; and
    (B) The issuer shall maintain documentation of the determination of 
that reasonable estimate and provide such documentation to the exchange 
or association.
    (iv) The issuer must recover erroneously awarded compensation in 
compliance with its recovery policy except to the extent that it would 
be impracticable to do so. Recovery would be impracticable only if the 
direct expense paid to a third party to assist in enforcing the policy 
would exceed the amount to be recovered, or if recovery would violate 
home country law. Before concluding that it would be impracticable to 
recover any amount of erroneously awarded compensation based on expense 
of enforcement, the issuer must first make a reasonable attempt to 
recover that erroneously awarded compensation. The issuer shall 
document such reasonable attempt(s) to recover, and provide that 
documentation to the exchange or association. Before concluding that it 
would be impracticable to recover any amount of erroneously awarded 
compensation based on violation of home country law, the issuer must 
obtain an opinion of home country counsel, not unacceptable to the 
applicable national securities exchange or association, that recovery 
would result in such a violation, and shall provide such opinion to the 
exchange or association. In addition, the home country law must have 
been adopted in such home country prior to the date of publication in 
the Federal Register of proposed Rule 10D-1. In either case, the 
issuer's committee of independent directors responsible for executive 
compensation decisions, or in the absence of such a committee, a 
majority of the independent directors serving on the board, shall make 
any determination that recovery would be impracticable.
    (v) The issuer is prohibited from indemnifying any executive 
officer or former executive officer against the loss of erroneously 
awarded compensation.
    (vi) An issuer that has been delisted from any national securities 
exchange or national securities association for failing to comply with 
the recovery policy required by this section may not list its 
securities on any national securities exchange or national securities 
association until the issuer comes into compliance with that policy.
    (2) General exemptions. The requirements of this section shall not 
apply to the listing of:
    (i) A security futures product cleared by a clearing agency that is 
registered pursuant to section 17A of the Act (15 U.S.C. 78q-1) or that 
is exempt from the registration requirements of section 17A(b)(7)(A) 
(15 U.S.C. 78q-1(b)(7)(A)).
    (ii) A standardized option, as defined in Sec.  240.9b-1(a)(4), 
issued by a clearing agency that is registered pursuant to section 17A 
of the Act (15 U.S.C. 78q-1).
    (iii) Any security issued by a unit investment trust, as defined in 
15 U.S.C. 80a-4(2).
    (iv) Any security issued by a management company, as defined in 15 
U.S.C. 80a-4(3), that is registered under section 8 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-8), if such management company has 
not awarded incentive-based compensation to any executive officer of 
the company in any of the last three fiscal years, or in the case of a 
company that has been listed for less than three fiscal years, since 
the listing of the company.

[[Page 41193]]

    (c) Definitions. Unless the context otherwise requires, all terms 
used in this section have the same meaning as in the Act and the rules 
and regulations thereunder. In addition, unless the context otherwise 
requires, the following definitions apply for purposes of this section:
    (1) Accounting restatement. For purposes of this rule, an 
accounting restatement is the result of the process of revising 
previously issued financial statements to reflect the correction of one 
or more errors that are material to those financial statements.
    (2) Date on which an issuer is required to prepare an accounting 
restatement. For purposes of Section 10D of the Act (15 U.S.C. 78j-4), 
the date on which an issuer is required to prepare an accounting 
restatement is the earlier to occur of:
    (i) The date the issuer's board of directors, a committee of the 
board of directors, or the officer or officers of the issuer authorized 
to take such action if board action is not required, concludes, or 
reasonably should have concluded, that the issuer's previously issued 
financial statements contain a material error; or
    (ii) The date a court, regulator or other legally authorized body 
directs the issuer to restate its previously issued financial 
statements to correct a material error.

    Note to paragraph (c)(2): The date specified in paragraph 
(c)(2)(i) of this section generally is expected to coincide with the 
occurrence of the event described under Item 4.02(a) of Exchange Act 
Form 8-K (17 CFR 249.308). Neither date specified in paragraph 
(c)(2) of this section is predicated on if or when a Form 8-K is 
filed.

    (3) Executive officer. For purposes of Section 10D of the Act (15 
U.S.C. 78j-4), 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 shall be 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.

    Note to paragraph (c)(3): Policy-making function is not intended 
to include policy-making functions that are not significant. If 
pursuant to Item 401(b) of Regulation S-K (Sec.  229.401(b)) the 
issuer identifies a person as an executive officer, it is presumed 
that the Board of Directors has made that judgment and that the 
persons so identified are the executive officers for purposes of 
Section 10D of the Act (15 U.S.C. 78j-4), as are such other persons 
enumerated in this paragraph (c)(3) but not in Item 401(b).

    (4) Incentive-based compensation. For purposes of Section 10D (15 
U.S.C. 78j-4), incentive-based compensation is any compensation that is 
granted, earned or vested based wholly or in part upon the attainment 
of a financial reporting measure. Financial reporting measures are 
measures that are determined and presented in accordance with the 
accounting principles used in preparing the issuer's financial 
statements, any measures that are derived wholly or in part from such 
measures, and stock price and total shareholder return. A financial 
reporting measure need not be presented within the financial statements 
or included in a filing with the Commission.
    (5) Material noncompliance. For purposes of Section 10D (15 U.S.C. 
78j-4), a restatement to correct an error that is material to 
previously issued financial statements shall be deemed to result from 
material noncompliance of the issuer with a financial reporting 
requirement under the securities laws.
    (6) Received. For purposes of Section 10D (15 U.S.C. 78j-4), 
incentive-based compensation is deemed received in the issuer's fiscal 
period during which the financial reporting measure specified in the 
incentive-based compensation award is attained, even if the payment or 
grant of the incentive-based compensation occurs after the end of that 
period.
0
7. Amend Section 240.14a-101, by adding Item 22(b)(20) and Item 25 to 
read as follows:


Sec.  240.14a-101  Schedule 14A. Information required in proxy 
statement.

SCHEDULE 14A INFORMATION

* * * * *
    Item 22. * * *
    (b) * * *
    (20) In the case of a Fund that is an investment company registered 
under the Investment Company Act of 1940 (15 U.S.C. 80a) that is 
required to develop and implement a policy regarding the recovery of 
erroneously awarded compensation pursuant to Sec.  240.10D-1(b)(1), if 
at any time during the last completed fiscal year either a restatement 
that required recovery of excess incentive-based compensation pursuant 
to the Fund's compensation recovery policy was completed or there was 
an outstanding balance of excess incentive-based compensation from the 
application of the policy to a prior restatement, the Fund shall 
provide the following information:
    (i) For each restatement:
    (A) The date on which the Fund was required to prepare an 
accounting restatement, as defined in Sec.  240.10D-1(c)(2);
    (B) The aggregate dollar amount of excess incentive-based 
compensation attributable to such accounting restatement;
    (C) The estimates that were used in determining the excess 
incentive-based compensation attributable to such accounting 
restatement, if the financial reporting measure related to a stock 
price or total shareholder return metric; and
    (D) The aggregate dollar amount of excess incentive-based 
compensation that remains outstanding at the end of the last completed 
fiscal year;
    (ii) If during the last completed fiscal year the Fund decided not 
to pursue recovery from any individual subject to recovery of excess 
incentive-based compensation attributable to an accounting restatement, 
for each such individual, the name and amount forgone and a brief 
description of the reason the Fund decided in each case not to pursue 
recovery; and
    (iii) The name of each individual from whom, as of the end of the 
last completed fiscal year, excess incentive-based compensation had 
been outstanding for 180 days or longer since the date the issuer 
determined the amount the individual owed, and the dollar amount of 
outstanding excess incentive-based compensation due from each such 
individual.
    Instructions to paragraph 22(b)(20).
    1. Information provided under this paragraph is deemed to satisfy 
the requirements of paragraphs (b)(8) and (b)(11) of Item 22 with 
respect to the recovery of erroneously awarded compensation pursuant to 
Sec.  240.10D-1(b)(1).
    2. A compensation recovery policy is the policy required by the 
listing standards adopted pursuant to Sec.  240.10D-1.
    3. Excess incentive-based compensation'' is the erroneously awarded 
compensation computed as provided in Sec.  240.10D-1(b)(1)(iii) and the 
applicable listing standards for the Fund's securities.

[[Page 41194]]

    4. If the aggregate dollar amount of excess incentive-based 
compensation has not yet been determined, disclose this fact and 
explain the reason(s).
* * * * *
    Item 25. Exhibits.
    Provide the information required to be disclosed by Item 402(w) of 
Regulation S-K (17 CFR 229.402(w)), or Item 22(b)(20) of this Schedule 
14A, in an exhibit to this Schedule 14A electronically formatted using 
the eXtensible Business Reporting Language (XBRL) interactive data 
standard in accordance with the EDGAR Filer Manual (17 CFR 232.11). The 
exhibit must be block-text tagged.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
8. The authority citation for part 249 is revised to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78a et seq., 78c, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78p, 78q, 
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4 80b-11, and 7201 et seq.; 12 U.S.C. 5461 et seq.; and 
18 U.S.C. 1350, unless otherwise noted.
* * * * *
* * * * *
0
9. Amend Form 20-F (referenced in Sec.  249.220f) by adding Item 6.F 
and Instructions to Item 6.F, and adding Instruction 17 to the 
Instructions as to Exhibits, of Form 20-F, to read as follows:

    Note: The text of Form 20-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM 20-F

* * * * *

Item 6. Directors, Senior Management and Employees

* * * * *
    F. Disclosure of a listed issuer's action to recover erroneously 
awarded compensation. If at any time during the last completed fiscal 
year either a restatement that required recovery of excess incentive-
based compensation pursuant to the listed issuer's compensation 
recovery policy was completed or there was an outstanding balance of 
excess incentive-based compensation from the application of the policy 
to a prior restatement, the listed issuer shall, in its annual report 
on Form 20-F, provide the following information:
    (1) For each restatement:
    (i) The date on which the listed issuer was required to prepare an 
accounting restatement, as defined in Rule 10D-1(c)(2) under the 
Exchange Act (17 CFR 240.10D-1(c)(2));
    (ii) The aggregate dollar amount of excess incentive-based 
compensation attributable to such accounting restatement;
    (iii) The estimates that were used in determining the excess 
incentive-based compensation attributable to such accounting 
restatement, if the financial reporting measure related to a stock 
price or total shareholder return metric; and
    (iv) The aggregate dollar amount of excess incentive-based 
compensation that remains outstanding at the end of the last completed 
fiscal year;
    (2) If during the last completed fiscal year the listed issuer 
decided not to pursue recovery from any individual subject to recovery 
of excess incentive-based compensation attributable to an accounting 
restatement, for each such individual, the name and amount forgone and 
a brief description of the reason the listed issuer decided in each 
case not to pursue recovery; and
    (3) The name of each individual from whom, as of the end of the 
last completed fiscal year, excess incentive-based compensation had 
been outstanding for 180 days or longer since the date the issuer 
determined the amount the individual owed, and the dollar amount of 
outstanding excess incentive-based compensation due from each such 
individual.
    (4) The disclosure required to be provided by Item 6.F shall appear 
with, and in the same format as, the rest of the disclosure required to 
be provided by Item 6 and, in addition, shall be electronically 
formatted using the eXtensible Business Reporting Language (XBRL) 
interactive data standard in accordance with the EDGAR Filer Manual (17 
CFR 232.11) as an exhibit to this Form. The XBRL format disclosure 
required to be provided by this Item 6.F must be block-text tagged.
    Instructions to Item 6.F.
    1. For purposes of this Item, a ``listed issuer'' is an issuer that 
had a class of securities listed on a national securities exchange 
registered pursuant to section 6(a) of the Exchange Act (15 U.S.C. 78f) 
or a national securities association registered pursuant to section 
15A(a) of the Exchange Act (15 U.S.C. 78o-3) at any time during its 
last completed fiscal year.
    2. A ``compensation recovery policy'' is the policy required by the 
listing standards adopted pursuant to Rule 10D-1 under the Exchange Act 
(17 CFR 240.10D-1).
    3. ``Excess incentive-based compensation'' is the erroneously 
awarded compensation computed as provided in Rule 10D-1(b)(1)(iii) 
under the Exchange Act (17 CFR 240.10D-1(b)(1)(iii)) and the applicable 
listing standards for the listed issuer's securities.
    4. If the aggregate dollar amount of excess incentive-based 
compensation has not yet been determined, disclose this fact and 
explain the reason(s).
    5. The information required by Item 6.F must be disclosed only in 
annual reports and does not apply to registration statements on Form 
20-F. The information required by this Item 6.F will not be deemed to 
be incorporated by reference into any filing under the Securities Act, 
except to the extent that the listed issuer specifically incorporates 
it by reference.
* * * * *

Item 7. Major Shareholders and Related Party Transactions

* * * * *
    Instructions to Item 7.B * * *
    4. Disclosure need not be provided pursuant to this Item if the 
transaction involves the recovery of excess incentive-based 
compensation that is disclosed pursuant to Item 6.F.
* * * * *

INSTRUCTIONS AS TO EXHIBITS

* * * * *
    96. A listed issuer must provide as an exhibit to its Exchange Act 
annual report on Form 20-F the compensation recovery policy required by 
the applicable listing standards adopted pursuant to Rule 10D-1 under 
the Exchange Act (17 CFR 240.10D-1) . For purposes of this paragraph, a 
``listed issuer'' is a registrant that had a class of securities listed 
on a national securities exchange registered pursuant to section 6 of 
the Exchange Act (15 U.S.C. 78f) or a national securities association 
registered pursuant to section 15A of the Exchange Act (15 U.S.C. 78o-
3) at any time during its last completed fiscal year.
    97. The compensation recovery disclosure is required to be provided 
by a listed issuer under Item 6.F in electronic format using the XBRL 
interactive data standard in accordance with the EDGAR Filer Manual (17 
CFR 232.11). The exhibit must be block-text tagged. 17 through 95 and 
98 through 99 [Reserved]
* * * * *
0
10. Amend Form 40-F (referenced in Sec.  249.240f) by adding paragraph 
(17) to General Instruction B and Instructions to paragraph (17) of 
General Instruction B to read as follows:


[[Page 41195]]


    Note: The text of Form 40-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM 40-F

* * * * *
    (17) Recovery of erroneously awarded compensation.
    (a) A listed issuer shall include as exhibit 96 the compensation 
recovery policy required by the applicable listing standards adopted 
pursuant to Exchange Act Rule 10D-1 (17 CFR 240.10D-1).
    (b) If at any time during the last completed fiscal year either a 
restatement that required recovery of excess incentive-based 
compensation pursuant to the listed issuer's compensation recovery 
policy was completed or there was an outstanding balance of excess 
incentive-based compensation from the application of the policy to a 
prior restatement, the listed issuer shall, in its annual report on 
Form 40-F, provide the following information:
    (1) For each restatement:
    (i) The date on which the listed issuer was required to prepare an 
accounting restatement, as defined in Exchange Act Rule 10D-1(c)(2) (17 
CFR 240.10D-1(c)(2));
    (ii) The aggregate dollar amount of excess incentive-based 
compensation attributable to such accounting restatement;
    (iii) The estimates that were used in determining the excess 
incentive-based compensation attributable to such accounting 
restatement, if the financial reporting measure related to a stock 
price or total shareholder return metric; and
    (iv) The aggregate dollar amount of excess incentive-based 
compensation that remains outstanding at the end of the last completed 
fiscal year;
    (2) If during the last completed fiscal year the listed issuer 
decided not to pursue recovery from any individual subject to recovery 
of excess incentive-based compensation attributable to an accounting 
restatement, for each such individual, the name and amount forgone and 
a brief description of the reason the listed issuer decided in each 
case not to pursue recovery; and
    (3) The name of each individual from whom, as of the end of the 
last completed fiscal year, excess incentive-based compensation had 
been outstanding for 180 days or longer since the date the issuer 
determined the amount the individual owed, and the dollar amount of 
outstanding excess incentive-based compensation due from each such 
individual.
    (4) The disclosure required to be provided by paragraph (17) of 
General Instruction B shall appear with, and in the same format as 
generally required for, the rest of the disclosure required to be 
provided by General Instruction B and, in addition, shall be 
electronically formatted using the eXtensible Business Reporting 
Language (XBRL) interactive data standard in accordance with the EDGAR 
Filer Manual (17 CFR 232.11) as exhibit 97 to this Form. The XBRL 
format disclosure required to be provided by paragraph (17) of General 
Instruction B must be block-text tagged.
    Instructions to paragraph (17).
    1. For purposes of this paragraph, a ``listed issuer'' is an issuer 
that had a class of securities listed on a national securities exchange 
registered pursuant to section 6 of the Exchange Act (15 U.S.C. 78f) or 
a national securities association registered pursuant to section 15A of 
the Exchange Act (15 U.S.C. 78o-3) at any time during its last 
completed fiscal year.
    2. A ``compensation recovery policy'' is the policy required by the 
listing standards adopted pursuant to Exchange Act Rule 10D-1 (17 CFR 
240.10D-1).
    3. ``Excess incentive-based compensation'' is the erroneously 
awarded compensation computed as provided in Exchange Act Rule 10D-
1(b)(1)(iii) (17 CFR 240.10D-1(b)(1)(iii)) and the applicable listing 
standards for the listed issuer's securities.
    4. If the aggregate dollar amount of excess incentive-based 
compensation has not yet been determined, disclose this fact and 
explain the reason(s).
    5. The information required by paragraph (17) of General 
Instruction B must be disclosed only in annual reports and does not 
apply to registration statements on Form 40-F. The information required 
by this paragraph (17) will not be deemed to be incorporated by 
reference into any filing under the Securities Act, except to the 
extent that the listed issuer specifically incorporates it by 
reference.
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
11. The general authority citation for Part 274 is revised to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78j-4, 
78l, 78m, 78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 
111-203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
12. Amend Form N-CSR (referenced in 17 CFR 274.128) by:
0
a. Revising General Instruction D;
0
b. Redesignating Item 12 as Item 13;
0
c. Adding new Item 12;
0
d. Redesignating paragraph (a)(2) of newly designated Item 13 
(Exhibits) as paragraph (a)(4); and
0
e. Adding paragraphs (a)(2) and (a)(3) to redesignated Item 13 
(Exhibits).
    The additions read as follows:

    Note: The text of Form N-CSR does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM N-CSR

* * * * *

GENERAL INSTRUCTIONS * * *

D. Incorporation by Reference

    A registrant may incorporate by reference information required by 
Items 4, 5, 12, and 13(a)(1). No other Items of the Form shall be 
answered by incorporating any information by reference. The information 
required by Items 4, 5, and 12 may be incorporated by reference from 
the registrant's definitive proxy statement (filed or required to be 
filed pursuant to Regulation 14A (17 CFR 240.14a-1 et seq.)) or 
definitive information statement (filed or to be filed pursuant to 
Regulation 14C (17 CFR 240.14c-1 et seq.)) which involves the election 
of directors, if such definitive proxy statement or information 
statement is filed with the Commission not later than 120 days after 
the end of the fiscal year covered by an annual report on this Form. 
All incorporation by reference must comply with the requirements of 
this Form and the following rules on incorporation by reference: Rule 
10(d) of Regulation S-K under the Securities Act of 1933 (17 CFR 
229.10(d)) (general rules on incorporation by reference, which, among 
other things, prohibit, unless specifically required by this Form, 
incorporating by reference a document that includes incorporation by 
reference to another document, and limits incorporation to documents 
filed within the last 5 years, with certain exceptions); Rule 303 of 
Regulation S-T (17 CFR 232.303) (specific requirements for 
electronically filed documents); Rules 12b-23 and 12b-32 under the 
Exchange Act (additional rules on incorporation by reference for 
reports filed pursuant to Sections 13 and 15(d) of the Exchange Act); 
and Rules 0-4, 8b-23, and 8b-32 under the Investment Company Act of 
1940 (17 CFR 270.0-4, 270.8b-23, and 270.8b-32) (additional rules on 
incorporation by reference for investment companies).
* * * * *

Item 12. Recovery of Erroneously Awarded Compensation

    In the case of a registrant that is required to develop and 
implement a

[[Page 41196]]

policy regarding the recovery of erroneously awarded compensation 
pursuant to Rule 10D-1(b)(1) under the Exchange Act (17 CFR 240.10D-1), 
if at any time during the last completed fiscal year either a 
restatement that required recovery of excess incentive-based 
compensation pursuant to the registrant's compensation recovery policy 
was completed or there was an outstanding balance of excess incentive-
based compensation from the application of the policy to a prior 
restatement, the registrant shall provide the following information:
    (a) For each restatement:
    (1) The date on which the registrant was required to prepare an 
accounting restatement, as defined in Rule 10D-1(c)(2) under the 
Exchange Act (17 CFR 240.10D-1(c)(2));
    (2) The aggregate dollar amount of excess incentive-based 
compensation attributable to such accounting restatement;
    (3) The estimates that were used in determining the excess 
incentive-based compensation attributable to such accounting 
restatement, if the financial reporting measure related to a stock 
price or total shareholder return metric; and
    (4) The aggregate dollar amount of excess incentive-based 
compensation that remains outstanding at the end of the last completed 
fiscal year;
    (b) If during the last completed fiscal year the registrant decided 
not to pursue recovery from any individual subject to recovery of 
excess incentive-based compensation attributable to an accounting 
restatement, for each such individual, the name and amount forgone and 
a brief description of the reason the registrant decided in each case 
not to pursue recovery; and
    (c) The name of each individual from whom, as of the end of the 
last completed fiscal year, excess incentive-based compensation had 
been outstanding for 180 days or longer since the date the issuer 
determined the amount the individual owed, and the dollar amount of 
outstanding excess incentive-based compensation due from each such 
individual.

Instructions

    1. The information required by this Item is only required in an 
annual report on Form N-CSR.
    2. A ``compensation recovery policy'' is the policy required by the 
listing standards adopted pursuant to Rule 10D-1 under the Exchange Act 
(17 CFR 240.10D-1).
    3. ``Excess incentive-based compensation'' is the erroneously 
awarded compensation computed as provided in Rule 10D-1(b)(1)(iii) 
under the Exchange Act (17 CFR 240.10D-1(b)(1)(iii)) and the applicable 
listing standards for the listed registrant's securities.
    4. If the aggregate dollar amount of excess incentive-based 
compensation has not yet been determined, disclose this fact and 
explain the reason(s).

Item 13. Exhibits

    (a) * * *
    (2) Any policy required by the listing standards adopted pursuant 
to Rule 10D-1 under the Exchange Act (17 CFR 240.10D-1) by the 
registered national securities exchange or registered national 
securities association upon which the registrant's securities are 
listed.

Instruction to Paragraph (a)(2)

    The exhibit required by this paragraph (a)(2) is only required in 
an annual report on Form N-CSR.
    (3) Unless the information required by Item 12 is answered by 
incorporating by reference from the registrant's definitive proxy 
statement or definitive information statement pursuant to General 
Instruction D, provide the information required to be disclosed by Item 
12 in an exhibit to this Form electronically formatted using the 
eXtensible Business Reporting Language (XBRL) interactive data standard 
in accordance with the EDGAR Filer manual (17 CFR 232.11). The exhibit 
must be block-text tagged.

Instruction to Paragraph (a)(3)

    The exhibit required by this paragraph (a)(3) is only required in 
an annual report on Form N-CSR.
* * * * *

    By the Commission.
    Dated: July 1, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-16613 Filed 7-13-15; 8:45 am]
 BILLING CODE 8011-01-P