[Federal Register Volume 87, Number 227 (Monday, November 28, 2022)]
[Rules and Regulations]
[Pages 73076-73142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-23757]



[[Page 73075]]

Vol. 87

Monday,

No. 227

November 28, 2022

Part II





Securities and Exchange Commission





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17 CFR Parts 229, 232, et al.





Listing Standards for Recovery of Erroneously Awarded Compensation; 
Final Rule

  Federal Register / Vol. 87 , No. 227 / Monday, November 28, 2022 / 
Rules and Regulations  

[[Page 73076]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 232, 240, 249, 270, and 274

[Release Nos. 33-11126; 34-96159; IC-34732; File No. S7-12-15]
RIN 3235-AK99


Listing Standards for Recovery of Erroneously Awarded 
Compensation

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting a new rule and rule amendments to implement 
Section 954 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank Act''), which added Section 10D to 
the Securities Exchange Act of 1934 (``Exchange Act''). In accordance 
with Section 10D of the Exchange Act, the final rules direct the 
national securities exchanges and associations that list securities to 
establish listing standards that require each issuer to develop and 
implement a policy providing for the recovery, in the event of a 
required accounting restatement, of incentive-based compensation 
received by current or former executive officers where that 
compensation is based on the erroneously reported financial 
information. The listing standards must also require the disclosure of 
the policy. Additionally, the final rules require a listed issuer to 
file the policy as an exhibit to its annual report and to include other 
disclosures in the event a recovery analysis is triggered under the 
policy.

DATES: The amendments are effective January 27, 2023.

FOR FURTHER INFORMATION CONTACT: Steven G. Hearne, Senior Special 
Counsel, at (202) 551-3430, in the Office of Rulemaking, Division of 
Corporation Finance, U.S. Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to:

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           Commission reference                 CFR citation (17 CFR)
------------------------------------------------------------------------
Regulation S-K............................
    Item 10 through 1406..................  Sec.  Sec.   229.10 through
                                             229.1406.
    Item 402..............................  Sec.   229.402.
    Item 404..............................  Sec.   229.404.
    Item 601..............................  Sec.   229.601.
    Rule 10 through 903...................  Sec.  Sec.   232.10 through
                                             232.903.
    Rule 405..............................  Sec.   232.405.
Exchange Act \1\..........................
    Rule 10D-1............................  Sec.   240.10D-1.
    Schedule 14A..........................  Sec.   240.14a-101.
Form 20-F.................................  Sec.   249.220f.
    Form 40-F.............................  Sec.   249.240f.
    Form 10-K.............................  Sec.   249.310.
Exchange Act and Investment Company Act of
 1940 (``Investment Company Act'')\2\.
    Form N-CSR............................  Sec.  Sec.   249.331 and
                                             274.128.
Investment Company Act....................
    Rule 30a-2............................  Sec.   270.30a-2.
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Table of Contents
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    \1\ 15 U.S.C. 78a et seq.
    \2\ 15 U.S.C. 80a-1 et seq.
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I. Introduction and Background
II. Discussion of Final Amendments
    A. Issuers and Securities Subject To Exchange Act Rule 10D-1
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
    B. Restatements
    1. Restatements Triggering Application of Recovery Policy
    a. Proposed Amendments
    b. Comments
    c. Final Amendments
    2. Date the Issuer Is Required To Prepare an Accounting 
Restatement
    a. Proposed Amendments
    b. Comments
    c. Final Amendments
    C. Application of Recovery Policy
    1. Executive Officers Subject to Recovery Policy
    a. Proposed Amendments
    b. Comments
    c. Final Amendments
    2. Incentive-Based Compensation
    a. Incentive-Based Compensation Subject to Recovery Policy
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    b. When Compensation Is ``Received'' and Time Period Covered
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    3. Recovery Process
    a. Calculation of Erroneously Awarded Compensation
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    b. Board Discretion Regarding Whether To Seek Recovery
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    c. Board Discretion Regarding the Means of Recovery
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    D. Disclosure of Issuer Policy on Incentive-Based Compensation
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
    E. Indemnification and Insurance
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
    F. Transition and Timing
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
III. Other Matters
IV. Economic Analysis
    A. Baseline
    B. Analysis of Potential Economic Effects
    1. Direct Effects on Issuers and Shareholders
    2. Effects on U.S. Exchanges and Listings
    3. Costs of Recovery
    4. Effects on Financial Reporting
    5. Effects on Executive Compensation
    6. Effects of Disclosure and Tagging Requirements
    7. Indemnification and Insurance
    8. Effects May Vary for Different Types of Issuers
    C. Alternatives
    1. Exemptions for Certain Categories of Issuers
    2. Excluding Incentive-Based Compensation Tied to Stock Price
    3. Including Only ``Big R'' Restatements as Trigger Events
    4. Other Alternatives Considered
V. Paperwork Reduction Act
    A. Summary of the Collection of Information
    B. Summary of the Final Amendments and Effect of the Final 
Amendments on Existing Collections of Information
    C. Burden and Cost Estimates Related to the Final Amendments
VI. Final Regulatory Flexibility Act Analysis
    A. Need for, and Objectives of, the Final Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Final Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    Statutory Authority

I. Introduction and Background

    Section 954 of the Dodd-Frank Act added 15 U.S.C. 78j-4 (``Section 
10D'') to the Exchange Act. Title 15 Section 78j-4 (a) of the U.S. Code 
(``Section 10D(a)'') requires the Securities and Exchange Commission 
(the ``Commission'') to adopt rules directing the national securities 
exchanges \3\

[[Page 73077]]

(``exchanges'') and the national securities associations \4\ 
(``associations'') to prohibit the listing of any security of an issuer 
that is not in compliance with the requirements of 15 U.S.C. 78j-4(b) 
(``Section 10D(b)''). Section 10D(b) of the Exchange Act requires the 
Commission to adopt rules directing the exchanges to establish listing 
standards that require each issuer to develop and implement a policy 
providing:
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    \3\ A ``national securities exchange'' is an exchange registered 
as such under 15 U.S.C. 78f (``Section 6 of the Exchange Act''). 
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, because 
the final rules exempt security futures products and standardized 
options from their scope, any registered national securities 
exchange that lists and trades only security futures products or 
standardized options is not required to file a rule change in order 
to comply.
    \4\ A ``national securities association'' is an association of 
brokers and dealers registered as such under 15 U.S.C. 78o-3 
(``Section 15A of the Exchange Act''). 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 
exchanges in this release. However, if any associations were to list 
securities, the rules would apply to them.
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     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
     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 incentive-based compensation (including stock 
options awarded as compensation) that was received 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.
    In seeking to implement this statutory mandate, we have been guided 
by the language, structure, and legislative history of Section 10D. As 
a part of the Dodd-Frank Act legislative process, in a 2010 report, the 
Senate Committee on Banking, Housing and Urban Affairs stated that 
``Section 954 [Section 10D] requires public companies to have a policy 
to recover money that they erroneously paid in incentive compensation 
to executive officers as a result of material noncompliance with 
accounting rules.'' \5\ The Senate Report further clarified that 
application of the recovery policy mandated by Section 10D ``does not 
require adjudication of misconduct in connection with the problematic 
accounting that required restatement.'' \6\
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    \5\ See Report of the Senate Committee on Banking, Housing, and 
Urban Affairs, S.3217, Report No. 111-176 at 135-36 (Apr. 30, 2010) 
(``Senate Report'') at 135.
    \6\ Id.
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    The Senate Report highlighted the Committee's belief that it is 
``unfair to shareholders for corporations to allow executive officers 
to retain compensation that they were awarded erroneously.'' \7\ The 
language and legislative history of the Dodd-Frank Act make clear that 
Section 10D is premised on the notion that an executive officer should 
not retain incentive-based compensation that, had the issuer's 
accounting been correct in the first instance, would not have been 
received by the executive officer, regardless of any fault of the 
executive officer for the accounting errors. The Senate Report also 
indicates that shareholders should not ``have to embark on costly legal 
expenses to recoup their losses'' and that ``executives must return 
monies that should belong to the shareholders.'' \8\
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    \7\ Id.
    \8\ Id.
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    Informed by this legislative history, we read Section 10D to 
express a simple proposition: executive officers of exchange-listed 
issuers should not be entitled to retain incentive-based compensation 
that was erroneously awarded on the basis of materially misreported 
financial information that requires an accounting restatement. The 
statute thus mandates that exchange-listed issuers maintain policies to 
recover such compensation for the benefit of the issuers' owners--their 
shareholders. In light of the straightforward nature of the goal 
Congress sought to achieve, we have approached implementation of the 
statute with the view that discretion to implement and execute these 
mandated recovery policies generally should be limited.
    For similar reasons, we believe Section 10D's mandated recovery 
policies were intended to apply broadly. Because Congress specifically 
referenced ``incentive-based compensation (including stock options 
awarded as compensation),'' we infer that it intended the provision to 
cover any incentive-based compensation that may be impacted by 
financial reporting. Further, Congress did not define ``executive 
officers'' narrowly by limiting the term to include only the named 
executive officers or another subset of executives; rather it appears 
that Congress intended the scope of the statute to reach more broadly 
to include all of an issuer's executive officers.\9\ While this scope 
may result in recovery from officers who did not play a direct role in 
an accounting error or who did not help to set a ``tone at the top'' 
that affects financial reporting accuracy, we understand that effect to 
be consistent with the statutory purpose of recovering compensation 
erroneously paid to executive officers regardless of whether the 
executive officer directly contributed to the error.
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    \9\ While Section 10D applies broadly to all executive officers 
and Congress did not specify a subset of executive officers, the 
Senate Report makes clear it is not intended to apply to rank-and-
file employees. See Senate Report at 136 (``This policy is required 
to apply to executive officers, a very limited number of employees, 
and is not required to apply to other employees'').
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    In addition to the benefits and purposes that Congress identified 
when enacting Section 10D, our implementation of the statute has been 
informed by certain additional benefits of the recovery requirement. As 
discussed in Section IV.B., the recovery requirement may provide 
executive officers with an increased incentive to take steps to reduce 
the likelihood of inadvertent misreporting and will reduce the 
financial benefits to executive officers who choose to pursue 
impermissible accounting methods, which we expect will further 
discourage such behavior. These increased incentives may improve the 
overall quality and reliability of financial reporting, which further 
benefits investors. These additional benefits further support our view 
that the most appropriate means of implementing the Section 10D mandate 
is to require robust recovery policies that will help to ensure that 
executive officers at exchange-listed issuers do not retain the 
benefits of erroneously awarded incentive-based compensation.
    On July 1, 2015, the Commission proposed a new rule, and rule and 
form amendments \10\ to implement the provisions of Section 10D.\11\ On 
October 14, 2021, the Commission reopened the comment period for the 
Proposing Release to allow interested persons further opportunity to 
analyze and comment upon the proposed rules in light of developments 
since the publication of the Proposing Release and the Commission's 
further consideration of the statutory mandate.\12\ In the Reopening 
Release, the Commission stated that it was considering, and requested 
public comment on, certain revisions to the proposals included in the 
Proposing Release, including a broader

[[Page 73078]]

interpretation of the statutory term ``an accounting restatement due to 
material noncompliance.'' \13\ The Commission re-opened the comment 
period again on June 8 2022, in connection with the addition to the 
comment file of a memorandum prepared by Commission staff providing 
additional analysis on compensation recovery policies and accounting 
restatements.\14\ We have received numerous comment letters pursuant to 
our initiative to receive advance public comment in implementing the 
Dodd-Frank Act,\15\ in response to the Proposing Release, and in 
response to the reopening releases.\16\ Commenters broadly supported 
the objectives of the proposed rules, although commenters offered 
various recommendations and expressed various concerns regarding the 
proposed implementation. As discussed further below, after reviewing 
and considering the public comments and recommendations and guided by 
our understanding of the goal Congress was trying to achieve, we are 
adopting the proposed rules substantially as proposed, but with certain 
modifications to broaden the scope of covered restatements, clarify the 
rules, and address comments received on the proposals.
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    \10\ See Listing Standards for Recovery of Erroneously Awarded 
Compensation, Release No. 34-75342 (Jul. 1, 2015) [80 FR 41144 (July 
14, 2015)] (``Proposing Release'').
    \11\ Public Law 111-203, 124 Stat. 1900 (2010).
    \12\ See Reopening of Comment Period for Listing Standards for 
Recovery of Erroneously Awarded Compensation, Release No. 34-93311 
(Oct. 14, 2021) [86 FR 58232 (Oct. 21, 2021)] (``Reopening 
Release'').
    \13\ See generally, Reopening Release.
    \14\ See Reopening of Comment Period for Listing Standards for 
Recovery of Erroneously Awarded Compensation, Release No. 34-95057 
(June 8, 2022) [87 FR 35938 (June 14, 2022)] (``Second Reopening 
Release''). See also Memorandum from the Division of Economic and 
Risk Analysis (June 8, 2022) (submitted to the comment file in 
connection with Second Reopening Release) (``2022 staff 
memorandum'').
    \15\ Comment letters related to the executive compensation 
provisions of the Dodd-Frank Act provided prior to the Proposing 
Release are available at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml.
    \16\ Comment letters related to the Proposing Release, the 
Reopening Release, and the Second Reopening Release are available at 
https://www.sec.gov/comments/s7-12-15/s71215.htm. A comment letter 
from two members of Congress raised concerns about the Reopening 
Release. See comment letter from Sen. Pat Toomey and Sen. Richard 
Shelby, dated Feb. 1, 2022 (``Toomey/Shelby''). Specifically, the 
letter criticized the Commission for reopening the comment period on 
the Proposing Release and seeking comment on a number of regulatory 
alternatives without updating the cost-benefit analysis and analysis 
required by 44 U.S.C. 3501 et seq. (``Paperwork Reduction Act'' or 
``PRA'') and 5 U.S.C. 601 et seq. (``Regulatory Flexibility Act'' or 
``RFA'') and urged the Commission to repropose the rulemaking. The 
letter asserted that the approach taken in the Reopening Release 
significantly impaired the public's ability to comment thoughtfully 
on the proposals and was inconsistent with 5 U.S.C. 551 through 559 
(``Administrative Procedure Act''). In response to these concerns, 
we note that the Reopening Release included a robust discussion of 
the broader interpretation of the statutory term under consideration 
and certain potential changes and solicited comment on that 
interpretation and those potential changes. The 2022 staff 
memorandum in connection with the Second Reopening Release analyzed 
the benefits and costs of the potential changes. The 2022 staff 
memorandum also considered the impact on smaller registrants. Given 
the discussion included in the Proposing Release, the Reopening 
Release, the Second Reopening Release, and the 2022 staff 
memorandum, and in this adopting release, we believe the final rules 
satisfy the requirements of the Administrative Procedure Act and 
other applicable statutes and that a reproposal is unnecessary. 
Moreover, in response to both the Reopening and Second Reopening 
Releases, we received numerous comments from members of the public 
on the potential changes and additional disclosures, including 
comments on their economic effects, and we have considered those 
comments in adopting the final rules.
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II. Discussion of Final Amendments

    New Exchange Act Rule 10D-1 sets forth the listing requirements 
that exchanges and associations that list securities are directed to 
establish pursuant to Section 10D of the Exchange Act. Amendments to 
Regulation S-K, Form 10-K, Form 20-F, Form 40-F, and for certain 
investment companies, Form N-CSR and Schedule 14A, require disclosure 
of the listed issuer's policy on recovery of incentive-based 
compensation and information about actions taken pursuant to such 
recovery policy.
    New Exchange Act Rule 10D-1 and the rule amendments adopted in this 
release supplement existing provisions \17\ by directing the exchanges 
to establish listing standards that require issuers to: \18\
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    \17\ See 15 U.S.C. 7243 (providing that the chief executive 
officer (``CEO'') and chief financial officer (``CFO'') of an issuer 
must reimburse the issuer for bonus or other incentive-based or 
equity-based compensation resulting from an accounting restatement 
due to the material noncompliance of the issuer, as a result of 
misconduct) and 17 CFR 229.402(b) (requiring disclosure of company 
policies and decisions regarding the adjustment or recovery of 
awards or payments to named executive officers in the issuer's 
Compensation Discussion and Analysis (``CD&A'')). The CD&A 
disclosure requirement is principles-based in that it identifies the 
disclosure concept and provides several non-exclusive examples. 
Under 17 CFR 229.402(b)(1), companies must explain all material 
elements of their named executive officers' compensation by 
addressing mandatory principles-based topics in CD&A. 17 CFR 
229.402(b)(2) sets forth nonexclusive examples of the kind of 
information that should be addressed in CD&A, if material.
    \18\ Exchanges may adopt listing standards with requirements 
that are more extensive than those of Rule 10D-1. Listed issuers 
may, of course, adopt policies more extensive than those called for 
by the listing standards, so long as those policies at a minimum 
satisfy the listing standards.
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     Develop and implement written policies for recovery of 
incentive-based compensation based on financial information required to 
be reported under the securities laws, applicable to the issuers' 
executive officers, during the three completed fiscal years immediately 
preceding the date that the issuer is required to prepare an accounting 
restatement; and
     Disclose those compensation recovery policies in 
accordance with Commission rules, including providing the information 
in tagged data format.
    To assure that issuers listed on different exchanges are subject to 
the same disclosure requirements regarding erroneously awarded 
compensation recovery policies, amendments to the Commission's 
disclosure rules require all issuers listed on any exchange to file 
their written compensation recovery policy as an exhibit to their 
annual reports,\19\ to indicate by check boxes on their annual reports 
whether the financial statements of the registrant included in the 
filing reflect a correction of an error to previously issued financial 
statements and whether any such corrections are restatements that 
required a recovery analysis,\20\ and to disclose any actions an issuer 
has taken pursuant to such recovery policy.\21\
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    \19\ See 17 CFR 229.601(b)(97), 17 CFR 240.14a-101, 17 CFR 
249.220f, 17 CFR 249.240f, and 17 CFR 274.128 Item 19(a)(2).
    \20\ See 17 CFR 249.220f, 17 CFR 249.240f, and 17 CFR 249.310. 
But see Section II.D.3. regarding check box disclosure on 17 CFR 
274.128.
    \21\ See 17 CFR 229.402(w) (``Item 402(w) of Regulation S-K''), 
17 CFR 240.14a-101(b)(20), 17 CFR 249.220f Item 6.F., 17 CFR 
249.240f Item 19, and 17 CFR 274.128 Item 18.
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A. Issuers and Securities Subject To Exchange Act Rule 10D-1

    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. 
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.\22\
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    \22\ In this regard, Section 10D differs from other Dodd Frank 
Act 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, to provide 
exemptions, or to take into account whether the requirements 
disproportionately burden small issuers.
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1. Proposed Amendments
    The Commission proposed to require exchanges to apply the 
disclosure and recovery policy requirements to all listed issuers, with 
only limited exceptions. As Section 10D refers to ``any security'' of 
an issuer, the Commission proposed that the listing

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standards and other requirements apply without regard to the type of 
securities issued, including to issuers of listed debt or preferred 
securities that do not have listed equity.\23\ The Commission did 
however propose to exempt security futures products and standardized 
options because the Commission recognized that information about the 
compensation practices at the clearing agencies that issue these 
securities is less relevant to investors,\24\ and to exempt the 
securities of certain registered investment companies from the proposed 
listing standards because the Commission recognized that the 
compensation structures of issuers of these securities render 
application of the rules unnecessary.\25\
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    \23\ 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. See proposed Rule 
10D-1(b)(1)(vi).
    \24\ ``Equity security'' as defined in 15 U.S.C. 78c(a)(11) 
includes any security future on any stock or similar security. A 
``security future'' as defined in 15 U.S.C. 78c(a)(55) means ``a 
contract of sale for future delivery of a single security or of a 
narrow-based security index.'' ``Security futures product'' as 
defined in 15 U.S.C. 78c(a)(56) and 7 U.S.C. 1a(32) include a 
security future or any put, call, straddle, option or privilege on 
any security future. Security futures products may be traded on 
exchanges registered under 15 U.S.C. 78f and associations registered 
under 15 U.S.C. 78o-3 without such securities being subject to the 
registration requirements of the Securities Act and the Exchange Act 
so long as they are cleared by a clearing agency that is registered 
under 15 U.S.C. 78q-1 or that is exempt from registration under 15 
U.S.C. 78q-1(b)(7). See 15 U.S.C. 77c(a)(14), 15 U.S.C. 78l(a), 17 
CFR 240.12h-1(e). Comparable regulatory treatment exists for 
standardized options, which are defined in 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. See 17 CFR 
230.238, 17 CFR 240.12a-9, 17 CFR 240.12h-1(d).
    \25\ The Commission proposed to exempt the listing of any 
security issued by a registered management investment company if 
such 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. The Commission additionally proposed to exempt the listing 
of any security issued by a unit investment trust.
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    The Commission did not propose to otherwise exempt categories of 
listed issuers, such as emerging growth companies (``EGCs''),\26\ 
smaller reporting companies (``SRCs''),\27\ foreign private issuers 
(``FPIs''),\28\ and controlled companies.\29\ The Commission further 
did not propose to grant the exchanges discretion to decide whether 
certain categories of securities should be exempted from the Section 
10D listing standards.
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    \26\ See 15 U.S.C. 77b(a)(19) and 15 U.S.C. 78c(a)(80).
    \27\ See 17 CFR 240.12b-2.
    \28\ See 17 CFR 240.3b-4(c). The Commission did propose to 
permit a FPI to make a determination regarding impracticability to 
recover in limited circumstances where doing so would violate home 
country law. See Section II.C.3.b, of the Proposing Release and 
Section II.C.3.b. for a discussion of impracticability of recovery.
    \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.
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2. Comments
    We received substantial comment on whether certain classes of 
issuers and securities should be subject to the proposal. Some 
commenters supported the scope of issuers covered by the proposal.\30\ 
Other commenters recommended that the Commission exercise its exemptive 
authority to exclude certain issuers and classes of securities from the 
requirements.\31\
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    \30\ See, e.g., comment letters from American Federation of 
Labor and Congress of Industrial Organizations (``AFL-CIO''); 
Americans for Financial Reform (Sept. 14, 2015) (``AFR 1''); Better 
Markets, Inc. (Sept. 14, 2015) (``Better Markets 1''); Council of 
Institutional Investors (Aug. 27, 2015) (``CII 1''); California 
Public Employees' Retirement System (Sept. 14, 2015) (``CalPERS 
1''); CFA Institute (Sept. 14, 2015) (``CFA Institute 1''); Robert 
E. Rutkowski (Sept. 15, 2015) (``Rutkowski 1''); and State Board of 
Administration (``SBA''). Some of these commenters contended that 
investors deserve the same protections regardless of the category of 
listed issuer. See comment letters from AFL-CIO; CII 1; the Office 
of the Comptroller of the State of New York; and Public Citizen 
(Nov. 19, 2021) (``Public Citizen 2'').
    \31\ See, e.g., comment letters from American Bar Association 
Committee on Federal Regulation of Securities of the Section of 
Business Law (Feb. 11, 2016) (``ABA 1''); Davis Polk & Wardwell LLP 
(Sept. 11, 2015) (``Davis Polk 1''); Duane Morris LLP (``Duane''); 
Financial Services Roundtable (``FSR''); Freshfields Bruckhaus 
Deringer (``Freshfields''); Japanese Bankers Association (``Japanese 
Bankers''); Kaye Scholer LLP (``Kaye Scholer''); SAP SE (``SAP''); 
Sullivan & Cromwell LLP (Sept. 22, 2015) (``S&C 1''); TELUS 
Corporation (``TELUS''); and UBS Group AG (``UBS'').
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    A number of commenters expressed concern regarding application of 
the rules to FPIs,\32\ and suggested that application of the rules 
could impose inconsistent standards \33\ and questioned the feasibility 
of implementation by FPIs.\34\ Some of these commenters recommended 
that the Commission unconditionally exempt FPIs,\35\ noting that FPIs 
have been exempted from many of the Commission's executive compensation 
regulations and are not subject to Section 16 of the Exchange Act,\36\ 
and that other U.S. listing standards permit FPIs to comply with home 
country standards rather than the U.S. listing standard 
requirements.\37\ Commenters alternatively recommended that the 
Commission exempt FPIs where the home country has an appropriate 
governance regime or law governing erroneously awarded 
compensation.\38\
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    \32\ See, e.g., comment letters from ABA 1 (suggesting that the 
general presumption against the extraterritorial application of 
United States law, as well as the general principle of international 
comity, should apply); Davis Polk 1; Duane; FSR (noting the burden 
of having to comply with U.S.-based executive compensation 
governance in addition to home country laws); Freshfields; Japanese 
Bankers (suggesting that ``a penalty on restatement of financial 
statements prepared in accordance with the home country accounting 
standard should be determined by judicial ruling of the home 
country, and should not be governed by the U.S. listing rules''); 
Kaye Scholer; SAP; S&C 1; TELUS; and UBS.
    \33\ See, e.g., comment letters from the U.S. Chamber of 
Commerce Center for Capital Markets Competitiveness (Sept. 14, 2015) 
(``CCMC 1'') (suggesting that ``affected [issuers] may find 
themselves endeavoring to comply with contradictory laws in multiple 
jurisdictions creating conflicts that cannot be addressed with a 
single solution''); Freshfields (expressing concerns regarding 
potential conflicts between the proposed listing standard and home 
country rules and noting potential conflicts with home country laws, 
stock exchange requirements, or corporate governance arrangements); 
and S&C 1 (stating that ``[r]equiring a non-U.S. issuer to comply 
with U.S. and home country requirements would upset the regulatory 
framework established by the home country and potentially impose 
inconsistent standards''). See also comment letter from Duane 
(suggesting the rule could force issuers to choose between violating 
home country law or the listing standards).
    \34\ See comment letters from CCMC 1; and Kaye Scholer 
(suggesting that an issuer's home country has a more appropriate 
interest in determining whether companies domiciled there should be 
subject to a compensation recovery requirement). See also comment 
letters from ABA 1 (noting that such issuers generally adhere to 
IFRS, which sets forth criteria for determining when a restatement 
is required that differ from GAAP, such that applying the rule to 
FPIs may lead to inconsistent treatment among issuers); and Davis 
Polk 1.
    \35\ See comment letters from ABA 1; Davis Polk 1; Duane; FSR; 
Freshfields; Japanese Bankers; Kaye Scholer; SAP; S&C 1; TELUS; and 
UBS.
    \36\ See, e.g., comment letter from FSR (noting that FPIs have 
been exempted from many of the executive compensation regulations 
enacted under the Dodd-Frank Act, as well as disclosure requirements 
under Item 402 of Regulation S-K, and further stating that because 
such issuers are not subject to Section 16, the proposed rules would 
require such issuers to design and implement new executive 
compensation governance structures).
    \37\ See comment letters from UBS (citing the NYSE Group, Inc. 
(``NYSE'') audit committee independence rule); and Duane (citing 
Exchange Act Section 10C). See also comment letter in response to 
the Reopening Release from Cravath, Swaine & Moore LLP (``Cravath'') 
(noting the burden placed on FPIs that may be subject to different 
corporate governance standards in their home countries).
    \38\ See, e.g., comment letters from Freshfields; and TheCityUK 
(suggesting permitting compliance with home country provisions that 
provide for similarly rigorous disciplines meeting the same goals).
---------------------------------------------------------------------------

    One commenter urged the Commission to exempt all registered 
investment companies unconditionally, rather than the proposed 
exemption for registered unit investment trusts (``UITs'') and for 
registered management

[[Page 73080]]

investment companies (``listed funds'') that have not awarded 
incentive-based compensation in the last three fiscal years.\39\ The 
commenter asserted that the legislative history of the Dodd-Frank Act 
does not indicate that the purpose of Section 10D was to address abuses 
with respect to listed funds; that listed funds have been exempted from 
certain prior compensation-related rulemakings; and that listed fund 
financial statements are less complex than operating company financial 
statements, resulting in accounting restatements being rare for listed 
funds.\40\ The commenter therefore believed that the costs to affected 
listed funds would outweigh the benefits. The commenter also stated 
that the proposal could affect more than the small number of internally 
managed listed funds that the Commission estimated in the proposal, 
because some externally managed listed funds may pay some or all of the 
funds' chief compliance officers' compensation.
---------------------------------------------------------------------------

    \39\ See comment letter from Investment Company Institute (Sept. 
14, 2015). ICI submitted a comment letter on the original proposal 
in 2015 as well as on the Reopening Release (Nov. 22, 2021). Because 
the letters largely made the same points, the letters are referred 
to collectively as if they were a single letter (``ICI''). Another 
commenter supported the Commission's proposed conditional exemption 
for listed funds, while also urging the Commission to exempt them 
and certain other issuers unconditionally, but without any further 
analysis supporting this recommendation for listed funds. See 
comment letter from FSR.
    \40\ See comment letter from ICI.
---------------------------------------------------------------------------

    Another commenter urged the Commission to extend the proposed 
conditional exemption to externally managed business development 
companies (``BDCs'').\41\ The commenter asserted that the same policy 
considerations supporting the conditional exemption for listed funds 
apply to externally managed BDCs, and that provisions of the Investment 
Advisers Act of 1940 \42\ and the Investment Company Act effectively 
prohibit these BDCs from offering certain incentive compensation plans 
to their officers.\43\
---------------------------------------------------------------------------

    \41\ See comment letter from Clifford Chance et al.
    \42\ 15 U.S.C. 80b-1 through 15 U.S.C. 80b-21.
    \43\ See comment letter from Clifford Chance et al.
---------------------------------------------------------------------------

    We received limited comment on the Commission's proposal to exempt 
security futures products and standardized options. One commenter 
generally supported the proposed exemption and no other commenters 
objected to the proposal to exempt security futures products and 
standardized options, or otherwise addressed this aspect of the 
proposal.\44\ Some commenters recommended exemptions for debt-only 
issuers \45\ and controlled companies.\46\
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    \44\ See comment letter from ABA 1.
    \45\ See, e.g., comment letters from ABA 1; Davis Polk 1 (noting 
protections from the indenture contract and Trust Indenture Act, the 
ability to negotiate for indenture covenants, and that a wholly-
owned subsidiary of a reporting company are not required to provide 
executive compensation disclosure); FSR (suggesting that the harm 
that the proposal is designed to address is immaterial to such 
investors and that a public parent issuer would have oversight over 
its executive compensation and financial statements); Jesse M. Fried 
(``Fried''); and Society for Corporate Governance (formerly Society 
of Corporate Secretaries & Governance Professionals) (Sept. 18, 
2015) (``SCG 1''). See also comment letter in response to the 
Reopening Release from Davis Polk (Nov. 22, 2021) (``Davis Polk 3'') 
(further noting that debt-only issuers are exempt from many rules 
related to executive compensation). In contrast, one commenter 
specifically opposed such an exemption. See comment letter from 
Better Markets 1.
    \46\ See comment letters from Duane; and Fried (both suggesting 
that debt-only and controlled companies may have greater control 
over executive officers and can employ incentives, such as extra pay 
or threat of termination, that would dwarf the incentive effect of a 
potential compensation recovery).
---------------------------------------------------------------------------

    Some commenters expressed support for requiring recovery by SRCs 
and EGCs as proposed,\47\ while others recommended that the Commission 
exempt SRCs and EGCs, citing the costs and burdens associated with 
imposing compensation recovery policies containing the detail and scope 
contemplated by the proposal.\48\ As an alternative to exemption, these 
commenters recommended deferring compliance for these issuers.\49\ In 
response to the Reopening Release, a number of commenters additionally 
noted the burdens on smaller issuers and recommended 
accommodations.\50\
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    \47\ See, e.g., comment letters from Better Markets 1; CalPERS 1 
(noting small issuers may offer substantial incentive compensation 
packages); Public Citizen (Sept. 14, 2015) (``Public Citizen 1'') 
(suggesting such issuers lack the wider and potentially more 
vigilant shareholder base of larger companies); and SBA 
(recommending that strong governance practices should be applied at 
early growth stages). See also comment letter from CFA Institute 1 
(suggesting it would not be appropriate or necessary to scale the 
proposed disclosure requirements for smaller or EGCs).
    \48\ See, e.g., comment letters from ABA 1 (further suggesting 
that such issuers should not be required to disclose their reasons 
for not pursuing recovery or the aggregate amount of excess 
compensation remaining outstanding at fiscal year-end); Compensia; 
Mercer; and National Association of Corporate Directors (``NACD''). 
See also Annual Report for Fiscal Year 2021: Office of the Advocate 
for Small Business Capital Formation (``2021 OASB Annual Report''), 
available at https://www.sec.gov/files/2021-OASB-Annual-Report.pdf, 
at 68 (recommending generally that in engaging in rulemaking that 
impacts small businesses, the Commission tailor the disclosure and 
reporting framework to the complexity and size of operations of 
companies, either by scaling obligations or delaying compliance for 
the smallest of the public companies, particularly as it pertains to 
potential new or expanded disclosure requirements).
    \49\ See, e.g., comment letters from ABA 1; Compensia; Mercer; 
and NACD.
    \50\ See, e.g., comment letters in response to the Reopening 
Release from Committee on Federal Regulation of Securities of the 
Section of Business Law of the American Bar Association (Jan. 24, 
2022) (``ABA 2''); CCMC (Nov. 22, 2021) (``CCMC 2''); and Hunton 
Andrews Kurth (``Hunton'').
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3. Final Amendments
    After considering the comments, we are adopting rules to require 
exchanges to apply the disclosure and compensation recovery policy 
requirements to all listed issuers,\51\ with only limited exceptions, 
substantially as proposed.\52\ Under the final rules, an issuer would 
be subject to delisting if it does not adopt and comply with its 
compensation recovery policy.\53\ In a clarification to the proposal, 
17 CFR 240.10D-1(a) as adopted provides that the requirements of 
Section 10D apply to each exchange and association to the extent such 
exchange or association lists securities. Accordingly, the requirements 
will not apply to exchanges that only trade securities pursuant to 
unlisted trading privileges but do not list securities.\54\ We are 
exempting the listing of certain security futures products, 
standardized options, securities issued by unit investment trusts, and 
the securities issued by certain registered investment companies from 
the mandated listing standards, as proposed.\55\
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    \51\ In a modification from the proposal, the rule refers to a 
national securities association that lists securities generally, 
rather than the more specific reference to an association that 
``lists securities in an automated inter-dealer quotation system.'' 
In addition, we are simplifying the rule by not adopting proposed 
Rule 10D-1(b)(1)(vi), which would have specifically provided that an 
issuer that had been delisted for failing to comply with its 
recovery policy may not list its securities on an exchange, and an 
exchange would not be permitted to list a delisted issuer until the 
issuer comes into compliance with its recovery policy, because such 
a delisted issuer that remained out of compliance with the recovery 
policy would already not be permitted to list its securities on an 
exchange by function of 17 CFR 240.10D-1(a)(1), which requires 
exchanges to ``prohibit the initial or continued listing of any 
security of an issuer that is not in compliance with the 
requirements of any portion of this section.''
    \52\ See 17 CFR 240.10D-1(a)(3).
    \53\ Under the 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. See Section 
II.D.3.
    \54\ Such exchanges may not list securities until their listing 
standards comply with the requirements of Rule 10D-1. Exchanges that 
do not list securities should consider updating any applicable 
listing standards to comply with the requirements of Rule 10D-1 or 
including an appropriate limitation acknowledging that they may only 
trade securities pursuant to unlisted trading privileges.
    \55\ See 17 CFR 240.10D-1(c)(1) through (4).
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    As the Commission stated in the Proposing Release, Section 10D does 
not distinguish among issuers or types of

[[Page 73081]]

securities, and does not instruct the Commission to exempt any 
particular types of issuers or securities or direct the Commission to 
permit the exchanges to provide for such exemptions. In evaluating 
whether to exempt specific categories of issuers and securities, in 
addition to the views of commenters, we have considered whether 
providing exemptions from the requirements of Section 10D would be 
consistent with our understanding of the purpose of this statutory 
provision. We have also considered the incidence of restatements by 
different categories of issuers and whether, in light of such 
incidence, exempting these classes of issuers would be necessary or 
appropriate in the public interest and consistent with the protection 
of investors. Although we recognize commenters' concerns regarding 
application of the rule to FPIs, SRCs, and EGCs, as discussed more 
fully below, we have determined not to exempt these categories of 
issuers from the final rules.
    With respect to application of the final amendments to FPIs, we 
note that Section 10D does not exempt FPIs. While the Commission could 
exercise its discretion to exempt such issuers by rule, we decline to 
do so. We acknowledge some of the practical concerns regarding 
implementation of the recovery policy raised by commenters, as 
discussed above; however, these concerns are not unique to FPIs and, in 
any event, do not in our view justify exempting such issuers from the 
obligation to recover incentive-based compensation that was erroneously 
awarded. We believe that shareholders of FPIs listed in the United 
States should benefit from recovery of erroneously awarded compensation 
in the same manner as shareholders of domestic issuers. Moreover, the 
recovery requirements will help to encourage reliable financial 
reporting by listed issuers, which is as important for investors in 
FPIs as for other issuers. Studies have shown that foreign companies 
present a similar risk of restatement as other companies \56\ and that 
U.S. issuers who are non-accelerated filers \57\ accounted for 
approximately 53% of restatements.\58\ To the extent that recovery 
under Rule 10D-1 would be wholly inconsistent with a foreign regulatory 
regime, we have included an impracticability accommodation, as 
discussed in Section II.C.3.b., which may alleviate some of the 
implementation challenges faced by FPIs.
---------------------------------------------------------------------------

    \56\ See 2020 Financial Restatements: A Twenty-Year Review, 
Audit Analytics (2021) (``A Twenty-Year Review'') (analyzing data 
related to accounting restatements, including specific analysis for 
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 private 
issuers). Foreign companies in this study included both FPIs and 
foreign companies filing on Form 10-K.
    \57\ 17 CFR 240.12b-2.
    \58\ See A Twenty-Year Review.
---------------------------------------------------------------------------

    We also do not view the application of the final amendments to FPIs 
listed on U.S. national exchanges as an extraterritorial application of 
U.S. law. The statutory language generally identifies the types of 
conduct that trigger the relevant requirement and, by extension, the 
focus of the statute for the purpose of an extraterritoriality 
analysis.\59\ Having identified the activity regulated by the statutory 
provision, we can determine whether a person is engaged in conduct that 
the statutory provision regulates and whether this conduct occurs 
within the United States. The statutory focus of Section 10D is on 
``the listing of any security of an issuer'' on a national securities 
exchange. The recovery policies mandated by Section 10D apply only to 
those foreign issuers who have chosen to access the U.S. capital 
markets by listing on a U.S. national exchange. We thus do not view the 
final rules as an extraterritorial application of U.S. legal 
requirements.
---------------------------------------------------------------------------

    \59\ See Morrison v. National Australia Bank, Ltd., 130 S. Ct. 
2869, 2884 (2010) (identifying the focus of statutory language to 
determine what conduct was relevant in determining whether the 
statute was being applied to domestic conduct).
---------------------------------------------------------------------------

    With respect to the application of the rule to SRCs and EGCs, we 
note that, unlike in other provisions of the Dodd-Frank Act, Congress 
did not direct the Commission to consider differential treatment for 
certain classes of issuers, such as SRCs and EGCs.\60\ Similar to our 
reasons for not exercising our discretion to exempt FPIs, we decline to 
exempt SRCs and EGCs from the final amendments. In our view, recovery 
of incentive-based compensation that was not earned and should not have 
been paid is as appropriate for smaller listed issuers as it is for 
larger issuers. We believe shareholders of smaller issuers should 
benefit from recovery of erroneously awarded compensation in the same 
manner as shareholders of larger issuers. Similarly, recovery 
encourages the preparation of reliable financial information, which may 
be even more important for smaller issuers and EGCs than for others 
because of their susceptibility to an increased likelihood of reporting 
an accounting error and to material weakness in internal control over 
financial reporting, as studies have found.\61\
---------------------------------------------------------------------------

    \60\ In contrast, Section 952 of the Dodd-Frank Act directs the 
Commission to take ``into consideration the size of an issuer and 
any other relevant factors'' when providing exemption authority.
    \61\ See, e.g., Jacquelyn Gillette, Sudarshan Jayaraman, and 
Jerold Zimmerman Accounting Restatements: Malfeasance and/or Optimal 
Incompetence? (working paper Mar. 2017), available at https://pages.business.illinois.edu/accountancy/wp-content/uploads/sites/12/2017/02/YSS-2017-Gillette.pdf (finding that ``larger and more 
profitable firms invest more in accounting resources'', and that 
``accounting resources are negatively associated with the likelihood 
of a restatement''); see also Preeti Choudhary, Kenneth Merkley and 
Katherine Schipper, Immaterial Error Corrections and Financial 
Reporting Reliability, 38 Contemp. Acct. Rsch. 2423 (Winter 2021) 
(finding that future restatements are less likely for larger firms) 
(``Choudhary et al''). See also Jeong-Bon Kim, Jay Junghun Lee, and 
Jong Chool Park, Internal Control Weakness and the Asymmetrical 
Behavior of Selling, General, and Administrative Costs, (37) J. 
Acct. Auditing & Fin 259-292 (2022) (finding that firms with 
internal control weaknesses are significantly smaller in terms of 
sales revenue, selling, general and administrative costs, and total 
assets). See also discussion above and Section IV.A. discussing the 
number of restatements for smaller issuers as compared to other 
issuers.
---------------------------------------------------------------------------

    We recognize, as some commenters asserted, that shareholders of 
controlled companies and certain private companies with listed debt may 
have a greater degree of control over executive officers than at other 
companies. We further recognize that debt holders of debt-only issuers 
receive certain protections from the Trust Indenture Act and indenture 
covenants governing such debt. Recovery of erroneously awarded 
compensation will encourage executive officers to reduce errors 
requiring restatements, which could benefit potential future investors 
and enhance the efficiency of the market as a whole. Further, while 
controlling shareholders generally face fewer difficulties in directing 
and incentivizing executive officers, the final amendments will help 
minimize any gaps that remain, such as those that could exist for an 
issuer's minority shareholders. Although a controlling majority 
shareholder may owe state law duties to minority shareholders, we do 
not believe that investors' confidence in the accuracy of financial 
reporting should depend on their assessment of the likelihood of 
successful litigation under state law to vindicate minority shareholder 
rights.
    We are not granting the exchanges discretion to exempt certain 
categories of securities from the listing standards. In reaching these 
conclusions, in addition to the plain language of the statute and the 
fundamental inequity of permitting executive officers to retain 
compensation they did not earn, we

[[Page 73082]]

considered the relative burdens of compliance on different categories 
of issuers and types of securities. As discussed more fully in Section 
IV, while we recognize that the listing standards could, in certain 
respects, impose burdens on particular categories of issuers, there is 
also reason to believe that these issuers, their shareholders, and the 
markets in general, may derive benefits from the listing standards. The 
compensation recovery requirements may reduce the financial benefits to 
executive officers when an issuer is required to prepare an accounting 
restatement, and thus may increase incentives for reporting accurate 
financial results.\62\ Additionally, the recovery requirements may 
encourage issuers and their executive officers to devote more resources 
to the production of high-quality financial reporting. Shareholders of 
listed issuers will, in turn, benefit from improved financial 
reporting, and issuers may derive benefits in the form of reduced costs 
of capital. As with other categories of listed issuers, we believe that 
these benefits justify the costs imposed by the final amendments for 
specific categories of issuers, such as EGCs, SRCs, FPIs, controlled 
companies, and debt-only issuers.
---------------------------------------------------------------------------

    \62\ As discussed more fully in Section IV, academic research 
finds that companies with strong compensation recovery provisions 
experience improved financial reporting, lower CEO turnover, and 
lower CEO compensation. See Michael H.R. Erkens, Ying Gan, and B. 
Burcin Yurtoglu, Not all clawbacks are the same: Consequences of 
strong versus weak clawback provisions, 66 J. Acct & Econ., 291 
(2018). See also Lillian H. Chan et al., The Effects of Firm-
Initiated Clawback Provisions on Earnings Quality and Auditor 
Behavior 54 J. Acct. & Econ. 180 (2012) (finding that after the 
adoption of clawback provisions, incidence of accounting 
restatements declines, firms' earnings response coefficients 
increase, and auditors are less likely to report material internal 
control weaknesses, charge lower audit fees, and issue audit reports 
with a shorter lag); Ed DeHaan, Frank Hodge, and Terry Shevlin, Does 
Voluntary Adoption of a Clawback Provision Improve Financial 
Reporting Quality?, 30 Contemp. Acct. Rsch. 1027 (2013) (finding 
improvements in financial reporting quality following clawback 
adoption, including decreases in meet-or-beat behavior and 
unexplained audit fees, a decrease in restatements, a significant 
increase in earnings response coefficients and a significant 
decrease in analyst forecast dispersion).
---------------------------------------------------------------------------

    We are adopting, as proposed, the exemptions for the listing of 
security futures products cleared by a registered clearing agency or a 
clearing agency that is exempt from the registration requirements of 
the Exchange Act and for standardized options issued by a registered 
clearing agency because the role of a clearing agency as the issuer of 
these securities is fundamentally different from that of other listed 
issuers.\63\ Whereas in most cases the purchaser of a security is 
making an investment decision regarding the issuer of a security, 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, even though the clearing agency is the 
issuer of those securities. 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. 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.\64\ Accordingly, pursuant to our authority under 
Section 36 of the Exchange Act, we find that it is necessary or 
appropriate in the public interest, and consistent with the protection 
of investors, to exempt the listing of a security futures product and a 
standardized option from the requirements of Rule 10D-1 under the 
Exchange Act.\65\
---------------------------------------------------------------------------

    \63\ 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'').
    \64\ The Commission has previously recognized these fundamental 
differences and provided exemptions for security futures products 
and standardized options when it adopted the audit committee listing 
requirements in 17 CFR 240.10A-3 and the compensation committee 
listing requirements in 17 CFR 240.10C-1. See Listing Standards for 
Compensation Committees, Release No. 33-9330 (June 20, 2012) [77 FR 
38422 (June 27, 2012)].
    \65\ See 17 CFR 240.10D-1(c)(1) and (2).
---------------------------------------------------------------------------

    Similarly, we are adopting the proposal to exempt the listing of 
any security issued by a listed fund on the condition that the fund has 
not awarded incentive-based compensation to any current or former 
executive officer of the fund in any of the last three fiscal years or, 
in the case of a fund that has been listed for less than three fiscal 
years, since the initial listing.\66\ We make this conditional 
exemption pursuant to our authority under Section 36 of the Exchange 
Act, because we find that it is necessary or appropriate in the public 
interest, and consistent with the protection of investors. The 
conditional exemption would permit listed funds that do not pay 
incentive-based compensation to avoid the burden of developing recovery 
policies they may never use.\67\ Listed funds that have paid incentive-
based compensation in that time period, however, would be subject to 
the rule and rule amendments and be required to implement a 
compensation recovery policy like other listed issuers.\68\
---------------------------------------------------------------------------

    \66\ See 17 CFR 240.10D-1(c)(4). Listed funds, unlike most other 
issuers, are generally externally managed and often have few, if 
any, employees that are compensated by the fund (i.e., the issuer). 
Instead, listed funds 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. In order to apply the new rules to listed 
funds, we are amending Form N-CSR as proposed to redesignate Item 18 
as Item 19 and to add a new paragraph (a)(2) to this Item (with 
current paragraph (a)(2) redesignated as (a)(3)) to require any 
listed fund that would be subject to the requirements of Rule 10D-1 
to include as an exhibit to its annual report on Form N-CSR its 
policy on recovery of incentive-based compensation. We are also 
adding new Item 18 to Form N-CSR as well as amending Item 22 of 
Schedule 14A of the Exchange Act to require listed funds that would 
be subject to Rule 10D-1 to provide information that would generally 
mirror the disclosure requirements of Item 402(w) of Regulation S-K.
    \67\ In addition, because the exemption applies to the listing 
of securities of registered investment companies, it would not apply 
to business development companies, which are a category of closed-
end management investment company that is not registered under the 
Investment Company Act.
    \68\ One commenter observed that the rule would cover any 
incentive-based compensation paid to listed fund chief compliance 
officers (``CCOs'') if they are within the rule's definition of an 
``executive officer.'' See comment letter from ICI. We agree that if 
a listed fund pays an executive officer incentive-based compensation 
within the time period specified in the final rule, then the fund 
would be required to implement a compensation-recovery policy. 
Although the commenter urged the Commission to interpret the 
executive officer definition to exclude a listed fund's CCO, we do 
not see a basis for this interpretation and the commenter did not 
provide one.
---------------------------------------------------------------------------

    We are not exempting listed funds unconditionally, as two 
commenters suggested. The final rules are designed to reflect the 
structure and compensation practice of listed funds by requiring funds 
to implement compensation recovery policies only when they in fact 
award incentive-based compensation covered by Section 10D. While listed 
funds' financial statements may in general be less complex than those 
of operating companies, restatements can and do still occur. To the 
extent that executive officers of listed funds receive incentive-based 
compensation on the basis of a financial reporting measure that is 
restated, we

[[Page 73083]]

believe that the policy concerns underlying the rule apply equally to 
listed funds, regardless of whether they were specifically mentioned in 
the Dodd-Frank Act's legislative history or the treatment of registered 
investment companies for purposes of other compensation-related 
disclosure requirements.
    We also are not exempting externally managed BDCs, as one commenter 
suggested. Although BDCs whose advisers receive certain forms of 
compensation are subject to certain limitations on their ability to 
offer equity compensation such as options, or to establish a profit-
sharing plan, the definition of incentive-based compensation in Section 
10D applies to a broader range of incentive-based compensation 
arrangements. In addition, BDCs are generally subject to other 
disclosure requirements in Regulation S-K, and the final rules treat 
all BDCs, whether managed externally or internally, in a consistent 
manner.\69\
---------------------------------------------------------------------------

    \69\ A commenter suggested that the Commission had previously 
exempted externally managed BDCs from pay ratio disclosure 
requirements adopted in 2015. See comment letter of Clifford Chance 
et al. The rule did not provide an exemption for externally managed 
BDCs. Instead, the Commission observed that as a practical matter no 
externally managed BDCs would be subject to it. See Pay Ratio 
Disclosure, Release No. 33-9877 (Aug. 5, 2015) [80 FR 50103 (Aug. 
18, 2015)] at n.90 (``Business development companies will be treated 
in the same manner as issuers other than registered investment 
companies and therefore will be subject to the pay ratio disclosure 
requirement'').
---------------------------------------------------------------------------

    As proposed, we are exempting the listing of any security issued by 
a UIT because, unlike listed funds, 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, and 
they do not file a certified shareholder report. In addition, because 
the investment portfolio of a UIT is generally fixed, UITs are not 
actively managed. Accordingly, pursuant to our authority under Section 
36 of the Exchange Act, we find that it is necessary or appropriate in 
the public interest, and consistent with the protection of investors, 
to exempt the listing of any security issued by a UIT from the 
requirements of Rule 10D-1 under the Exchange Act.\70\
---------------------------------------------------------------------------

    \70\ See 17 CFR 240.10D-1(c)(3) and (4).
---------------------------------------------------------------------------

B. Restatements

1. Restatements Triggering Application of Recovery Policy
    Sections 10D(a) and 10D(b)(2) require the Commission to adopt rules 
directing exchanges and associations to establish listing standards 
that require issuers to develop and implement 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 . 
. . .'' \71\
---------------------------------------------------------------------------

    \71\ See Senate Report at 135.
---------------------------------------------------------------------------

a. Proposed Amendments
    The Commission proposed to require that issuers adopt and comply 
with a written policy providing that in the event the issuer is 
required to prepare a restatement \72\ to correct an error \73\ that is 
material \74\ to previously issued financial statements,\75\ the 
obligation to prepare the restatement would trigger application of the 
compensation recovery policy. In connection with this proposed trigger, 
the Commission proposed to define an ``accounting restatement'' \76\ 
and specifically noted 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.\77\
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    \72\ 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 Financial Accounting Standards 
Board Accounting Standards Codification Topic 250, 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 International 
Accounting Standard 8, Accounting Policies, Changes in Accounting 
Estimates and Errors (``IAS 8''), paragraph 5.
    \73\ 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, paragraph 5.
    \74\ The Commission did not propose any additional clarification 
about when an error 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 and has received extensive and 
comprehensive judicial and regulatory attention. See, e.g., TSC 
Industries, Inc. v. Northway, 426 U.S. 438 (1976); Basic v. 
Levinson, 485 U.S. 224 (1988).
    \75\ When we refer to financial statements, we mean the 
statement of financial position (balance sheet), statement of 
comprehensive income, statement of cash flows, statement of 
stockholders' equity, related schedules, 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 17 CFR 210. 6-10, financial highlights, 
and accompanying footnotes, as required by Commission regulations.
    \76\ The Commission proposed to define the term 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.''
    \77\ See Section II.B.1 of the Proposing Release.
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    After the Commission issued the Proposing Release, some 
commentators expressed concerns that some issuers may not be making 
appropriate materiality determinations for errors identified \78\ and 
may be seeking to avoid recovery under their compensation recovery 
policies.\79\ In the Reopening Release, the Commission stated that it 
was considering whether to interpret the phrase ``an accounting 
restatement due to material noncompliance'' to include all required 
restatements made to correct an error in previously issued financial 
statements and sought public feedback on such an interpretation. In 
particular, the Commission requested comment on whether to provide that 
recovery is required with respect to both (1) restatements that correct 
errors that are material to previously issued financial statements 
(commonly referred to as ``Big R'' restatements), and (2) restatements 
that correct errors that are not material to previously issued 
financial statements, but would result in a material misstatement if 
(a) the errors were left uncorrected in the current

[[Page 73084]]

report or (b) the error correction was recognized in the current period 
(commonly referred to as ``little r'' restatements).\80\ A ``little r'' 
restatement differs from a ``Big R'' restatement primarily in the 
reason for the error correction (as noted above), the form and timing 
of reporting, and the disclosure required. For example, a ``Big R'' 
restatement requires the issuer to file an Item 4.02 Form 8-K and to 
amend its filings promptly to restate the previously issued financial 
statements.\81\ In contrast, a ``little r'' restatement generally does 
not trigger an Item 4.02 Form 8-K, and an issuer may make any 
corrections ``the next time the registrant files the prior year 
financial statements.'' \82\ In connection with the Second Reopening 
Release, the Commission provided further opportunity to analyze and 
comment upon a memorandum prepared by Commission staff containing 
additional analysis and data on compensation recovery policies and 
accounting restatements.\83\
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    \78\ See Choudhary et al., supra note 61.
    \79\ See, e.g., Jean Eaglesham, Shh! Companies Are Fixing 
Accounting Errors Quietly, Wall St. J. (Dec. 5, 2019), available at 
https://www.wsj.com/articles/shh-companies-are-fixing-accounting-errors-quietly-11575541981. See also Rachel Thompson, Reporting 
Misstatements as Revisions: An Evaluation of Managers' Use of 
Materiality Discretion (working paper Sept. 17, 2021) available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3450828 
(retrieved from SSRN Elsevier database).
    \80\ See Staff Accounting Bulletin No. 108, Considering the 
Effects of Prior Year Misstatements when Quantifying Misstatements 
in Current Year Financial Statements (Sept. 13, 2006). Studies cited 
and data included in this release on ``little r'' restatement 
frequency may define ``little r'' restatements differently than the 
definition used herein and are generally based on the total number 
of revisions to previously issued financial statements where the 
issuer did not file an Item 4.02 Form 8-K.
    \81\ An Item 4.02 Form 8-K is required to be filed when an 
issuer concludes that any of its previously issued financial 
statements should no longer be relied upon because of an error in 
such financial statements. It is due within four business days after 
the conclusion.
    \82\ See supra note 80.
    \83\ In the 2022 staff memorandum, the staff refers to ``little 
r'' restatements as restatements that correct errors that would only 
result in a material misstatement if the errors were left 
uncorrected in the current report or the error correction was 
recognized in the current period. This reference has the same 
meaning as the description of ``little r'' restatements in this 
release.
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b. Comments
    We received a range of comments on the proposals regarding 
restatements triggering application of the compensation recovery 
policy. In response to the Proposing Release, some commenters expressed 
support for the proposed use of the concept of a ``material error'' as 
the standard for the recovery trigger.\84\ Some commenters suggested 
that the materiality standard was vague, or thought examples would be 
helpful.\85\ Other commenters recommended that the Commission expressly 
provide that a restatement to correct immaterial errors would not 
trigger a compensation recovery,\86\ or sought additional guidance for 
aggregating immaterial error corrections.\87\ Some commenters 
recommended that recovery should not be limited to restatements for 
errors that were material to the previously issued financial 
restatements,\88\ or recommended revisions to the proposed definition 
of ``accounting restatement.'' \89\ Other commenters suggested that 
recovery should be triggered when any revision to previously issued 
financial statements occurred.\90\ Other commenters, noting a decline 
in the number of formal accounting restatements, recommended that the 
Commission expand the scope of the rulemaking beyond implementation of 
Section 10D to require compensation recovery policies to address 
instances of misconduct by executive officers that do not result in a 
financial restatement.\91\
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    \84\ See comment letters from Business Roundtable (Sept. 14, 
2015) (``BRT 1''); Better Markets 1; Center On Executive 
Compensation (Sept. 14, 2015) (``CEC 1''); CFA Institute 1; Ernst & 
Young LLP (``EY'') (Sept. 15, 2015); NACD; PricewaterhouseCoopers 
LLP (``PWC''); SCG 1; and SBA.
    \85\ See comment letters from CalPERS 1; Exxon/Mobil Corporation 
(``Exxon'') (suggesting that recovery should only be triggered by a 
restatement that ``significantly altered the total mix of 
information available''); International Bancshares Corporation 
(``IBC'') (suggesting that recovery should only be triggered by a 
restatement if there is a substantial likelihood a reasonable 
investor would consider the restatement as important in deciding how 
to vote); Japanese Bankers; National Association of Manufacturers 
(``NAM'') (suggesting ambiguity could result in great variation 
among issuers in which restatements should trigger recovery); and 
SBA.
    \86\ See comment letters from CCMC 1; Chevron Corporation 
(``Chevron''); EY; and SCG 1. See also comment letter from PWC 
(suggesting that inclusion of the word ``material'' clarifies that 
the listing standard would not apply to restatements that reflect 
the correction of immaterial errors).
    \87\ See comment letters from ABA 1; Chevron; Corporate 
Governance Coalition for Investor Value (``Coalition''); Davis Polk 
1; FSR; and IBC.
    \88\ See comment letters from AFL-CIO (Sept. 14, 2015) 
(expressing concern regarding ``revision restatements'' that would 
allow an issuer to avoid the application of the proposed 
compensation recovery provisions); As You Sow (Sept. 15, 2015) (``As 
You Sow 1''); CII 1; CalPERS 1; and SBA. But see comment letter from 
ABA 1 (noting ``that the analysis of an error's materiality takes 
into account the error's impact on executive compensation'').
    \89\ See comment letters from Chevron and SCG 1 (recommending 
that the definition include a specific reference to GAAP) and from 
ABA 1 (recommending that the definition refer to the applicable 
accounting standards). See also comment letter from PWC (noting that 
the proposed definition permits the listing standard to be applied 
regardless of the accounting framework a listed issuer follows).
    \90\ See, e.g., comment letters from As You Sow 1; CII 1; and 
CalPERS 1.
    \91\ See comment letters from AFL-CIO; AFR 1; Plamen Kovachev 
(``Kovachev'') (recommending the rule include ethical misconduct 
triggers to more closely align the rule with executives' fiduciary 
duties); Rutkowski 1; and UAW Retiree Medical Benefits Trust, et al. 
(``UAW, et al.'').
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    In response to the Reopening Release, we received a similar range 
of comments relating to the recovery trigger and the meaning of ``an 
accounting restatement due to material noncompliance.'' \92\ A number 
of commenters supported the standard set forth in the Proposing Release 
that would apply recovery policies only when a restatement is required 
to correct errors that are material to previously issued financial 
statements and triggers disclosure under Item 4.02(a) of Form 8-K.\93\ 
These commenters further contended that an ``accounting restatement due 
to material noncompliance'' should not include ``little r'' 
restatements.\94\ Other commenters supported interpreting what it means 
to be required to prepare an accounting restatement due to material 
noncompliance in the manner described in the Reopening Release.\95\

[[Page 73085]]

Some of these commenters noted research suggesting that issuers may be 
deeming revisions to be immaterial even though the revisions meet at 
least one of the indicators of materiality described in Staff 
Accounting Bulletin No. 99.\96\ Some of these commenters additionally 
suggested that the increasing prevalence of revisions may stem from 
management seeking to avoid restatements that would trigger an Item 
4.02 Form 8-K filing or the application of a compensation recovery 
policy provision.\97\ Some commenters further recommended expanding the 
recovery policy triggers.\98\
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    \92\ One commenter on the Reopening Release suggested ``it would 
be easier and more streamlined for issuers to rely on existing 
guidance, literature, and definitions concerning accounting errors 
rather than define the terms `accounting restatement' and `material 
noncompliance.' '' See comment letter in response to the Reopening 
Release from ABA 2.
    \93\ See, e.g., comment letters in response to the Reopening 
Release from Davis Polk 3 (stating that ``immaterial errors should 
not trigger clawback policies'' and cautioning against creating a 
new materiality standard for disclosure of financial restatements 
solely for Rule 10D-1 purposes); Hunton; McGuireWoods, LLP and 
Brownstein Hyatt Farber Schreck LLP (``McGuireWoods'') (recommending 
that the Commission define ``material error'' as occurring when the 
issuer is required, by applicable accounting standards, to issue 
restated financial statements to correct one or more errors that are 
``material'' to previously issued financial statements); S&C 
(contending that immaterial error corrections to the current 
period--commonly referred to as out-of-period adjustments--should 
not be included because they are not restatements or ``due to 
material noncompliance'') (Nov. 16, 2021) (``S&C 2''); and SCG (Nov. 
29, 2021) (``SCG 3'').
    \94\ See, e.g., comment letters in response to the Reopening 
Release from Davis Polk 3 (contending that Proposing Release 
facilitates the purpose of the recovery rule in being triggered on 
the basis of ``meaningful errors'' and that ``little r'' 
restatements do not meet this standard and would create costs due to 
the uncertainty of the standard); Hunton (suggesting that ``little 
r'' restatements are immaterial to investors and should not serve as 
a recovery policy trigger); McGuireWoods (suggesting that Section 
10D intended that not all restatements should trigger recovery and, 
in particular, that immaterial restatements should be excluded from 
recovery); and SCG 3. As discussed below, we disagree with how a 
number of these commenters characterize ``little r'' restatements.
    \95\ See, e.g., comment letters in response to the Reopening 
Release from Better Markets (Nov. 22, 2021) (``Better Markets 2'') 
(recommending including a definition in the final rule, such as one 
defining an accounting restatement as either a revision restatement 
or a re-issuance restatement, to avoid unintended, inconsistent 
interpretations, and other enforcement challenges that could result 
from reliance on guidance); CFA Institute (Nov. 22, 2021) (``CFA 
Institute 2'') (suggesting a broad interpretation may serve to 
mitigate the perception of misaligned motivations); Council of 
Institutional Investors (Nov. 18, 2021) (``CII 3'') (suggesting that 
Section 10D was not intended to narrowly limit the required recovery 
policy to exclude ``little r'' restatements); International 
Corporate Governance Network (``ICGN''); Occupy the SEC 
(``Occupy''); Ohio Public Employees Retirement System (Nov. 22, 
2021) (``OPERS 2'') (recommending that the Commission clarify ``that 
its definition of `accounting restatement' includes all required 
restatements made to correct an error in previously issued financial 
statements, regardless of whether they are formal restatements or 
revisions''); and Public Citizen 2. See also comment letters in 
response to the Second Reopening Release from Americans for 
Financial Reform (July 6, 2022) (``AFR 2'') (noting studies finding 
that ``little r'' restatements have been issued in lieu of ``Big R'' 
restatements to avoid compensation recovery provisions); and Council 
of Institutional Investors (June 24, 2022).
    \96\ See, e.g., comment letters in response to the Reopening 
Release from CFA Institute 2 (further suggesting that lack of 
transparency in the issuer's materiality assessment and the reason 
for the method of correction may be contributing factors); and OPERS 
2.
    \97\ See, e.g., comment letters in response to the Reopening 
Release from Better Markets 2; and OPERS 2.
    \98\ See, e.g., comment letters in response to the Reopening 
Release from New York City Retirement Systems (``NYCRS'') 
(recommending recouping compensation from executives responsible for 
detrimental conduct causing significant financial or reputational 
harm); and New York State Common Retirement Fund (``NYSCRF'') 
(recommending recouping compensation awarded to executives during 
periods of fraudulent activity, inadequate oversight, misbehavior, 
including discrimination and harassment of any kind, or gross 
negligence, which impacted or is reasonably expected to impact 
financial results or cause reputational harm).
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    A few commenters supported a requirement for an issuer to disclose 
its evaluation that errors are immaterial,\99\ while some other 
commenters opposed requiring this disclosure.\100\ Another stated that 
``involvement of the independent auditors in evaluating management's 
materiality analysis and concurring (through the audit opinion) with 
management's conclusion, with oversight from the company's audit 
committee, provides sufficient protection of investor interests that 
material errors do not go uncorrected by a company trying to avoid the 
clawback of incentive compensation.'' \101\
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    \99\ See, e.g., comment letters from Better Markets 1; CalPERS 
1; and CFA Institute 1. See also comment letter from CFA Institute 1 
(noting that because of the inherent estimates, judgements, and 
complexity involved, issuers should disclose their evaluations, the 
process and assumptions used to determine whether the error(s) in 
question were material or immaterial, and why they decided the 
matter in this way and suggesting that thorough disclosure provides 
investors enough information to understand the material facts and 
the reasoning behind such determination, and thereby helps them to 
make appropriate decisions about the board's actions); and ICGN.
    \100\ See, e.g., comment letters from BRT 1 (suggesting it is a 
tenet of the Federal securities laws that disclosure of immaterial 
information is not required); EY; NACD; and SCG 1.
    \101\ See comment letter from EY.
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c. Final Amendments
    After considering comments received on the Proposing Release and 
reopening releases, in a change from the proposal, we are adopting 
rules to require listed issuers to adopt and comply with a written 
compensation recovery policy that will be triggered in the event the 
issuer is required to prepare an accounting restatement that corrects 
an error in previously issued financial statements that is material to 
the previously issued financial statements, or that would result in a 
material misstatement if the error were corrected in the current period 
or left uncorrected in the current period.\102\ While the proposed 
rules focused on restatements for errors that are material to the 
previously issued financial statements, after further consideration and 
input from commenters, the final rules reflect a broader construction 
of the phrase ``an accounting restatement due to the material 
noncompliance of the issuer with any financial reporting requirement 
under the securities laws'' based upon the fact that both types of 
restatements are caused by material misstatements that either already 
exist or would exist in the current period.
---------------------------------------------------------------------------

    \102\ See 17 CFR 240.10D-1(b)(1) (``Rule 10D-1(b)(1)'').
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    In our view, the statutory language of Section 10D--``an accounting 
restatement due to the material noncompliance of the issuer with any 
financial reporting requirement under the securities laws''--can 
appropriately be read to encompass both ``Big R'' and ``little r'' 
restatements. First, as a threshold matter, we disagree with those 
commenters who stated that ``little r'' restatements are not accounting 
restatements. We note that both are considered ``accounting 
restatements'' under U.S. GAAP and IFRS \103\ because both result in 
revisions of previously issued financial statements for a correction of 
an error in those financial statements. In contrast, as noted by one 
commenter, sometimes the correction of an error is recorded instead in 
the current period financial statements--commonly referred to as an 
out-of-period adjustment--when the error is immaterial to the 
previously issued financial statements, and the correction of the error 
is also immaterial to the current period.\104\ We agree with that 
commenter that an out-of-period adjustment should not trigger a 
compensation recovery analysis under the final rules, because it is not 
an ``accounting restatement.'' \105\
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    \103\ See supra note 72.
    \104\ See comment letter from S&C 2.
    \105\ See supra note 93. In response to commenters who requested 
clarification about the statement in the Proposing Release 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,'' we do not think this 
is necessary. See supra note 87. Staff guidance on materiality is 
already available which specifically addresses the aggregation of 
misstatements that individually do not cause the financial 
statements taken as a whole to be materially misstated. See infra 
note 108. Furthermore, the scope of the final amendments includes 
``little r'' restatements, which are sometimes required due to the 
cumulative effects of an error over multiple reporting periods. See 
more detailed discussion below.
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    Second, both types of restatements address material noncompliance 
of the issuer with financial reporting requirements. In the case of a 
``Big R'' restatement, the material noncompliance results from an error 
that was material to previously issued financial statements. In the 
case of a ``little r'' restatement, the material noncompliance results 
from an error that is material to the current period financial 
statements if left uncorrected or if the correction were recorded only 
in the current period.\106\ Due to the materiality of the impact the 
error would have on the current period, the previously issued financial 
statements must be revised to correct it even

[[Page 73086]]

though the error may not have been material to those financial 
statements. We note that the plain language of Section 10D does not 
limit the concept of ``an accounting restatement due to material 
noncompliance'' to effects on previously issued financial statements, 
and thus the final rules require compensation recovery analysis for 
both ``Big R'' and ``little r'' restatements.
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    \106\ We note that certain errors may compound over time. While 
the initial error amount may not have been material to previously 
issued financial statements, it may become material due to its 
cumulative effect over multiple reporting periods. A material 
adjustment to the current period that relates to an error from 
previously issued financial statements would cause the current 
period financial statements to be materially misstated. An example 
of such error is an improper expense accrual (such as an overstated 
liability) that has built up over five years at $20 per year. Upon 
identification of the error in year five, the issuer evaluated the 
misstatement as being immaterial to the financial statements in 
years one through four. To correct the overstated liability in year 
five a $100 credit to the statement of comprehensive income would be 
necessary; however, $80 of it would relate to the previously issued 
financial statements for years one through four. During the 
preparation of its annual financial statements for year five, the 
issuer determines that, although a $20 annual misstatement of 
expense would not be material, the adjustment to correct the $80 
cumulative error from previously issued financial statements would 
be material to comprehensive income for year five. Accordingly, the 
issuer must correct the financial statements for years one through 
four.
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    We also disagree with those commenters who asserted that including 
``little r'' restatements would make it difficult to comply with the 
rule. Issuers are already required to perform a materiality analysis on 
each error that is identified in order to determine how to account for 
and report the correction of that error. Thus, issuers will have 
already performed the analysis necessary to identify these additional 
accounting restatements. Furthermore, the final rules reduce 
uncertainty regarding their scope by expressly identifying the types of 
restatements that are required to be included within an issuer's 
recovery policy.
    In addition to being clear and consistent with applicable 
accounting literature, guidance, and the plain language of Section 10D, 
this construction of the statutory language addresses concerns that 
issuers could manipulate materiality and restatement determinations to 
avoid application of the compensation recovery policy.\107\ In this 
regard, we note that Commission staff has provided guidance to assist 
issuers in making materiality determinations. The staff guidance 
emphasizes that an issuer's materiality evaluation of an identified 
unadjusted error should consider the effects of the identified 
unadjusted error on the applicable financial statements and related 
footnotes, and evaluate quantitative and qualitative factors.\108\ 
Registrants, auditors, and audit committees should already be aware of 
the need to assess carefully whether an error is material by applying a 
well-reasoned, holistic, objective approach from a reasonable 
investor's perspective based on the total mix of information. Further, 
whether the misstatement has the effect of increasing management's 
compensation, for example, by satisfying requirements for the award of 
bonuses or other forms of incentive compensation, is a qualitative 
factor that should be considered when making a materiality 
determination.
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    \107\ We note evidence supporting the materiality manipulation 
concern. See, e.g., Brian Hogan and Gregory A. Jonas, The 
association between executive pay structure and the transparency of 
restatement disclosures, Acct. Horizons (Sept. 2016) (finding that 
CFO pay structure is correlated with the transparency of restatement 
disclosure (``Big R'' vs. ``little r'')). See also Thompson, supra 
note 69 (finding that issuers with compensation recovery provisions 
are more likely to report misstatements as ``little r'' restatements 
instead of ``Big R'' restatements).
    \108\ See Staff Accounting Bulletin No. 99, Materiality (Aug. 
12, 1999) and Staff Accounting Bulletin No. 108, Considering the 
Effects of Prior Year Misstatements when Quantifying Misstatements 
in Current Year Financial Statements (Sept. 13, 2006). (This 
guidance and any other staff statement cited in this release is not 
a rule, regulation, or statement of the Commission and the 
Commission has neither approved nor disapproved its content. This 
guidance, like all staff statements, has no legal force or effect: 
it does not alter or amend applicable law, and it creates no new or 
additional obligations for any person.) We note that Commission 
staff have observed that some materiality analyses appear to be 
biased toward supporting an outcome that an error is not material to 
previously issued financial statements. See id. Relatedly, it has 
been reported that, while the total number of accounting 
restatements by issuers declined each year from 2013 to 2020, the 
percentage of ``little r'' restatements increased to approximately 
76% of restatements in 2020. See Audit Analytics, 2020 Financial 
Restatements: A Twenty-Year Review (November 2021).
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    Requiring recovery analysis for both ``Big R'' and ``little r'' 
accounting restatements does not eliminate the risk that an issuer 
could avoid a recovery obligation by manipulating its materiality 
analysis of an error.\109\ While this is an inherent risk, we note the 
involvement of an independent auditor in evaluating management's 
materiality analyses, with the oversight of the audit committee, 
protects investor interests by helping ensure that material errors do 
not go uncorrected by an issuer seeking to avoid the recovery of 
erroneously awarded compensation. Furthermore, we note the potential 
serious consequences, including but not limited to Commission 
enforcement action and private litigation, of mischaracterizing 
material accounting errors as immaterial.
---------------------------------------------------------------------------

    \109\ This could occur if an issuer were to inappropriately 
conclude that an identified error was not material to its previously 
issued financial statements or the current period.
---------------------------------------------------------------------------

    For similar reasons, we are not adopting a requirement for an 
issuer to disclose the materiality analysis of an error when the error 
is determined to be immaterial, as recommended by some commenters. 
Inclusion of ``little r'' restatements in the scope of restatements 
triggering recovery, the involvement of independent auditors and 
oversight of audit committees, and the serious potential consequences 
of deliberate mischaracterizations of accounting errors, should 
mitigate the risk that some errors will be incorrectly determined to be 
immaterial. Further, many assessments of materiality are complex and 
highly sensitive to particular facts and circumstances. Requiring 
issuers to disclose sufficient information to make these assessments 
meaningful to investors would likely entail lengthy disclosures that 
may be of limited use for investors. Instead, we are adopting a 
disclosure requirement, discussed in Section II.D., for issuers to 
clearly identify on the cover page of their annual reports when the 
financial statement periods presented contain restatements, which 
should provide additional transparency regarding such restatements.
    In a change from the proposal, Rule 10D-1 will not provide separate 
definitions of ``accounting restatement'' or ``material noncompliance'' 
as proposed. Existing accounting standards and guidance already set out 
the meaning of those terms.\110\ This rule is not intended to affect 
that guidance. While we acknowledge that a number of commenters 
supported the proposed definitions of ``accounting restatement'' and 
``material noncompliance,'' in light of the modifications discussed 
above, we agree with the commenter that suggested that it will be 
easier for issuers to look to existing guidance, literature, and 
definitions when assessing accounting errors \111\ and that such an 
approach will help ensure that those standards are consistently applied 
both across different issuers and over time.
---------------------------------------------------------------------------

    \110\ Rule 10D-1 clarifies the meaning of an ``accounting 
restatement due to the material noncompliance of the issuer with any 
financial reporting requirement under the securities laws.''
    \111\ See comment letter in response to the Reopening Release 
from ABA 2.
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    As indicated in the Proposing Release, we understand that under 
current accounting standards the following types of changes to an 
issuer's financial statements do not represent error corrections, and 
therefore would likewise not trigger application of the issuer's 
compensation recovery policy under the listing standards:
     Retrospective application of a change in accounting 
principle; \112\
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    \112\ 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 the structure of an issuer's internal organization; 
\113\
---------------------------------------------------------------------------

    \113\ 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.

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[[Page 73087]]

     Retrospective reclassification due to a discontinued 
operation; \114\
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    \114\ 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; \115\
---------------------------------------------------------------------------

    \115\ 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 (IFRS filers only); \116\ 
and
---------------------------------------------------------------------------

    \116\ See IFRS 3, paragraph 45.
---------------------------------------------------------------------------

     Retrospective revision for stock splits, reverse stock 
splits, stock dividends or other changes in capital structure.
2. Date the Issuer Is Required To Prepare an Accounting Restatement
    Section 10D(b)(2) requires recovery of erroneously awarded 
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 an issuer is ``required to prepare an accounting 
restatement'' for purposes of this provision.
a. Proposed Amendments
    The Commission proposed 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.
    A note to the proposed rule indicated 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 would be predicated on if or when a Form 8-K was filed. 
In the Reopening Release, the Commission solicited further comment as 
to whether to remove the ``reasonably should have concluded'' language 
in light of concerns that the language adds uncertainty to the 
determination.
b. Comments
    We received a range of comments on the proposed specification of 
the date the issuer is required to prepare an accounting restatement 
(referred to in this release as the ``trigger date''). Some commenters 
supported including ``reasonably should have concluded'' as an 
objective standard that provides certainty and prevents manipulation or 
the potential for evasion,\117\ while others expressed concern that use 
of ``reasonably should have concluded'' could introduce elements of 
uncertainty and subjectivity into the determination.\118\ Some 
commenters recommended a bright-line standard involving a single date, 
such as the date of the Item 4.02(a) Form 8-K filing.\119\ Other 
commenters recommended including as a trigger the filing of an Item 
4.02(b) Form 8-K disclosing that independent accountants have advised 
the issuer that the financial statements can no longer be relied 
upon.\120\ Some commenters, however, did not believe that receipt of 
such a notification from the auditor should be conclusive.\121\
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    \117\ See comment letters from Better Markets 1; and Compensia. 
Some commenters specifically supported using the earlier to occur of 
the alternative dates, as proposed. See, e.g., letters from CalPERS 
1; CII 1; and CFA Institute 1.
    \118\ See, e.g., comment letters from ABA 1; BRT 1; CEC 1; 
Exxon; and SCG 1. Some of these commenters further suggested that 
the language could invite disputes or lead to litigation. See, e.g., 
comment letters from Exxon; and SCG 1.
    \119\ See, e.g., comment letters from Davis Polk 1; Mercer; and 
NACD. See also comment letters from Exxon (recommending the actual 
issuance of a restatement); and Public Citizen 1 (recommending the 
date the erroneous financial statement is filed).
    \120\ See comment letters from CFA Institute 1; and EY.
    \121\ See comment letters from ABA 1; and SCG 1.
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    Some commenters expressed the view that existing legal requirements 
provide sufficient deterrents against intentionally delaying issuance 
of a restatement.\122\ Other commenters expressed concerns about the 
potential for delay,\123\ and one suggested the proposed ``reasonably 
should have concluded'' language would discourage issuers from 
improperly delaying filing a restatement to avoid recovery.\124\
---------------------------------------------------------------------------

    \122\ See, e.g., comment letters from ABA 1 (noting that other 
existing laws, including the certification requirements and anti-
fraud provisions of the Exchange Act as well as applicable corporate 
law, provide the appropriate incentives to make timely financial 
reporting determinations in connection with Commission filings); and 
Exxon (noting Commission and private litigation liabilities likely 
to accrue while a material error in an issuer's financial reporting 
remains uncorrected, the personal certification requirements 
applicable to the principal executive and financial officers, and 
the risk that an issuer's independent auditors will refuse to give 
an opinion on financial statements containing an uncorrected 
material error).
    \123\ See comment letters from Public Citizen 1; and CFA 
Institute 1 (noting that considerable time can pass between the time 
an error is detected and the time a court or regulator requires the 
issuer to take action).
    \124\ See comment letter from CII 1.
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    In response to the Reopening Release, a number of commenters 
expressed support for the inclusion of ``reasonably should have 
concluded'' language in the proposed rule because in their view it 
would create a more objective standard and appropriately limit board 
discretion.\125\ In contrast, other commenters supported using the date 
the issuer's board of directors (or 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 that the 
issuer's previously issued financial statements contain a material 
error. Some of these commenters expressed concern about uncertainty or 
ambiguity associated with the ``reasonably should have concluded'' 
determination.\126\
---------------------------------------------------------------------------

    \125\ See, e.g., comment letters in response to the Reopening 
Release from Better Markets 2 (suggesting the ``reasonably should 
have concluded'' language imposes an enforceable obligation on the 
issuer and reduces the likelihood of litigation by inducing issuers 
to act prudently to avoid the risk); CFA Institute 2 (suggesting the 
language would mitigate concerns about internal investigations 
taking longer than necessary, unreasonable delays in reaching a 
conclusion, or misalignment of executives' incentives impacting the 
timeliness or accuracy of the financial reporting); and ICGN. See 
also comment letters in response to the Reopening Release from 
Eileen Morrell; Public Citizen 2; Occupy; and OPERS 2 (supporting 
the use of the ``reasonably should have concluded'' language); and 
comment letter in response to the Second Reopening Release from AFR 
2 (suggesting that the ``reasonably should have concluded'' language 
discourages issuers from delaying actions necessary to fix erroneous 
financial statements).
    \126\ See, e.g., comment letters in response to the Reopening 
Release from ABA 2 (suggesting the ``reasonably should have 
concluded'' language would add subjectivity by using a triggering 
event that differs from Form 8-K and would be open to second-
guessing and litigation); CEC (Nov. 17, 2021) (``CEC 2'') 
(suggesting the language creates excessive uncertainty and excessive 
legal risk based on the board's view of when the look back period 
should commence versus the view of an impacted shareholder or an 
executive who disputes that timing); Davis Polk 3; and McGuireWoods 
(suggesting the standard would be ambiguous and overly broad and 
noting that Item 4.02 of Form 8-K relies on when the board concludes 
a restatement is required). See also comment letter in response to 
the Reopening Release from SCG 1 (noting that knowingly, recklessly, 
or negligently misreporting false or misleading financial 
information already subjects the issuer to liability).
---------------------------------------------------------------------------

    Some commenters on the proposal additionally sought guidance as to 
the types of facts that would support a finding that the issuer 
reasonably should have concluded that its previously issued financial 
statements contain a material error.\127\ Some

[[Page 73088]]

commenters also sought clarification regarding when a regulator or 
other legally authorized body directs an issuer to restate its 
previously issued financial statements to correct a material 
error.\128\
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    \127\ See comment letters from CEC 1; Compensia; and SCG 1 
(seeking clarification that a restatement by an issuer's peer group 
member does not trigger recovery when an issuer's incentive-based 
compensation is based on performance relative to the peer group).
    \128\ See comment letter from EY (suggesting that it may be 
unclear whether a request for a restatement from a regulator would 
be a trigger, given the lack of finality of the determination). See 
also comment letters from CEC 1 (recommending that the date not be 
established until a court order is final and non-appealable); and 
SCG 1 (recommending that the date of the initial court or agency 
restatement order should be designated as the starting point of the 
three-year look-back period, but only after the order is final and 
non-appealable).
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c. Final Amendments
    After considering the comments, we are adopting the rules 
substantially \129\ as proposed to provide that under the listing 
standards the date on which an issuer is required to prepare an 
accounting restatement is the earlier to occur of:
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    \129\ In a nonsubstantive change from the proposal, we have 
incorporated the standard for the date the issuer is required to 
prepare an accounting restatement into 17 CFR 240.10D-1(a)(1)(ii) 
rather than separately defining the term ``date on which an issuer 
is required to prepare an accounting restatement'' in paragraph (c) 
as proposed.
---------------------------------------------------------------------------

     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 is 
required to prepare an accounting restatement due to the material 
noncompliance of the issuer with any financial reporting requirement 
under the securities laws as described in Rule 10D-1(b)(1); or
     The date a court, regulator or other legally authorized 
body directs the issuer to prepare an accounting restatement.\130\
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    \130\ See 17 CFR 240.10D-1(b)(1)(ii) (``Rule 10D-1(b)(1)(ii)'').
---------------------------------------------------------------------------

    We believe the final rule provides reasonable certainty for 
issuers, shareholders, and exchanges while minimizing incentives for 
issuers to delay their restatement conclusions. While we acknowledge 
some commenters' assertion that a bright-line or single-date standard 
might be easier to apply, we continue to have concerns that such an 
approach would not address the potential for delay of a restatement 
determination in order to manipulate the recovery date.
    As noted in the Proposing Release,\131\ using the date the 
erroneous financial statements were filed as the triggering date would 
be inconsistent with the three-year look-back period because if the 
date of filing of the erroneous financial statements were used, 
recovery would not apply to any incentive-based compensation received 
after that date, even when the amount was affected by the erroneous 
financial statements. As a result, we disagree with the suggestion that 
the look-back period should be triggered by the date the issuer files 
the accounting restatement. The issuer will necessarily determine that 
it is ``required to prepare'' a restatement on or before the day it 
files the restatement. We have not adopted this suggestion because it 
would allow an issuer to delay the recovery period, and potentially 
reduce the amount of compensation subject to recovery, by delaying the 
filing of a restatement it had already determined it was required to 
prepare.
---------------------------------------------------------------------------

    \131\ See Proposing Release at Section II.B.2 (``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.'').
---------------------------------------------------------------------------

    Rather, we agree with the commenters that indicated that the timing 
standard we are adopting is sufficiently certain and appropriately 
limits board discretion. The standard promotes compliance with the rule 
by making evasion of the application of a recovery policy more 
difficult.\132\ The ``reasonably should have concluded'' concept 
reduces the incentive for an issuer to delay the investigation of a 
known error and the decision that a restatement is necessary, because 
the delayed decision date would not determine the beginning of the 
recovery period. We recognize that, as some commenters indicated, 
establishing the trigger date as the date that the issuer's board 
concludes, or reasonably should have concluded, that the issuer is 
required to prepare an accounting restatement creates some risk that 
the board's conclusions will be subject to litigation. We believe this 
risk is acceptable in light of the benefit of deterring issuers from 
manipulating the timing of their conclusions to avoid or delay a 
recovery obligation. In order to trigger application of the recovery 
policy, an issuer merely needs to have concluded that it is required to 
prepare an accounting restatement, which may occur before the precise 
amount of the error has been determined.\133\ We further note that 
applying a reasonableness standard to the determination of the three-
year look-back supports an exchange's ability to enforce the recovery 
provision by providing the exchange a standard by which to review an 
issuer's conclusion.
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    \132\ Rule 10D-1(b)(1)(ii) is being established specifically for 
purposes of determining the relevant recovery period under Rule 10D-
1. The ``reasonably should have concluded'' language applies only 
with respect to the determination of the three-year look-back timing 
for purposes of compensation recovery. It does not apply with 
respect to a conclusion under applicable accounting rules and 
standards as to whether there is an error that requires a 
restatement.
    \133\ We disagree with commenters that asserted that the 
reasonableness standard increases uncertainty or ambiguity. While we 
acknowledge that the standard is not a fixed date in time, it is 
intended to allow an exchange to assess, based on the facts 
available to the issuer, the point at which a reasonable person 
would have concluded that an accounting restatement is required. 
Contrary to a subjective determination, this standard provides for 
an objective assessment based on the facts available as to the 
determination of the timing of the lookback.
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    To the extent that an issuer is required to file an Item 4.02(a) 
Form 8-K, the conclusion that it is required to prepare an accounting 
restatement is expected to coincide with the occurrence of the event 
disclosed in the Form 8-K.\134\ In addition, in applying a 
reasonableness standard to the determination of a three-year look-back 
period, while not dispositive, one factor that an issuer would have to 
consider carefully would be any notice that it may receive from its 
independent auditor that previously issued financial statements contain 
a material error.\135\
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    \134\ In a modification from the proposal, we are no longer 
including a note indicating that the date generally is expected to 
coincide with the occurrence of the event described in Item 4.02(a) 
of Exchange Act Form 8-K because we are expanding the circumstances 
that would trigger the analysis to include ``little r'' restatements 
which generally do not require reporting on a Form 8-K.
    \135\ We are not, however, adopting the suggestion of some 
commenters that the filing of an Item 4.02(b) Form 8-K disclosing 
that independent accountants have advised the issuer that the 
financial statements can no longer be relied upon be included as a 
trigger. See supra note 120. As noted by another commenter, such a 
date may not be conclusive. See comment letter from ABA 1. However, 
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, at the latest, when the listed issuer determines to 
restate its financial statements, even if it subsequently neglects 
to file an Item 4.02(a) Form 8-K to report that decision.
---------------------------------------------------------------------------

    While we anticipate that most issuers will make their determination 
regarding the three-year look-back trigger based on the standard in 17 
CFR 240.10D-1(b)(1)(ii)(A), some issuers may not conclude they are 
required to prepare an accounting restatement and instead may choose to 
contest whether an accounting restatement is required. While we expect 
these occurrences to be rare, 17 CFR 240.10D-1(b)(1)(ii)(B) (``Rule 
10D-

[[Page 73089]]

1(b)(1)(ii)(B)'') clarifies that in these circumstances, the trigger 
date will be no later than the date a court, regulator, or other 
legally authorized body directs the issuer to prepare an accounting 
restatement. In the event that such date is different than the date an 
issuer reasonably should have concluded that an accounting restatement 
is required, Rule 10D-1(b)(1)(ii) mandates that the trigger date be the 
earlier date. In response to questions raised by a commenter, we are 
clarifying that for purposes of Rule 10D-1(b)(1)(ii)(B), the date of 
the initial court order or agency action would be the trigger date for 
the three-year look-back period, but that the determination and 
application of the recovery policy would occur only after the order is 
final and non-appealable.
    Incorporating the triggering events into the rule rather than 
leaving the determination solely to the issuer will 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, is triggered for purposes of the listing standards. In this 
regard, we note that the rule also states that an issuer's obligation 
to recover erroneously awarded compensation is not dependent on if or 
when the restated financial statements are filed with the 
Commission.\136\
---------------------------------------------------------------------------

    \136\ See 17 CFR 240.10D-1(b)(1)(i)(B) (``Rule 10D-
1(b)(1)(i)(B)'').
---------------------------------------------------------------------------

C. Application of Recovery Policy

1. Executive Officers Subject to Recovery Policy
    Section 10D identifies the class of persons and the time frame 
during which that class of persons is subject to recovery of 
erroneously awarded incentive-based compensation. Specifically, 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 erroneously awarded compensation from ``any 
current or former executive officer of the issuer who received 
incentive-based compensation'' during the three-year look back 
period.\137\
---------------------------------------------------------------------------

    \137\ Section 10D does not define ``executive officer'' for 
purposes of the recovery policy. 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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a. Proposed Amendments
    The Commission proposed to include in the listing standards a 
definition of ``executive officer'' modeled on the definition of 
``officer'' in 17 CFR 240.16a-1(f) (``Rule 16a-1(f)''). For purposes of 
Section 10D, the proposed definition of ``executive officer'' included 
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. The proposed definition expressly included the principal 
financial officer and the principal accounting officer (or if there is 
no such accounting officer, the controller), reflecting the view that 
their responsibility for financial information justifies their 
inclusion in the definition of ``executive officer'' for this purpose. 
As proposed, 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.\138\
---------------------------------------------------------------------------

    \138\ The proposed definition also contained 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 17 CFR 229.401(b) 
are presumed to be executive officers for purposes of the proposed 
rule.
---------------------------------------------------------------------------

    The Commission additionally proposed that the rules 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. 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.\139\
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    \139\ 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.
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b. Comments
    Commenters provided varying recommendations on the appropriate 
definition of ``executive officer.'' Some commenters expressly 
supported the proposed definition,\140\ and one recommended expanding 
the definition.\141\ Other commenters suggested that the proposed 
definition was too broad.\142\ Some of these commenters contended that 
Section 10D does not require the breadth of the proposed 
definition,\143\ and some further recommended various other limits on 
covered executive officers.\144\ In contrast, some commenters noted 
that a narrower definition would exclude individuals with a significant 
executive role at an issuer and could be contrary to the interests of 
investors.\145\
---------------------------------------------------------------------------

    \140\ See, e.g., comment letters from AFL-CIO; AFR 1; As You Sow 
1; Better Markets 1; CEC 1; CFA Institute 1; CII 1; OPERS (Sept. 14, 
2015) (``OPERS 1'') (supporting the focus on policy-making 
functions); Public Citizen 1; Rutkowski 1; and UAW, et al.
    \141\ See comment letter from Better Markets 1 (recommending 
including the principal legal officer, the chief compliance officer, 
and the chief information officer). But see comment letter from CEC 
1 (suggesting that expanding the pool of executives beyond Section 
16 officers would go beyond Congress' intended purpose).
    \142\ See, e.g., comment letters from ABA 1; American Vanguard 
Corporation (``American Vanguard''); CCMC 1; Chevron; Coalition; 
Compensia; Duane; FedEx Corporation (Sept. 14, 2015) (``FedEx 1''); 
Fried; Hay Group, Inc. (``Hay Group''); IBC; Japanese Bankers; 
Kovachev; NAM; Pay Governance LLC (``Pay Governance''); S&C 1; SCG 
1; Steven Hall & Partners (``SH&P''); and WorldatWork (``WAW''). See 
also comment letters in response to the Reopening Release 
recommending limiting the term to executives who had a meaningful 
role or responsibility over the issuer's financial reporting from 
ABA 2; CCMC 2; McGuireWoods; and SCG (Nov. 3, 2021) (``SCG 2'').
    \143\ See, e.g., comment letters from CCMC 1; Chevron; 
Compensia; NAM; and SCG 1.
    \144\ Some commenters recommended limiting the definition to the 
issuer's named executive officers as defined in 17 CFR 
229.402(a)(3). See, e.g., comment letter from Duane; FedEx 1; Fried; 
Hay Group; and NACD. Other commenters recommended limiting the 
definition to only the principal executive officer, principal 
financial officer, principal accounting officer (or if there is no 
such accounting officer, the controller), and, in addition, any 
officer in charge of a principal business unit, division, or 
function or who performs a policy-making function and whom the board 
of directors or compensation committee determines to have had an 
important role in contributing to the events leading to a financial 
restatement. See, e.g., comment letters from ABA 1; Chevron; and SCG 
1. Still other commenters recommended various forms of scienter 
requirements. See, e.g., comment letters from American Vanguard; 
CCMC 1; Coalition; Compensia; and SH&P.
    \145\ See, e.g., comment letters from AFL-CIO; AFR 1; and 
Rutkowski 1.
---------------------------------------------------------------------------

    We received limited comment specific to our proposal to base the 
definition on the Rule 16a-1(f) definition of ``officer,'' instead of 
the 17 CFR 240.3b-7 (``Rule 3b-7'') definition of ``executive 
officer.'' \146\ A few commenters suggested that including all Section 
16 officers, without providing the compensation committee discretion in 
enforcing recovery, may affect issuers' practices in identifying their 
executive officers.\147\
---------------------------------------------------------------------------

    \146\ See comment letters from Keith Paul Bishop (``Bishop'') 
(recommending use of the Rule 3b-7 definition) and CalPERS 1 
(supporting use of the Rule 3b-7 definition as an alternative to the 
proposal).
    \147\ See comment letters from ABA 1 (suggesting that some 
issuers may have an incentive to reevaluate the identification of 
their ``corporate insiders'' to see whether they should reduce the 
number of individuals subject to those rules--particularly where the 
individual has little or no responsibility for accounting and 
finance matters); and Pearl Meyer (suggesting the definition may 
lead some issuers to redefine duties of executive officers in order 
to limit those subject to recovery). See also Compensia.

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[[Page 73090]]

    Several commenters recommended limiting recovery only to incentive-
based compensation earned during the portion of the look-back period 
when the individual was an executive officer of the issuer.\148\ Some 
questioned whether recovery for periods when the individual was serving 
in non-executive capacities would be consistent with the statute.\149\ 
Others questioned the fairness of applying recovery to periods when an 
officer was not serving in an executive capacity.\150\ Some commenters 
further expressed concern that this aspect of the proposal would 
discourage employees from serving as executive officers, with a 
detrimental impact on corporate governance and the issuer's ability to 
provide for smooth transitions.\151\ In contrast, one commenter 
expressly supported the proposal.\152\
---------------------------------------------------------------------------

    \148\ See, e.g., comment letters from ABA 1; CCMC 1; CEC 1; 
Chevron; Compensia; Davis Polk 1; Duane; Ensco, PLC (``Ensco''); 
Exxon; FSR; FedEx 1; IBC; Mercer; NACD; and S&C 1. See also comment 
letters in response to the Reopening Release from Davis Polk 3; and 
McGuireWoods. One commenter additionally suggested granting the 
board discretion to recover only for the portion of the look-back 
period when the person was an executive officer. See comment letter 
from Ensco.
    \149\ See comment letters from Exxon; and FSR.
    \150\ See comment letters from FSR; and SH&P.
    \151\ See comment letters from Davis Polk 1; IBC; and S&C 1.
    \152\ See comment letter from CalPERS 1.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the comments, we are adopting the rules defining 
executive officers subject to recovery substantially as proposed, with 
modifications in response to commenters.\153\ Section 10D uses the term 
``executive officer'' to identify the persons who are to be subject to 
the rules without reference to a specific scope or defined term. As 
described above, while Congress did not intend to cover rank-and-file 
employees, it also did not limit the scope of recovery to those 
officers who may be ``at fault'' for accounting errors that led to a 
restatement, nor to those who are directly responsible for the 
preparation of the financial statements.
---------------------------------------------------------------------------

    \153\ See 17 CFR 240.10D-1(b)(1)(i) (``Rule 10D-1(b)(1)(i)'') 
and the definition of ``executive officer'' in 17 CFR 240.10D-1(d) 
(``Rule 10D-1(d)'').
---------------------------------------------------------------------------

    In developing the definition of ``executive officer'' for purposes 
of Rule 10D-1, we considered the statutory purpose of the rule. First, 
Section 10D seeks to recover erroneously awarded incentive-based 
compensation, reducing a potential form of unjust enrichment, in which 
executive officers would gain from accounting errors at the expense of 
shareholders. The statute thus protects shareholders from bearing the 
economic burden of erroneously awarded compensation derived from 
material noncompliance with financial reporting requirements. The 
statute also helps to maintain investor confidence in markets and 
improve liquidity by incentivizing executive officers to provide more 
accurate financial reporting. While some commenters recommended that we 
use our discretion to apply Section 10D to a limited set of executive 
officers, such as named executive officers, executive officers who had 
a role in preparing the financial statements, or executive officers who 
had a role in the accounting error leading to the restatement, we are 
not persuaded that such limitations would be consistent with Congress' 
goals. Further, Congress' use of the unqualified term ``executive 
officer'' in Section 10D, compared to its application of qualifiers to 
that term elsewhere in the Dodd-Frank Act, suggests that it did not 
intend to limit the group of executive officers subject to recovery.'' 
\154\
---------------------------------------------------------------------------

    \154\ We note, for example, that Section 952 of the Dodd-Frank 
Act uses the term ``named executive officer'' and Section 953 
directly refers to 17 CFR 229.402, which makes extensive use of the 
term ``named executive officer''.
---------------------------------------------------------------------------

    We also acknowledge commenters who recommended that we base the 
definition on Rule 3b-7.\155\ The term ``executive officer'' as defined 
in 17 CFR 240.3b-7 and the term we are adopting are similar. However, 
we determined to establish a definition of ``executive officer'' in 
Rule 10D-1 in order to expressly include officers with an important 
role in financial reporting. This includes an issuer's president, 
principal financial officer, and principal accounting officer (or if 
there is no such accounting officer, the controller), which we note is 
consistent with the term ``officer'' as defined in Rule 16a-1(f). 
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 essential that 
officers with an important role in financial reporting be subject to 
the recovery policy, which is expected to further incentivize high-
quality financial reporting.
---------------------------------------------------------------------------

    \155\ See supra note 146.
---------------------------------------------------------------------------

    At the same time, because Congress broadly intended Section 10D to 
ensure that erroneously awarded compensation be returned to the issuer, 
we do not agree with commenters who suggested that the scope of the 
rule should be limited to only officers with a direct role in financial 
reporting. Further, including officers with policy-making functions or 
important roles in the preparation of financial statements in the 
definition of ``executive officer'' for purposes of Rule 10D-1 will 
ensure that the recovery policy requirements have the additional 
benefits of providing executive officers with an increased incentive to 
reduce the likelihood of inadvertent misreporting and of reducing the 
financial benefits to executive officers from failures to accurately 
account for the issuer's results. Because officers with policy making 
functions or important roles in the preparation of financial statements 
play an important managerial role and help set the tone at the top, 
ensuring that the required recovery policy will apply to any such 
officers may enhance these benefits. Further, requiring the issuer to 
establish a direct connection between an executive officer and a 
material error would add significant time, uncertainty, and litigation 
risk to recovery determinations, which in turn would increase costs to 
the issuer and its shareholders.
    Further, the definition of ``executive officer'' we are adopting, 
like the Rule 16a-1(f) definition of ``officer,'' 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. Identification of an executive officer for 
purposes of this section would include, at a minimum, executive 
officers identified pursuant to 17 CFR 229.401(b).\156\ With respect to 
commenters who indicated that issuers may have an incentive to 
mischaracterize an officer determination, we remind issuers that such a 
determination must be an objective determination without regard to 
whether that officer is subject to a recovery policy.
---------------------------------------------------------------------------

    \156\ See Rule 10D-1(d), modeled on the Note to Rule 16a-1(f).
---------------------------------------------------------------------------

    We also concluded that applying additional scienter or 
responsibility requirements as suggested by some commenters would run 
counter to the intent of the statute. Section 10D does not require the 
issuer to establish scienter before it may recover erroneously awarded 
incentive-based compensation, nor does the statute limit recovery to 
executive officers who were directly involved with the accounting 
error. This suggests that Congress intended that the recovery policy be

[[Page 73091]]

implemented without regard to the fault of the executive officers for 
the accounting errors. In this regard, we believe Section 10D was 
established not to punish wrongdoing, but to require executive officers 
to return monies that rightfully belong to the issuer and its 
shareholders.
    The statute specifically requires recovery from any current or 
former executive officers of the issuer who received incentive-based 
compensation in excess of what would have been paid to the executive 
officer under the accounting restatement. Section 10D(b)(2) expressly 
states that the recovery policy must apply to ``any current or former 
executive officer of the issuer.'' We believe recovery from former 
executive officers is appropriate because otherwise, such individuals 
would be in a position to improperly benefit from material errors that 
occurred during their tenure as executive officers at the issuer.\157\
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    \157\ The final amendments do not distinguish between former 
executive officers that leave a company, retire, or transition to an 
employee role (including after serving as an executive officer in an 
interim capacity) during the recovery period. We disagree with 
commenters who suggest that an individual who serves as an executive 
officer and then transitions to an employee role should not be 
subject to recovery of incentive based compensation received while 
serving as an employee. Section 10D-1 specifically applies to 
``former executive officers'' and does not distinguish among types 
of former executive officers. Moreover, any former executive officer 
who is now an employee who receives incentive-based compensation 
that would be affected by the recovery policy is receiving 
compensation that, had the issuer's financial statements not been in 
error, the individual would not have received. Similarly, while we 
acknowledge commenters' concerns regarding the application of the 
statute and the rules to interim executive officers, the recovery 
policy would only apply if such interim (and former interim) 
executive officers received erroneously awarded compensation as a 
result of errors in the financial statements. Like retired 
executives, such individuals would be in a position to benefit from 
erroneously awarded compensation as a result of such errors. The 
potential for such benefit would weaken the individual's incentives 
to ensure accurate financial statements while they were serving as 
an executive.
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    We agree, however, with commenters who suggested that requiring 
recovery from individuals for incentive-based compensation received 
prior to the period when they became an executive officer may not serve 
the goals of the statute.\158\ Therefore, in a change from the 
proposal, the final rule will only require recovery of incentive-based 
compensation received by a person (i) after beginning service as an 
executive officer and (ii) if that person served as an executive 
officer at any time during the recovery period.\159\ Recovery of 
compensation received while an individual was serving in a non-
executive capacity prior to becoming an executive officer will not be 
required.\160\
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    \158\ See supra note 150.
    \159\ See 17 CFR 240.10D-1(b)(1)(i)(A) and (B). The rule further 
provides that the recovery policy applies to incentive-based 
compensation received while the issuer has a class of securities 
listed on an exchange and during the three completed fiscal years 
immediately preceding the date that the issuer is required to 
prepare an accounting restatement. See 17 CFR 240.10D-1(b)(1)(i)(C) 
and (D).
    \160\ Id. Note that an award of incentive-based compensation 
granted to an individual before the individual becomes an executive 
officer will be subject to the recovery policy, so long as the 
incentive-based compensation was received by the individual at any 
time during the performance period after beginning service as an 
executive officer.
---------------------------------------------------------------------------

    We further note that the recovery requirement also does not apply 
to an individual who is an executive officer at the time recovery is 
required if that individual was not an executive officer at any time 
during the period for which the incentive-based compensation is subject 
to recovery. Nevertheless, nothing in the rule would limit an issuer's 
compensation recovery policy from requiring recovery more broadly.
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.
i. Proposed Amendments
    The Commission proposed to define ``incentive-based compensation'' 
in a principles-based manner as ``any compensation that is granted, 
earned or vested based wholly or in part upon the attainment of any 
financial reporting measure.'' The proposed definition further provided 
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, any measures derived 
wholly or in part from such financial information, and stock price and 
total shareholder return (``TSR''). 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.
ii. Comments
    We received a range of comments relating to the proposed definition 
of ``incentive-based compensation.'' Some commenters endorsed the 
proposed principles-based approach to defining ``incentive-based 
compensation.\161\ Other commenters recommended that the definition 
leverage existing executive compensation disclosure requirements and 
look to the existing definition of ``incentive plan.'' \162\ We also 
received a range of comments relating to the types of awards that 
should be covered. Some commenters recommended that the Commission 
expand the definition to include subjective awards as covered 
incentive-based compensation,\163\ while others objected to recovering 
compensation based on qualitative or discretionary standards.\164\ 
Similarly, a number of commenters expressed concern about excluding, or 
recommended including, time- or service-based awards.\165\ Other

[[Page 73092]]

commenters supported excluding time- or service-based awards \166\ and 
awards based on attaining nonfinancial measures.\167\ Some of these 
commenters requested specific confirmation that time-based equity 
awards are not considered incentive-based compensation for purposes of 
the rule.\168\ Some commenters supported having the rule also apply to 
deferred compensation as proposed; \169\ however, several other 
commenters expressed concern that application to deferred compensation 
plans and pension plans could violate the Internal Revenue Code or 
Employee Retirement Income Security Act (``ERISA'').\170\
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    \161\ See, e.g., comment letters from Better Markets 1; CalPERS 
1; CFA Institute 1; and OPERS 1. Commenters generally did not see 
the need for anti-evasion provisions. See, e.g., comment letters 
from Better Markets 1; CalPERS 1; and NACD. But see comment letter 
from OPERS 1.
    \162\ See, e.g., comment letters from ABA 1 (recommending 
including only awards already reported in an issuer's executive 
compensation disclosure and reported in the equity incentive plan 
and non-equity incentive plan awards columns of the Grants of Plan-
Based Awards Table pursuant to 17 CFR 229.402(d) that are granted, 
earned or vested based wholly or in part upon attainment of a 
financial reporting measure); and Kovachev (recommending reference 
to the 17 CFR 229.402(a)(6)(ii) definition of ``incentive plan,'' 
excluding compensation determined by metrics such as market share or 
customer satisfaction).
    \163\ See, e.g., comment letters from Better Markets 1 
(recommending a presumption that all incentive-based compensation is 
based in whole or in part on financial reporting measures); and 
Public Citizen 1 (recommending similar levels of recovery of all 
incentive-based compensation). See also comment letter from CFA 
Institute 1 (recommending board discretion to recover compensation 
based on satisfying subjective standards to the extent the 
subjective standards are satisfied in whole or in part by meeting a 
financial reporting measure performance goal) and comment letter in 
response to the Reopening Release form ICGN (recommending including 
ESG-related metrics).
    \164\ See, e.g., comment letters from FSR; Kovachev (contending 
that including discretionary bonuses would be beyond the scope of 
the statute); and NACD. See also comment letter from ABA 1 (noting 
that subjective awards do not lend themselves to formulaic re-
creation).
    \165\ See, e.g., comment letters from AFL-CIO (recommending that 
for stock options awarded as compensation the board make reasonable 
estimates of the effect on stock price); and Pay Governance 
(suggesting that excluding service-based equity awards could create 
an incentive to grant more such awards, thus shifting away from pay-
for-performance).
    \166\ See, e.g., comment letters from ABA 1; CEC 1; Chevron; 
Compensia; Davis Polk 1; FedEx 1; Japanese Bankers; Kovachev; and 
SCG 1.
    \167\ See comment letter from FedEx 1. See also Kovachev 
(recommending defining covered equity awards by referencing 
compensation reported in the Estimated Future Payouts Under Equity 
Incentive Plan Awards column of the Grants of Plan-Based Awards 
table provided pursuant to 17 CFR 229.402(c)).
    \168\ See, e.g., comment letters from Chevron; Compensia; and 
SCG 1. These commenters were concerned that the stock price metric 
included in the proposed definition could be read to include an 
equity award for which value is determined based on stock price but 
vests solely upon completion of a specified employment period or 
passage of time.
    \169\ See comment letters from AFR 1; and Rutkowski 1.
    \170\ See, e.g., comment letters from ABA 1; Exxon; FSR; IBC; 
Mercer; SCG 1; Sutherland Asbill & Brennan LLP (``Sutherland''); and 
WAW. But see comment letter from ABA 1 (noting that the forfeiture 
of excess incentive-based compensation deferred into a holdback plan 
as a recovery mechanism would be permissible and would not result in 
an accelerated payment under Section 409A of the Internal Revenue 
Code). See discussion relating to the exemption for tax-qualified 
retirement plans in Section II.B.3.b.iii.
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    We received a number of comments on the proposed inclusion of TSR/
stock price metrics. Some commenters expressly supported inclusion of 
these metrics,\171\ some commenters expressed qualifications or 
reservations but did not object to their inclusion,\172\ and other 
commenters expressly opposed inclusion of stock price/TSR metrics.\173\ 
Commenters opposed to inclusion of these metrics noted the costs, 
uncertainty, and subjectivity of calculating recoverable amounts,\174\ 
questioned the proposed definition of ``incentive-based compensation,'' 
\175\ expressed concern over the potential for litigation from 
shareholders or executive officers challenging the amount 
determined,\176\ questioned the statutory authority to cover the 
metrics,\177\ and suggested that the metrics' inclusion could 
discourage the use of TSR as a performance measure.\178\ Another 
commenter recommended providing a safe harbor for determining the 
amount subject to recovery if stock price and TSR metrics are 
included.\179\
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    \171\ See, e.g., comment letters from AFR 1; Better Markets 1 
(suggesting that these metrics fall within the ambit of the 
statutory formulation, which broadly encompasses all compensation 
``based on financial information required to be reported under the 
securities laws'' and provides for recovery of excessive 
compensation ``based on'' erroneous data and that because stock 
price and TSR are widely used in calculating executive compensation 
their exclusion would substantially undermine the attainment of the 
objectives underlying Section 10D); CalPERS 1; and Rutkowski 1 
(suggesting that inclusion is appropriate because stock price is 
based on investor expectation of cash flows, which are in turn 
deeply informed by accounting metrics).
    \172\ See, e.g., comment letters from CFA Institute 1 (noting 
that establishing a link between financial errors and a change in 
stock price would be easier in cases of fraud that are meant to 
directly affect stock price); Compensia (expressing concern 
regarding how to calculate the amounts subject to recovery); and 
OPERS 1.
    \173\ See, e.g., comment letters from ABA 1; BRT 1; Davis Polk 
1; FSR; FedEx 1; Fried; IBC; Japanese Bankers; Mercer; Meridian 
Compensation Partners LLC (``Meridian''); NACD; Pearl Meyer; and 
SH&P. See also comment letters in response to the Reopening Release 
from Cravath, McGuireWoods; and Hunton.
    \174\ See, e.g., comment letters from Davis Polk 1; FedEx 1; 
Fried; FSR; IBC (suggesting that analyses by third-party advisors 
are expensive, highly speculative, and imprecise); Mercer (citing 
the study of restatements by the Center for Audit Quality considered 
in the Proposing Release to show that restatements at over 4,000 
companies caused only an average 1.5% decline in stock price and a 
median decline of 0.01%. The average impact of restatements as a 
result of a material error was slightly higher (-2.3%), but the 
median was also near zero%); and SH&P. Some of these commenters 
suggested that the subjectivity of calculating the amounts for stock 
price/TSR metrics would be incompatible with the no-fault standard 
of the proposed rule. See, e.g., comment letters from Davis Polk 1; 
FedEx 1; and SH&P (further recommending that due to the 
subjectivity, recovery should be at the discretion of the board). 
See also comment letters in response to the Reopening Release from 
Cravath; Hunton; and McGuireWoods (suggesting that calculating the 
amounts would be difficult and would require additional economic 
analysis by issuers).
    \175\ See, e.g., comment letter from ABA 1 (recommending that 
the present disclosure requirements under Item 402 of Regulation S-K 
adequately define the types of compensation that should be 
considered ``incentive-based compensation'' for purposes of Section 
10D: that is non-equity incentive plan awards as reported in columns 
(c) through (e) of the Grants of Plan-Based Awards table pursuant to 
17 CFR 229.402(d)(2)(iii) and equity incentive plan awards as 
reported in columns (f) through (h) of that table pursuant to 17 CFR 
229.402(d)(2)(iv)).
    \176\ See comment letters from Davis Polk 1; and FSR.
    \177\ See comment letters from ABA 1; Meridian (suggesting that 
implicit in the determination of excess incentive-based compensation 
is that the reach of Section 10D is limited to incentive-based 
compensation that is linked to the achievement of specific financial 
metrics); and NACD. See also comment letters in response to the 
Reopening Release from ABA 1 (suggesting it is inconsistent with the 
statutory mandate to include either an issuer's stock price or its 
TSR in such definition as each measure reflects many factors beyond 
the issuer's reported financial information, the sole criterion set 
forth in Section 10D); and McGuireWoods (suggesting the term is 
limited to financial reporting measures used in preparing the 
issuer's financial statements that are accounting-based metrics).
    \178\ See, e.g., comment letter from FSR (suggesting that 
avoiding the use of TSR could be problematic in light of proposed 
``pay-versus-performance'' rules requiring issuers to disclose the 
relationship between company performance as reflected by TSR and the 
compensation paid).
    \179\ See comment letter in response to the Reopening Release 
from McGuireWoods.
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iii. Final Amendments
    After considering the statutory language of Section 10D, the views 
of commenters, and the administrability of any mandatory recovery 
policy that encompasses incentive-based compensation, we are adopting 
substantially as proposed the defined term ``incentive-based 
compensation.'' \180\ Specifically, for purposes of Rule 10D-1, we are 
defining ``incentive-based compensation'' to be ``any compensation that 
is granted, earned, or vested based wholly or in part upon the 
attainment of any financial reporting measure.'' \181\ We determined to 
define the term in a principles-based manner so that the rule will 
capture new forms of compensation that are developed and new measures 
of performance upon which compensation may be based. As noted above, 
any incentive-based compensation recovered under the final rules is 
compensation that an executive officer would not have been entitled to 
receive had the financial statements been accurately presented. A 
number of the alternatives recommended by commenters would omit 
incentive-based compensation received outside of an incentive plan. 
Allowing executive officers to retain such incentive-based pay when it 
was erroneously awarded based on material accounting errors would 
undermine the statutory purpose of Section 10D to recover these amounts 
for the benefit of issuers and their shareholders. Absent recovery of 
such compensation, executive officers would still be in a position to 
benefit from

[[Page 73093]]

accounting errors, undermining their incentives to ensure reliable 
financial reporting. Further, gaps in the forms of incentive-based pay 
that would be subject to recovery might encourage issuers to shift 
compensation towards omitted categories, further undermining the 
purpose of the rule.
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    \180\ See Rule 10D-1(d). The definition applies only to recovery 
of incentive-based compensation under proposed Rule 10D-1, and does 
not apply to the recovery of incentive-based compensation pursuant 
to 15 U.S.C. 7243 (``Sarbanes-Oxley Act Section 304'').
    \181\ ``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% of 
the target amount is earned if a certain revenue level is achieved, 
and 40% 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.
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    Consistent with the proposal, we are defining ``financial reporting 
measures'' to be measures that are determined and presented in 
accordance with the accounting principles used in preparing the 
issuer's financial statements, and any measures derived wholly or in 
part from such measures.\182\ This includes ``non-GAAP financial 
measures'' for purposes of Exchange Act Regulation G and 17 CFR 229.10 
as well other measures, metrics and ratios that are not non-GAAP 
measures, like same store sales.\183\ Financial reporting measures may 
or may not be included in a filing with the Commission, and may be 
presented outside the financial statements, such as in Management's 
Discussion and Analysis of Financial Conditions and Results of 
Operations \184\ or the performance graph.\185\
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    \182\ See Rule 10D-1(d).
    \183\ See Conditions for Use of Non-GAAP Measures, Release No. 
33-8176 (Jan. 22, 2003) [68 FR 4820 (Jan. 20, 2003)] and Commission 
Guidance on Management's Discussion and Analysis of Financial 
Condition and Results of Operations, Release No. 33-10751 (Jan. 30, 
2020) [85 FR 10571 (Feb. 25, 2020)].
    \184\ 17 CFR 229.303. See also Item 5, Form 20-F. Examples of 
such measures could be accounts receivable turnover, Earnings before 
interest, taxes, depreciation and amortization, or sales per square 
foot.
    \185\ 17 CFR 229.201(e).
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    In order to provide guidance to issuers, we reiterate the examples 
of financial reporting measures provided in the Proposing Release, 
including, but not limited to, the following accounting-based measures 
and measures derived from:
     Revenues;
     Net income;
     Operating income;
     Profitability of one or more reportable segments; \186\
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    \186\ As disclosed in a financial statement footnote. See ASC 
Topic 280.
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     Financial ratios (e.g., accounts receivable turnover and 
inventory turnover rates);
     Net assets or net asset value per share (e.g., for 
registered investment companies and business development companies that 
are subject to the rule);
     Earnings before interest, taxes, depreciation and 
amortization;
     Funds from operations and adjusted funds from operations;
     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, the definition of ``financial reporting measures'' 
also includes stock price and TSR, as proposed.\187\ As the Commission 
noted in the Proposing Release, 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.'' We note that Congress' direction to include 
compensation that is ``based on'' financial information and to recover 
compensation ``based on'' the erroneous accounting data suggests 
Congress' intent to provide an expansive reading of those terms. The 
final rule therefore encompasses incentive-based compensation tied to 
measures such as stock price and TSR because improper accounting 
affects such measures and in turn results in excess compensation.\188\
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    \187\ In a nonsubstantive modification from the proposal, we 
have broken out the inclusion of stock price and TSR in a separate 
clause of the definition. By including a separate clause in the 
definition, instead of using the conjunctive ``and,'' the 
modification makes clear that stock price and TSR are financial 
reporting measures.
    \188\ One commenter recommended using the definition of 
``incentive plan award'' in 17 CFR 229.402(a)(6)(iii) of Regulation 
S-K, which includes ``any other performance measure.'' See comment 
letter from ABA 1. Using the existing definition of ``incentive plan 
award'' to define ``incentive-based compensation'' would apply the 
recovery to a different scope of incentive compensation. The Rule 
10D-1 definition does 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.
---------------------------------------------------------------------------

    Although the phrase ``financial information required to be reported 
under the securities laws'' might be interpreted as applying only to 
accounting-based metrics, in consideration of the statutory purpose 
described above, we have determined that it is appropriate to interpret 
the term to include performance measures including stock price and TSR 
that are affected by accounting-related information and that are 
subject to our disclosure requirements. Stock price and TSR are 
frequently used incentive-based performance metrics for executive 
compensation, such that excluding them could lead issuers to alter 
their executive compensation arrangements in ways that would avoid 
application of the mandatory recovery policy, undermining the 
objectives of the rule, as well as impacting efficient incentive 
alignment. While some commenters recommended that we narrow the scope 
of the definition, we agree with other commenters that supported a 
broader reading of the definition.\189\
---------------------------------------------------------------------------

    \189\ As one commenter noted, stock price is at least in part 
based on investor expectation of cash flows, which is intrinsically 
tied to a company's financial statement disclosures. See supra note 
171.
---------------------------------------------------------------------------

    We disagree with the contention put forth by some commenters that 
Section 10D is limited to incentive-based compensation that is linked 
to the achievement of specific financial metrics. Section 10D requires 
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.'' The use of the term ``based on'' 
is expansive and the statute does not explicitly delineate the types of 
financial information that should be considered. Section 10D(b) 
separately requires the issuer to recover from any current or former 
executive officer of the issuer who received ``incentive-based 
compensation . . . based on the erroneous data.'' As we have previously 
noted, if an executive officer erroneously receives incentive-based 
compensation based on stock price or TSR that was inaccurate as a 
result of an accounting misstatement, that compensation is based on 
such erroneous data.\190\ Being mindful of the statutory language and 
purpose of Section 10D, we do not see a basis for allowing that 
executive officer to retain such compensation, given that it was 
erroneously awarded. Absent recovery of such compensation, certain 
executive officers would be in a position to benefit from accounting 
errors, undermining their incentives to ensure reliable financial 
reporting. We therefore believe that inclusion of incentive-based

[[Page 73094]]

compensation based on stock price and TSR is necessary and appropriate 
for the implementation of Section 10D. Adopting a narrower definition 
of ``incentive-based compensation'' or ``financial reporting measures'' 
would result in the failure to recover from executive officers 
incentive-based compensation that was erroneously awarded to them, and 
therefore would be less effective in achieving the goals of the 
statute.
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    \190\ We note that Rule 10D-1 applies only to erroneously 
awarded incentive-based compensation based on stock price or TSR 
that was inaccurate as a result of the issuer's accounting 
restatement. For example, if the issuer is using TSR where the 
performance measure is linked to a peer group (such as relative 
TSR), only an accounting restatement by the issuer, not accounting 
restatements by other issuers in the peer group, would result in 
application of the rule and potential recovery.
---------------------------------------------------------------------------

    We recognize, as some commenters noted, concerns relating to costs, 
uncertainty, and subjectivity of calculating amounts of recoverable 
erroneously awarded compensation with respect to the calculation of 
stock price and TSR. These commenters highlighted that, once an issuer 
concludes that its compensation is incentive-based compensation for the 
purposes of this rule, issuers may need to engage in complex analyses 
that require technical expertise and specialized knowledge and may 
involve substantial exercise of judgment in order to determine the 
stock price impact of the error that led to a restatement. Due to the 
presence of confounding factors, it may be difficult to establish the 
relationship between an accounting restatement and the stock price.
    While we recognize these challenges, we believe the additional 
costs associated with these factors are justified in order to better 
achieve the objectives of the statute, as outlined above. 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 erroneously awarded compensation to be recovered 
following an accounting error. In an accommodation to address concerns 
relating to costs, uncertainty, and subjectivity of calculating these 
amounts, Rule 10D-1 permits issuers to use reasonable estimates when 
determining the impact of a restatement on stock price and TSR.\191\ 
Allowing the use of 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.\192\ Further, since ``little r'' 
restatements are less likely to be associated with significant stock 
price reactions, we expect that recovery of incentive-based 
compensation as a result of ``little r'' restatements that is tied to 
TSR would be relatively small and infrequent, which should further 
mitigate these costs.\193\
---------------------------------------------------------------------------

    \191\ See 17 CFR 240.10D-1(b)(1)(iii)(A) (``Rule 10D-
1(b)(1)(iii)(A)''). In addition, 17 CFR 240.10D-1(b)(1)(iii)(B) 
(``Rule 10D-1(b)(1)(iii)(B)'') requires the issuer to maintain 
documentation of the determination of that reasonable estimate and 
provide such documentation to the exchange or association as 
proposed. In a modification from the proposal, 17 CFR 
229.402(w)(1)(i)(C) additionally requires disclosure of the 
estimates that were used in determining the erroneously awarded 
compensation attributable to an accounting restatement and an 
explanation of the methodology used to estimate the effect on stock 
price or TSR, if the financial reporting measure related to a stock 
price or TSR metric, to better explain how the issuer established 
its estimates. See Section II.D.3.
    \192\ We acknowledge that implementation of a safe harbor could 
further mitigate potential concerns about the difficulties and costs 
of calculating recovery amounts. As discussed in more detail in 
Section II.B.3.a.iii, we believe that permitting reasonable 
estimates will sufficiently mitigate these potential difficulties.
    \193\ See discussion infra at note 400.
---------------------------------------------------------------------------

    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 and as proposed, the definition of ``incentive-based 
compensation'' in the final rule includes options and other similar 
equity awards whose grant or vesting is based wholly or in part upon 
the attainment of financial reporting measures.
    Specific examples of ``incentive-based compensation'' include, but 
are not limited to:
     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;
     Other cash awards based on satisfaction of a financial 
reporting measure performance goal;
     Restricted stock, restricted stock units, performance 
share units, 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 is not ``incentive-based 
compensation'' for this purpose include, but are not limited to:
     Salaries; \194\
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    \194\ 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 performance goal, such a salary increase 
is subject to recovery as a non-equity incentive plan award for 
purposes of Rule 10D-1.
---------------------------------------------------------------------------

     Bonuses paid solely at the discretion of the compensation 
committee or board that are not paid from a ``bonus pool'' that is 
determined by 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 nonfinancial reporting measures.\195\
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    \195\ This statement responds to commenters' questions and 
concerns regarding the treatment of time-based and service-based 
equity awards.
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b. When Compensation is ``Received'' and Time Period Covered
    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 erroneously awarded 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 or specify when an executive officer should be deemed to have 
received incentive-based compensation for the recovery policy required 
under the applicable listing standards.
i. Proposed Amendments
    The Commission proposed that incentive-based compensation would be 
deemed ``received'' for purposes of triggering a recovery policy in the 
fiscal period 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. As proposed, 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.

[[Page 73095]]

    The Commission further proposed that 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. Where an 
issuer has changed its fiscal year end during the three-year look-back 
period, the Commission proposed 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).
ii. Comments
    We received limited comment regarding clarification of when 
compensation is received and establishing the time period to be covered 
by the listing standard. Some commenters supported the proposed 
definition of when compensation is deemed ``received.'' \196\ In 
contrast, one commenter suggested that the proposed definition was 
overly broad.\197\
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    \196\ See comment letters from ABA 1 (noting the proposal is 
consistent with Item 402 reporting requirements and how most issuers 
view the receipt of incentive-based compensation); Better Markets 1; 
CFA Institute 1; and CEC 1 (suggesting the time gap between when the 
award's financial metric is achieved and the date the executive 
obtains control over the award may allow an issuer to seek recovery 
by cancelling the affected portion of the award). However, two of 
these commenters were split on the proposal to limit recovery only 
to the extent that compensation was received while the issuer has a 
class of securities listed on an exchange, with one in favor (ABA 1) 
and one opposed (Better Markets 1).
    \197\ See comment letter from NACD (noting that just because a 
reward is granted, earned, or vests does not mean that it is 
actually received).
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    One commenter expressly supported the three-year period as a 
reasonable period of time,\198\ another recommended issuer discretion 
to select the appropriate time period,\199\ and a third noted that 
accounting restatements may take place a considerable time after 
erroneous payments were made, and recommended that the look-back period 
should be extended to at least five years.\200\ In addition, while one 
commenter expressly supported the proposed use of fiscal years as 
consistent with the statutory language and minimizing the potential for 
confusion,\201\ another suggested that existing issuer recovery 
policies do not use the term ``fiscal year.'' \202\
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    \198\ See comment letter from CFA Institute 1.
    \199\ See comment letter from NACD.
    \200\ See comment letter from As You Sow 1.
    \201\ See comment letter from CEC 1.
    \202\ See comment letter from Bishop.
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iii. Final Amendments
    After considering the views of commenters, we are adopting the 
rules relating to when compensation is ``received'' and the time period 
covered substantially as proposed.\203\ Incentive-based compensation 
will be deemed received for purposes of the recovery policy under 
Section 10D in the fiscal period \204\ 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.\205\ Under the rules, incentive-based compensation is 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.\206\ Further, the time period covered for the recovery 
policy will be the three completed fiscal years immediately preceding 
the date the issuer is required to prepare an accounting 
restatement.\207\
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    \203\ See Rule 10D-1(b)(1)(i). In a nonsubstantive modification 
from the proposal, we are no longer including ``(f)or purposes of 
Section 10D'' in the definition of ``received'' in Rule 10D-1(d) as 
the introductory portion of Rule 10D-1(d) makes clear that the 
definitions are for purposes of the section. We additionally 
simplified the language in Rule 10D-1(b)(1)(i)(B) to clarify the 
meaning of transition period for purposes of the rule without 
defining the term.
    \204\ Including a transition period for a change in fiscal year, 
if applicable.
    \205\ See Rule 10D-1(d).
    \206\ See 17 CFR 240.10D-1(b)(1)(i)(A). After considering 
comments, we continue to believe that the statute calls for recovery 
limited to compensation that is received while the issuer has a 
class of securities listed on an exchange or an association. We note 
that an award of incentive-based compensation granted to an 
executive officer before the issuer lists a class of securities will 
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 is not required to be subject to the recovery policy.
    \207\ Including a transition period for a change in fiscal year, 
if applicable. See Rule 10D-1(b)(1)(i)(B).
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    The date of receipt of the compensation depends upon the terms of 
the award. For example,
     If the grant of an award is based, either wholly or in 
part, on satisfaction of a financial reporting measure performance 
goal, the award would be deemed received in the fiscal period when that 
measure was satisfied;
     If an equity award vests only upon satisfaction of a 
financial reporting measure performance condition, the award would be 
deemed received in the fiscal period when it vests; \208\
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    \208\ See infra notes 210 and 211.
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     A non-equity incentive plan award would be deemed received 
in the fiscal year that the executive officer earns the award based on 
satisfaction of the relevant financial reporting measure performance 
goal, rather than a subsequent date on which the award was paid; \209\ 
and
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    \209\ 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 17 CFR 
229.402(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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     A cash award earned upon satisfaction of a financial 
reporting measure performance goal would be deemed received in the 
fiscal period when that measure is satisfied.
    We further note that a particular award may be subject to multiple 
conditions and that an executive officer need not satisfy all 
conditions to an award for the incentive-based compensation to be 
deemed received for purposes of triggering the recovery policy. 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,'' we believe that the executive officer 
``receives'' the compensation for purposes of a 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.\210\ Ministerial acts or other conditions 
necessary to effect issuance or payment, such as calculating the amount 
earned or

[[Page 73096]]

obtaining the board of directors' approval of payment, do not affect 
the determination of the date received.\211\
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    \210\ We disagree with the commenter that suggested the proposed 
definition was overly broad. We believe this definition is 
appropriate for the recovery policy to capture the appropriate 
amounts of compensation subject to recovery. For example, an issuer 
could grant an executive officer restricted stock units in which the 
number of units earned is determined at the end of the three-year 
incentive-based performance period (2020-2022), but the award is 
subject to service-based vesting for two more years (2023-2024). 
Although the executive officer does not have a non-forfeitable 
interest in the units before expiration of the subsequent two-year 
service-based vesting period, the number of shares in which the 
units ultimately will be paid will be established at the end of the 
three-year performance period which is when the relevant financial 
reporting measure performance goal is attained. If the issuer's 
board of directors concludes in 2023 that the issuer will restate 
previously issued financial statements for 2020 through 2022 (the 
three-year performance period), the recovery policy should apply to 
reduce the number of units ultimately payable in stock, even though 
the executive officer has not yet satisfied the two-year service-
based vesting condition to payment. To the extent that an executive 
officer fails to then meet the service vesting period and never 
actually receives the compensation, the compensation forgone as a 
result of the failure to meet the vesting period would be the 
reduced compensation as a result of the recovery policy.
    \211\ For example, as stated above, an equity award granted upon 
attainment of a financial reporting measure would be deemed received 
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. The fiscal year in which an incentive-
based equity award is deemed received 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].
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    The three-year look-back period for the recovery policy will 
comprise the three completed fiscal years immediately preceding the 
date the issuer is required to prepare an accounting restatement for a 
given reporting period.\212\ We recognize that some commenters 
recommended different lengths of time for the look-back period; 
however, the final rules are consistent with the statute, which 
explicitly contemplates a three-year look-back.\213\ Basing the look-
back period on fiscal years, rather than a preceding 36-month period, 
is consistent with the statutory language and issuers' general practice 
of making compensation decisions and awards on a fiscal year 
basis.\214\ As an example, if a calendar year issuer concludes in 
November 2024 that a restatement of previously issued financial 
statements is required and files the restated financial statements in 
January 2025, the recovery policy would apply to compensation received 
in 2021, 2022, and 2023. 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. Moreover, an issuer will 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.\215\ In situations where an issuer has changed 
its fiscal year end during the three-year look-back period, 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).\216\
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    \212\ See Rule 10D-1(b)(1)(i)(B).
    \213\ See discussion in Section II.B.2 regarding the date an 
issuer is required to prepare an accounting restatement for purposes 
of Rule 10D-1.
    \214\ While we recognize, as one commenter noted, that some 
recovery policies may not use fiscal years, we have determined to 
use that term because the term is well understood and consistent 
with the statutory language.
    \215\ See Rule 10D-1(b)(1)(i)(B).
    \216\ Id. 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. 17 CFR 240.13a-10 and 17 CFR 
240.15d-10. For example, if in late 2021, an issuer changes its 
fiscal closing date from June 30 to Dec. 31, it would subsequently 
report on the transition period from July 1, 2021 to Dec. 31, 2021. 
If the issuer's board of directors concludes in May 2023 that it is 
required to restate previously issued financial statements, the 
look-back period would consist of the year ended June 30, 2020, the 
year ended June 30, 2021, the period from July 1, 2021 to Dec. 31, 
2021, and the year ended Dec. 31, 2022. However, consistent with 17 
CFR 210.3-06(a), 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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3. Recovery Process
a. Calculation of Erroneously Awarded 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.''
i. Proposed Amendments
    The Commission proposed to define the amount of incentive-based 
compensation that must be subject to the issuer's recovery policy 
(``erroneously awarded compensation'') 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.'' \217\ For incentive-
based compensation that is based on stock price or TSR, where the 
amount of erroneously awarded compensation is not subject to 
mathematical recalculation directly from the information in an 
accounting restatement, the Commission proposed that the erroneously 
awarded compensation amount may be determined based on a reasonable 
estimate of the effect of the accounting restatement on the applicable 
measure and that the issuer shall maintain documentation of that 
reasonable estimate and provide it to the exchange. The Commission 
further proposed that the erroneously awarded compensation would be 
calculated on a pre-tax basis.\218\
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    \217\ See Proposed Rule 10D-1(b)(1)(iii).
    \218\ Id. (providing that the erroneously awarded compensation 
must be computed without regard to any taxes paid by the executive 
officer). Under the proposal, the erroneously awarded compensation 
would be determined based on the full amount of incentive-based 
compensation received by the executive officer, rather than the 
amount remaining after the officer satisfies the officer's personal 
income tax obligation on it.
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    Additionally, in the Proposing Release, the Commission provided 
guidance relating to the amount to be recovered when discretion was 
exercised in the original grant and stated that Rule 10D-1 would not 
permit issuers' boards of directors to pursue differential recovery 
among executive officers, including in ``pool plans,'' \219\ where the 
board may have exercised discretion as to individual grants in 
allocating the bonus pool.
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    \219\ ``Pool plans'' are 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 executive 
officers are based on discretion.
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ii. Comments
    We received varying comments on how excess compensation subject to 
recovery should be determined. Some commenters expressed concern 
regarding issuers' ability to determine the amount of erroneously 
awarded compensation.\220\ Other commenters recommended that the 
Commission provide additional guidance regarding calculating 
recoverable amounts for specific forms of compensation, such as stock 
options, profits from the sale of securities, and awards where 
discretion to reduce the award had been used in determining the size of 
the original award.\221\ A few commenters also expressed concern about 
duplicative recovery.\222\
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    \220\ See comment letters from Coalition; Osler, Hoskin & 
Harcourt (``Osler''); and TELUS. Two of these commenters asserted 
that calculation of the amount would require the exercise of 
judgement and estimation. See comment letters from Osler; and TELUS.
    \221\ See comment letters from ABA 1; Compensia; IBC; Japanese 
Bankers; Kovachev; and Mercer.
    \222\ See comment letters from CCMC 1; Coalition; and FSR 
(noting that the proposal would credit recovery under Sarbanes-Oxley 
Act Section 304 and recommending extending the relief to recovery of 
compensation under other compensation recovery policies).
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    We received limited comment regarding the amount to be recovered 
when discretion was exercised in the original grant. One commenter 
recommended that recovery should not apply to a pool plan that does not 
have a minimum financial performance requirement,\223\ and another 
commenter supported allowing discretion as to the

[[Page 73097]]

amount recoverable if discretion was used to determine the original 
award amount.\224\ A few commenters recommended board discretion on 
various other aspects of recovery.\225\
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    \223\ See comment letter from NACD.
    \224\ See comment letter from ABA 1. See also comment letter 
from SH&P (supporting revisiting the use of discretion applied in 
granting the original award based on the new information from the 
restatement).
    \225\ See comment letters from Compensia (recommending 
discretion over whether to settle a recovery obligation for less 
than the full amount); and Technical Compensation Advisors, Inc. 
(``TCA'') (recommending discretion over which executives to recover 
from, the amount to recover from each, and the timing of repayment).
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    One commenter expressly supported the proposal to require issuers 
to maintain documentation of their determination of the reasonable 
estimate, but said it should be provided to the exchange upon the 
exchange's request rather than in all circumstances.\226\ Another 
commenter similarly recommended that issuers be required to provide 
documentation of the estimate to the exchange only upon request, 
subject to confidentiality assurances.\227\ Some commenters, however, 
opposed the idea that issuers should be required to provide the 
information.\228\
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    \226\ See comment letter from Compensia.
    \227\ See comment letter from ABA 1.
    \228\ See comment letters from Osler; and TELUS.
---------------------------------------------------------------------------

    Some commenters expressed concern regarding the proposed 
requirement that an issuer establish a reasonable estimate of the 
effect of the accounting restatement on the applicable measure as it 
relates to stock price and TSR.\229\ Other commenters recommended that 
the Commission provide additional guidance, or a safe harbor, for 
calculating ``reasonable estimates.'' \230\ In contrast, one commenter 
expressed support for the proposed requirement and recommended 
disclosure of the results for each executive officer.\231\
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    \229\ See comment letters from NAM; and SH&P. These commenters 
noted the numerous factors beyond the financial statements that 
affect the movement of an issuer's stock price.
    \230\ See, e.g., comment letters from CEC 1 (recommending that 
any estimate made in good faith be deemed per se reasonable); 
Chevron; Compensia; Hay Group; Pay Governance; Pearl Meyer; TCA; and 
WAW. Two of these commenters suggested that issuers may need to 
engage a valuation expert in some circumstances in order to 
establish a reasonable estimate. See comment letters from Chevron; 
and Compensia. Others noted the litigation risk and recommended the 
Commission provide examples, potential methodologies, or a safe 
harbor. See comment letters from Chevron; Pearl Meyer; and TCA. See 
also comment letter from EY (suggesting that some restatements, such 
as those relating to measurement and recognition of financial assets 
and liabilities, may have limited impact on stock price or TSR, such 
that an issuer may reasonably conclude that share price would not 
have been affected).
    \231\ See comment letter from Public Citizen 1.
---------------------------------------------------------------------------

    Some commenters expressed concern regarding recovery on a pre-tax 
basis and recommended that amounts should be recovered after 
taxes.\232\ Other commenters expressed concern over the effect that tax 
law could have on the recovery.\233\
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    \232\ See, e.g., comment letters from ABA 1; CEC 1; Davis Polk 
1; Duane; FedEx 1; Japanese Bankers; and NACD. Two of these 
commenters expressed concern that pre-tax recovery could be 
considered punitive. See comment letters from ABA 1; and FedEx 1. 
See also comment letters from ABA 2; Davis Polk 3; and McGuireWoods 
on the Reopening Release suggesting that recovery of compensation be 
made on an after-tax basis in order to avoid undue hardship for and 
an inequitable over-collection from executive officers.
    \233\ See, e.g., comment letters from Bishop (suggesting that 
Federal tax law does not permit executives to amend their income tax 
returns for earlier years which could result in the recovery being 
considered a financial penalty); Canadian Bankers Association 
(suggesting that the Canadian Income Tax Act does not provide for 
executive officers to recover any taxes paid); and Freshfields 
(suggesting that different outcomes for different individuals in 
different foreign jurisdictions with divergent recovery rules and 
tax rates could result in unfair tax impacts).
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iii. Final Amendments
    After considering the views of commenters, we are adopting 
substantially as proposed that the erroneously awarded compensation 
under an issuer's recovery policy is ``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,'' computed without regard to taxes paid.\234\ 
The final rules also provide that, for incentive-based compensation 
based on TSR or stock price, where the amount of erroneously awarded 
compensation is not subject to mathematical recalculation directly from 
the information in an accounting restatement, the amount must be based 
on a reasonable estimate of the effect of the accounting restatement on 
the applicable measure and the issuer must maintain documentation of 
the determination of that reasonable estimate and provide it to the 
exchange. While we recognize some commenters' concerns and requests for 
additional, specific guidance, including with respect to the 
calculation of the recoverable amount for specific forms of incentive-
based compensation, we believe that the guidance we are providing in 
this release coupled with the requirement in the final rule to use 
reasonable estimates of the effect of the accounting restatement 
provides appropriate direction and flexibility for issuers and 
exchanges to implement the rule.
---------------------------------------------------------------------------

    \234\ See 17 CFR 240.10D-1(b)(1)(iii) (``Rule 10D-
1(b)(1)(iii)'').
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    Applying this definition, after an accounting restatement, the 
issuer must first recalculate the applicable financial reporting 
measure and the amount of incentive-based compensation based thereon. 
The issuer must then determine whether, based on that financial 
reporting measure as calculated by 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.\235\ Where incentive-based compensation is 
based only in part on the achievement of a financial reporting measure 
performance goal, the issuer would first need to determine the portion 
of the original incentive-based compensation based on or derived from 
the financial reporting measure that was restated.\236\ 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.\237\
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    \235\ 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 amount of recoverable erroneously awarded 
compensation would be $200 (i.e., $2,000-$1,800).
    \236\ We address bonus pool plans in Section II.B.3.c.
    \237\ 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 amount of 
erroneously awarded compensation that would be recoverable 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 (i.e., $4,000-($1,800 + 
$1,000)).
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    For incentive-based compensation that is based on stock price or 
TSR, where the amount of erroneously awarded compensation is not 
subject to mathematical recalculation directly from the information in 
an accounting restatement, the amount of erroneously awarded 
compensation may be

[[Page 73098]]

determined based on a reasonable estimate of the effect of the 
accounting restatement on the applicable measure.\238\ 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, and under the final rules, issuers will have flexibility 
to determine the method that is most appropriate based on their facts 
and circumstances. While we recognize some commenters' concerns and 
request for additional guidance or a safe harbor, we believe that the 
requirement to use reasonable estimates of the effect of the accounting 
restatement provides useful flexibility for issuers to implement the 
rule, and that additional guidance or a safe harbor may unnecessarily 
limit issuers' methods to determine a reasonable estimate, or 
inadvertently create a de facto standard. While providing this 
flexibility, we note that the issuer would be required to maintain 
documentation of the determination of that reasonable estimate and 
provide such documentation to the relevant exchange.\239\
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    \238\ See Rule 10D-1(b)(1)(iii)(A).
    \239\ See Rule 10D-1(b)(1)(iii)(B). We disagree with commenters 
that recommended that the documentation of the determination be 
provided to the exchanges only upon request. Requiring the 
documentation in all cases will provide exchanges ready access to 
the necessary documentation to evaluate when they seek to determine 
whether estimates were reasonable. Requiring such documentation only 
upon request would put the onus of seeking documentation on the 
exchanges, adding an additional burden to enforcing the requirements 
that could lead to some issuers conducting a less robust--or even 
no--analysis in the belief that their analysis is unlikely to be 
reviewed or questioned.
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    The final rules provide that erroneously awarded compensation must 
be calculated without respect to tax liabilities that may have been 
incurred or paid by the executive \240\ to ensure that the issuer 
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 permits the issuer to avoid the burden and 
administrative costs associated with calculating erroneously awarded 
compensation based on the particular tax circumstances of individual 
executive officers, which may vary significantly based on factors 
independent of the incentive-based compensation and outside of the 
issuer's control. While we acknowledge the views of the commenters who 
opposed a pre-tax basis for recovery, we are adopting such an approach 
because it better effectuates the statutory intent of Section 10D in 
that it seeks to ensure recovery for the benefit of shareholders of the 
full amount of erroneously awarded compensation paid to the 
executive.\241\
---------------------------------------------------------------------------

    \240\ Rule 10D-1(b)(1)(iii) provides that the erroneously 
awarded compensation must be computed without regard to any taxes 
paid by the executive officer.
    \241\ See Senate Report supra note 5.
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    The ability of executive officers to recoup, to the extent 
authorized by applicable tax laws and regulations, taxes previously 
paid on recovered compensation, would mitigate fairness concerns raised 
by commenters.\242\ We note, however, that the extent to which a tax 
system allows current adjustments for tax paid in prior periods under 
assumptions that later prove incorrect is a matter of tax policy 
outside the scope of this rulemaking. Limiting recovery to after-tax 
amounts would in effect require shareholders to provide the tax relief 
that the tax authorities in the executive officer's jurisdiction chose 
not to offer. In any event, we believe any resulting tax burden should 
be borne by executive officers, not the issuer and its shareholders. In 
light of these considerations, coupled with the administrative 
difficulty for issuers to implement recovery on an after-tax basis, we 
believe the approach reflected in the final rules better meets the goal 
of recovery of the full amount of erroneously awarded compensation paid 
to the executive.
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    \242\ We are aware that in some instances executive officers may 
be able to reduce their current-period taxes to reflect earlier tax 
payments made on compensation that is subsequently recovered.
---------------------------------------------------------------------------

    We intend for the definition of erroneously awarded compensation to 
apply in a principles-based manner and as a result issuers may adopt 
more extensive recovery policies, so long as those policies at a 
minimum satisfy the requirements of the rule. While the definition is 
principles-based, we believe some guidance will be helpful for issuers, 
consistent with the proposal and input from commenters.
     For cash awards, the erroneously awarded compensation is 
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.\243\
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    \243\ Similarly, for nonqualified deferred compensation, the 
executive officer's account balance or distributions would be 
reduced by the erroneously awarded compensation contributed to the 
nonqualified deferred compensation plan and the interest or other 
earnings accrued thereon under the nonqualified deferred 
compensation plan.
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     For cash awards paid from bonus pools, the erroneously 
awarded compensation is the pro rata portion of any deficiency that 
results from the aggregate bonus pool that is reduced based on applying 
the restated financial reporting measure.\244\
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    \244\ Boards also may not 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. For example, 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, each bonus would need to 
be ratably reduced to recover the excess amount for each 
individual's bonus.
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     For equity awards, if the shares, options, or SARs are 
still held at the time of recovery, the erroneously awarded 
compensation is the number of such securities received in excess of the 
number that should have been received applying the restated financial 
reporting measure (or the value of that excess number). If the options 
or SARs have been exercised, but the underlying shares have not been 
sold, the erroneously awarded compensation is the number of shares 
underlying the excess options or SARs (or the value thereof).
    While we acknowledge that many commenters sought additional 
guidance, we decline to offer more specific guidance regarding the 
determination of erroneously awarded compensation with respect to 
additional forms of incentive-based compensation, as the determination 
will depend on the particular facts and circumstances applicable to 
that issuer and the executive officer's particular compensation 
arrangement. Issuers and their boards will be in the best position to 
make these determinations. A principles-based application of the rules 
provides useful flexibility for issuers and boards, and avoids the risk 
that more detailed guidance may inadvertently establish de facto 
standards. In that regard, boards of directors should consider the 
statute's goal to return erroneously awarded compensation to the issuer 
and its shareholders, and their fiduciary duties to those shareholders, 
in making such determinations. We additionally note that, as described 
in Section II.D., the issuer is required to disclose the amount of 
erroneously awarded compensation attributable to an accounting 
restatement, including an analysis of how the erroneously awarded 
compensation was calculated.
    In response to commenters who raised concerns that the rule may 
result in duplicative recovery, we note that Rule 10D-1 is not intended 
to alter or otherwise affect the interpretation of

[[Page 73099]]

other recovery provisions, such as Sarbanes-Oxley Act Section 304, or 
the determination by the Commission or the courts of when reimbursement 
is required under Section 304. To the extent that the application of 
Rule 10D-1 would provide for recovery of incentive-based compensation 
that the issuer recovers pursuant to Section 304 or other recovery 
obligations, it would be appropriate for the amount the executive 
officer has already reimbursed the issuer to be credited to the 
required recovery under the issuer's Rule 10D-1 recovery policy.\245\ 
We note, however, that recovery under Rule 10D-1 would not preclude 
recovery under Sarbanes-Oxley Act Section 304, to the extent any 
applicable amounts have not been reimbursed to the issuer.
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    \245\ Similarly, to the extent that the erroneously awarded 
compensation is recovered under a foreign recovery regime, the 
recovery would meet the obligations of Rule 10D-1.
---------------------------------------------------------------------------

b. Board Discretion Regarding Whether To Seek Recovery
    Section 10D requires the Commission, by rule, to direct the 
exchanges and associations to adopt listing standards that require 
issuers to adopt and comply with recovery policies. Specifically, under 
the statute, the Commission's rules shall require each issuer to 
develop a policy providing 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.
i. Proposed Amendments
    The Commission proposed 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 where 
certain conditions are met, including that (i) the direct expense paid 
to a third party to assist in enforcing the policy would exceed the 
amount to be recovered, and (ii) in certain circumstances where the 
recovery would violate home country law that was in effect prior to the 
date of publication of the Proposing Release in the Federal Register. 
As proposed, before concluding that it would be impracticable to 
recover any amount of erroneously awarded compensation based on direct 
expenses paid to a third party, the issuer would first need to make a 
reasonable attempt to recover that incentive-based compensation, 
document its attempts to recover, and provide that documentation to the 
exchange. 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 exchange, that recovery would result in 
such a violation. In addition, to minimize any incentive countries may 
have to change their laws in response to this provision, as proposed, 
the relevant home country law must have been adopted prior to the date 
of publication in the Federal Register of proposed Rule 10D-1, which 
was July 14, 2015. In either case, 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, or in the absence of a compensation committee, by a majority 
of the independent directors serving on the board.
ii. Comments
    We received mixed comments regarding the board's discretion over 
whether to pursue recovery and the scope of any such discretion. Some 
commenters expressly supported the proposal to provide limited board 
discretion over whether to pursue recovery, including the proposed 
conditions.\246\ A few commenters specifically supported the proposal 
to require that the individuals exercising discretion should be 
independent directors.\247\ Other commenters expressed concern that the 
proposed level of discretion was excessive.\248\
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    \246\ See comment letters from CII 1; OPERS 1; and UAW, et al.
    \247\ See comment letters from ABA 1; and NACD.
    \248\ See, e.g., comment letters from AFL-CIO (suggesting that 
the statutory language that the issuer ``will recover'' indicates 
that the board should have no discretion); As You Sow 1 
(recommending limiting consideration of costs to direct costs and 
expressing concern that issuers may be incentivized to inflate costs 
to avoid recovery); Better Markets 1; CalPERS 1 (recommending that 
erroneously awarded compensation be recovered even where the costs 
of recovery are greater than the amount recovered); and Public 
Citizen 1. See also comment letter from Fried (suggesting that 
boards may use discretion to decide not to recover and that 
requiring boards to recover excess pay, even if it is costly to do 
so, may reduce both executives' resistance to returning erroneously 
awarded pay and the likelihood of the need for recovery).
---------------------------------------------------------------------------

    In contrast, other commenters expressed concern regarding the 
limited scope of proposed board discretion \249\ and the requirement to 
first make a ``reasonable attempt'' at recovery before exercising 
discretion.\250\ Some of these recommended a de minimis threshold for 
pursuing recovery,\251\ or specifically objected to limiting cost 
considerations to direct costs.\252\ Some commenters further 
recommended that directors should have discretion to determine whether 
to recover awards based on metrics that cannot be accurately 
recalculated, including stock price and TSR.\253\ Other commenters 
further contended that directors' state law fiduciary duties justify 
allowing boards to exercise greater discretion, noting the board's 
business judgment, or expressing concern that the proposal's restricted 
discretion would diminish board authority.\254\ Some commenters

[[Page 73100]]

recommended that the Commission could balance greater board discretion 
with a requirement to publicly disclose the determination not to 
recover, the reasons why, and the amount at issue.\255\ Commenters also 
identified other specific factors that boards should be permitted to 
take into account in deciding whether to recover, such as the 
probability of recovery or likelihood of success; \256\ the 
circumstances giving rise to the accounting restatement; \257\ the 
potential costs of determining and defending the recovery 
determination; \258\ the potential effects on the issuer; \259\ the 
potential effect on executive officers; \260\ and the long-term impact 
on the issuer.\261\
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    \249\ See, e.g., comment letters from ABA 1 (characterizing the 
limited scope of board discretion as ``the single biggest impediment 
to the effective implementation of Section 10D''); BRT 1; Bishop; 
Compensation Advisory Partners LLC (``CAP''); CCMC 1; CEC 1; CFA 
Institute 1; Chevron; Coalition; Compensia; Davis Polk 1; Duane; 
Ensco; Exxon; FedEx 1; FSR; Hay Group; IBC; Kovachev; Mercer; NACD; 
Pearl Meyer; S&C 1; SCG 1; TCA; TELUS; and WAW. See also comment 
letters in response to the Reopening Release from ABA 2; CEC 2; 
Davis Polk 3; ICGN; McGuireWoods; and Hunton.
    \250\ See, e.g., comment letters from ABA 1 (noting the 
subjective nature of the determination and the resulting compliance 
burden, and recommending against the requirement); CEC 1; Chevron; 
Compensia (suggesting the requirement is an unreasonable and 
impractical burden); Exxon; IBC; Hay Group; SCG 1; and TELUS. Some 
of these commenters sought guidance as to what constitutes a 
reasonable attempt at recovery and requested the Commission provide 
examples or a safe harbor. See comment letters from CEC 1 
(recommending the Commission permit the board to make a preliminary 
determination of the success of the reasonable attempt); Chevron; 
and Hay Group.
    \251\ See, e.g., comment letters from ABA 1 (recommending a 
$10,000 threshold per executive); Chevron; Compensia; Duane 
(recommending a $50,000 threshold per executive); FSR; and Mercer 
(recommending a $10,000 threshold per executive).
    \252\ See, e.g., comment letters from ABA 1 (recommending that 
the board be permitted to consider the expense of determining 
whether excess compensation resulted from the restatement along with 
the recovery costs); CEC 1 (recommending that the Commission permit 
consideration of specific indirect costs, such as opportunity costs 
resulting from diverting internal staff, management and board 
resources); Compensia; Duane; SCG 1; and TELUS (recommending that 
the board be permitted to consider the costs of determining what the 
recoverable amount would be rather than incur those costs before 
making its determination). See also comment letter in response to 
the Reopening Release from ABA 2 (recommending the impracticability 
analysis be based on direct costs, whether or not paid to a third 
party, as well as any indirect costs that it can reasonably allocate 
to the recovery process).
    \253\ See, e.g., comment letters from Davis Polk 1; and SH&P.
    \254\ See, e.g., comment letters from BRT 1 (suggesting that 
directors have fiduciary duties, which would serve to blunt any 
potential adverse impact to Section 10D); Bishop; CCMC 1; Compensia 
(citing board's fiduciary duties and noting that shareholders could 
vote against directors or sue for breach of fiduciary duty); 
Kovachev (suggesting that under state corporate law directors, not 
shareholders or the Federal government, are responsible for 
determining executive compensation); Pearl Meyer; SCG 1 (suggesting 
that deciding whether excess compensation should be recovered is not 
unlike other decisions the compensation committee regularly makes); 
and WAW. See also comment letters in response to the Reopening 
Release from CEC 2 (suggesting that without sufficient discretion 
the rule could force a board to carry out a recovery in a manner at 
odds with its fiduciary duties and result in shareholder harm); and 
Hunton (noting discretion is consistent with the board's fiduciary 
or other legal duties under state law).
    \255\ See comment letters from CFA Institute 1; S&C 1; and TCA.
    \256\ See comment letters from BRT 1; and Bishop.
    \257\ See, e.g., comment letters from BRT 1 (suggesting taking 
into account the scope of misconduct or responsibility for the 
errors); CFA Institute 1 (suggesting taking into account the 
severity of the error behind the original financial reporting 
decision); and Davis Polk 1 (suggesting taking into account 
culpability).
    \258\ See comment letters from Bishop; and Davis Polk 1. See 
also comment letters from Ensco; and Pearl Meyer (recommending 
consideration be given where executives are subject to pre-existing 
legally binding contracts).
    \259\ See, e.g., comment letters from Bishop; BRT 1; Davis Polk 
1; NACD; and S&C 1 (expressing concern over negative publicity or 
reputational harm to the issuer). See also comment letter from Davis 
Polk 1 (noting that recovery could be considered an admission 
against interest by the issuer resulting in higher litigation risk).
    \260\ See comment letters from Davis Polk 1 (recommending 
permitting consideration of severe financial hardship, death or 
serious illness of the executive); and S&C 1 (recommending 
permitting consideration of the effect on recruiting and retaining 
executives).
    \261\ See comment letters from BRT 1; and S&C 1.
---------------------------------------------------------------------------

    Commenters addressing the impracticability conclusion based on 
violations of home country law expressed concern with the proposed 
limitations,\262\ with some suggesting that limiting the 
impracticability exclusion to home country law in effect as of the 
proposal's Federal Register publication could intrude into the public 
policy determinations of other nations \263\ and create a disincentive 
for foreign firms to list in the U.S.\264\ Some commenters also 
expressed concern over the proposed requirement for a legal 
opinion.\265\ However, no commenters identified any foreign laws that 
would prohibit recovery under the proposed rules.
---------------------------------------------------------------------------

    \262\ See, e.g., comment letters from ABA 1; Bishop; CCMC 1; 
Coalition; Duane; Exxon; FSR; Kaye Scholer; Mercer; Osler; SAP; S&C 
1; TELUS; and UBS. Some commenters recommended that an exemption 
based on home country law should also cover any other countries 
whose laws otherwise apply to the executive officer, such as the 
local law of the jurisdiction where the executive officer is 
employed, as that local law would govern the employee/employer 
relationship. See, e.g., comment letters from ABA 1; CCMC 1; 
Coalition; Davis Polk 1; Exxon; FSR; Kaye Scholer; Osler; SAP; S&C 
1; TELUS; and UBS. See also comment letter in response to the 
Reopening Release from Hunton.
    \263\ See comment letters from S&C 1; and TELUS.
    \264\ See comment letters from CCMC 1; and Coalition. See also 
comment letters in response to the Reopening Release from Cravath; 
and CCMC 2 (suggesting that the rules may penalize foreign firms for 
changes in law made after adoption of the rules).
    \265\ See, e.g., comment letters from Bishop; CEC 1 (noting 
legal uncertainty in some jurisdictions); CCMC 1; Coalition; 
Freshfields; SAP; S&C 1 (noting absence of a prohibition does not 
mean the compensation recovery provision would be enforced); and 
TELUS (noting enforceability of compensation recovery arrangements 
is a developing area of jurisprudence).
---------------------------------------------------------------------------

    Several commenters expressed concern that the proposal did not 
address potential impediments to recovery under state law and 
questioned whether the listing standards adopted pursuant to this rule 
would preempt state laws governing compensation.\266\ A number of these 
commenters suggested that the Commission provide an exception to 
recovery or allow boards discretion not to pursue recovery where such 
actions may cause the issuer to violate state law.\267\
---------------------------------------------------------------------------

    \266\ See comment letters from ABA 1; American Vanguard; Bishop; 
Coalition; Compensia; Cooley; Exxon; FSR; Mercer; NACD; Pearl Meyer; 
and SCG 1.
    \267\ See comment letters from Compensia; Cooley; FSR; Pearl 
Meyer; and SCG 1.
---------------------------------------------------------------------------

    Additionally, some commenters expressed concern regarding recovery 
of amounts deferred under tax-qualified retirement plans, stating that 
such actions may violate ERISA anti-alienation rules, which could 
result in loss of tax-qualified status for the plan.\268\
---------------------------------------------------------------------------

    \268\ See, e.g., comment letters from ABA 1; IBC; and Sutherland 
(noting that violating the Internal Revenue Code could result in 
loss of tax-qualified status for the plan, causing adverse 
consequences to all participants). See also comment letter from the 
Reopening Release from McGuireWoods.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering the views of commenters, we are adopting 
substantially as proposed rules to require 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. 
We read the Section 10D recovery mandate to require recovery regardless 
of ``fault'' or responsibility for the error or resulting restatement. 
The language of this provision signals that the issuer should pursue 
recovery in most instances.
    As we have previously noted, the intent of Section 10D is to 
require executive officers to return monies that rightfully belong to 
the issuer and its shareholders. In keeping with this intent and our 
understanding that the statute contemplates recovery in most instances, 
we have determined to establish very limited circumstances that would 
allow executive officers, or permit boards of directors to allow 
executive officers, to retain incentive-based compensation that they 
were erroneously awarded.
    Some commenters sought to justify allowing boards to exercise 
greater discretion or permitting issuers to not seek to recover 
erroneously awarded compensation by citing to state law fiduciary 
duties and a board's business judgment.\269\ Commenters also suggested 
that the Commission could balance greater board discretion with 
additional disclosure or suggested that boards should be permitted to 
take into account the probability of recovery or likelihood of success, 
the circumstances giving rise to the accounting restatement, the 
potential costs of determining and defending the recovery 
determination, the potential effects on the issuer, the potential 
effect on executive officers, and the long-term impact on the issuer. 
We have considered the potential costs of not affording such 
discretion, such as the possibility that in some instances recovery 
would be required even if the total costs for the issuer exceed the 
expected recovery amount. Notwithstanding these possible costs, other 
than the limited exceptions noted below, we do not believe that 
additional discretion to forgo recovery of erroneously awarded 
compensation would be appropriate. In enacting Section 10D, Congress 
determined that listed companies in the U.S. should ``develop and 
implement'' a policy providing that they ``will recover'' erroneously 
awarded compensation within three years of an accounting restatement. 
Congress chose to impose a federally mandated policy with specific 
parameters and requirements. Its decision to adopt such a mandate 
implies that Congress concluded that issuers likely would not 
voluntarily pursue recovery to the extent mandated by Section 10D. 
Allowing issuers broad discretion to decide whether to enforce such 
policies would therefore tend to undermine Congress' intent, as issuers 
that have previously failed to adopt

[[Page 73101]]

recovery policies that Congress concluded would protect shareholders 
may also tend to exercise their discretion to recover in ways that 
similarly fail to protect shareholders. Thus, to the extent that 
commenters' suggestions would further permit executive officers to 
retain monies that they should not have been awarded pursuant to their 
compensation agreements, such exceptions or limitations could undermine 
the objectives of the statute.
---------------------------------------------------------------------------

    \269\ See supra note 254.
---------------------------------------------------------------------------

    The exceptions we adopt below will limit the instances in which an 
issuer would be obliged to pursue a money-losing recovery. Providing 
for such narrow exceptions is consistent with the overall structure of 
the statutory recovery mandate, which is unqualified and applies on a 
no-fault basis to erroneously awarded compensation. We are concerned 
that affording broader discretion could undermine the effectiveness of 
the rule, as issuers and their boards may face short-term incentives or 
other impediments to pursuing recovery even where recovery would be in 
the interest of shareholders, the long-term interest of the issuer, or 
the market as a whole. In addition, providing boards with broad 
discretion to waive recovery could also reduce the reliability of 
financial reporting, as executive officers may expect that they would 
be enriched by some errors if the board had broad discretion.
    After considering the views of commenters, we are adopting 
impracticability exceptions, as proposed, where (1) the direct cost of 
recovery would exceed the amount of recovery, and (2) the recovery 
would violate home country law and additional conditions are met.\270\ 
We are additionally adopting an exception, as discussed further below, 
that addresses commenters' concerns about the implications of 
recovering amounts from tax-qualified retirement plans.
---------------------------------------------------------------------------

    \270\ See 17 CFR 240.10D-1(b)(1)(iv)(A) (``Rule 10D-
1(b)(1)(iv)(A)'') and 17 CFR 240.10D-1(b)(1)(iv)(B) (``Rule 10D-
1(b)(1)(iv)(B)'').
---------------------------------------------------------------------------

    We do not believe that inconsistency between the rules and existing 
compensation contracts, in itself, should be a basis for finding 
recovery to be impracticable. Such an approach could effectively 
exclude a significant number of existing compensation contracts from 
the scope of the rule, undermining its effectiveness. We note that 
issuers have been on notice of the statutory mandate for several years 
and will have additional time between adoption of these rules and 
exchange listing standards implementing the rules to amend any 
contracts to accommodate recovery. While a number of commenters 
suggested that recovery should be limited to executive officers who 
bear responsibility for the error; as discussed in Section II.C.1.c, 
under our reading of the statute, the extent to which an individual 
executive officer may be responsible for the financial statement errors 
requiring the restatement is irrelevant to whether they are subject to 
the requirement or the issuer should seek recovery.\271\ We also note 
that a number of commenters recommended a de minimis threshold for 
pursuing recovery. However, absent satisfaction of the conditions to 
demonstrate that recovery is impracticable due to costs, we believe a 
de minimis exception may risk being both over and under-inclusive, 
given the variation in issuer sizes and executive compensation 
structures. We therefore decline to adopt such an approach.
---------------------------------------------------------------------------

    \271\ We note that this standard similarly applies in Sarbanes-
Oxley Act Section 304.
---------------------------------------------------------------------------

    In determining whether recovery would be impracticable due to 
costs, the only permissible criteria under the rule are whether the 
direct costs paid to a third party to assist in enforcing recovery 
would exceed the erroneously awarded compensation amounts.\272\ Only 
direct costs paid to a third party, such as reasonable legal expenses 
and consulting fees, may be considered for this purpose.\273\ We 
disagree with those commenters that recommended permitting issuers to 
include indirect costs. Indirect costs relating to concerns such as 
reputation or the effect on hiring new executive officers are not 
readily quantifiable and, as one commenter noted, are susceptible to 
exaggeration,\274\ in addition to other confounding factors. We 
therefore do not believe such costs should be taken into account when 
determining whether recovery is impracticable.
---------------------------------------------------------------------------

    \272\ See Rule 10D-1(b)(1)(iv)(A).
    \273\ We note that the challenges of using incentive-based 
compensation tied to stock price and TSR to determine the amount of 
compensation to be recovered are not a sufficient basis for 
determining that recovery is impracticable. Nonetheless, the amount 
spent on a consultant or other third-party service provider could be 
considered in determining whether the impracticability exception 
applies, once the recoverable amount is determined.
    \274\ See comment letter from As You Sow 1.
---------------------------------------------------------------------------

    The final rules also require the issuer to make a reasonable 
attempt to recover incentive-based compensation before concluding that 
it would be impracticable to do so. The issuer must document its 
attempts to recover and provide that documentation to the 
exchange.\275\ We remain concerned that, without a requirement to 
attempt recovery, an issuer could simply assert impracticability 
without doing the work necessary to establish that the costs exceed the 
recovery amounts. We believe that requiring an attempt to recover is 
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.
---------------------------------------------------------------------------

    \275\ See Rule 10D-1(b)(1)(iv)(A). New Item 402(w) of Regulation 
S-K also requires the issuer to disclose why it determined not to 
pursue recovery.
---------------------------------------------------------------------------

    In providing this narrow cost exception, we note that Section 10D 
provides that, to meet the applicable listing standard, the issuer 
``will recover,'' without exceptions, erroneously awarded compensation 
resulting from material misstatements of financial reporting items. The 
plain text does not provide for issuer discretion. We believe that 
Congress' broad mandate to recover signals that an exception from 
recovery of an executive officer's erroneously awarded compensation, if 
any, that the Commission exercises its authority to grant should be 
carefully considered and tailored. In exercising our authority to 
provide an exception, we have determined that issuers should not be 
afforded broad discretion to determine whether to recover compensation. 
We are therefore adopting as proposed a narrow exception relating to 
impracticability due to costs.
    We also believe it is appropriate to adopt substantially as 
proposed a narrow exception that allows an issuer to conclude that 
recovery is impracticable because it would violate the home country law 
of the issuer.\276\ 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 
November 28, 2022, the date of publication in the Federal Register of 
Rule 10D-1.\277\ Before concluding that it would be impracticable to 
recover because doing so would violate home country law in effect as of 
the date of publication of Rule 10D-1 in the Federal Register, the 
issuer would first need to obtain an opinion of home country counsel, 
acceptable to the applicable exchange, that recovery would result in 
such a violation.\278\
---------------------------------------------------------------------------

    \276\ See Rule 10D-1(b)(1)(iv)(B).
    \277\ As discussed further below, in a modification from the 
Proposing Release, the relevant home country law must have been 
adopted prior to the date of publication in the Federal Register of 
Rule 10D-1 rather than July 14, 2015, which was the date of 
publication of the proposed rule.
    \278\ See Rule 10D-1(b)(1)(iv)(B). The issuer must provide such 
opinion to the exchange. We recognize the concerns of some 
commenters regarding the requirement for a legal opinion. We note, 
however, that requiring an issuer to obtain a legal opinion provides 
additional substantiation to the issuer's claim that recovery would 
result in such a violation and reduces the burden on exchanges, who 
might otherwise have to make a determination of whether the 
exception is available to the issuer, by permitting them to use and 
rely on the opinion.

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

[[Page 73102]]

    We recognize some commenters' concerns that the erroneously awarded 
compensation rules could intrude into the public policy determinations 
of other nations or create a disincentive for foreign firms to list in 
the U.S. However, the recovery mandate of Section 10D signals that the 
issuer should generally pursue recovery when it is determined there is 
erroneously awarded compensation subject to the rule. Issuers that 
choose to list on U.S. exchanges have chosen to be subject to the rules 
of those exchanges and the laws of the United States. Such issuers may 
choose to list on U.S. exchanges in order to signal the greater 
reliability of their financial reporting, and making executive officers 
subject to recovery may further strengthen this signal, so that the 
adopted approach in fact may incentivize, rather than discourage, 
listings by foreign firms. Given the clear mandate from the statute 
that executive officers not be permitted to retain erroneously awarded 
compensation, we have determined that any exception relating to 
impracticability due to conflict with home country law should be 
narrow.
    We are not expanding the exception, as suggested by some 
commenters, to cover the domicile of the executive officer or any other 
country whose laws may apply to the executive officer or to encompass 
foreign laws that may be enacted in the future.\279\ As compared to the 
jurisdiction of incorporation, it may be easier for an executive 
officer to shift domicile or work location and thereby avoid 
application of the rule. To the extent that the laws of jurisdictions 
other than the issuer's place of incorporation would present obstacles 
to recovery, we think those obstacles are more appropriately addressed 
by the discretion we are providing not to pursue recovery in situations 
in which the direct costs of recovering the erroneously awarded 
compensation would exceed the amount to be recovered.
---------------------------------------------------------------------------

    \279\ See supra note 262.
---------------------------------------------------------------------------

    Similarly we do not believe it is appropriate for the exception to 
apply without a time limitation. Doing so could incentivize 
jurisdictions to enact statutes that prohibit or restrict recovery in 
an effort to attract issuers that may be seeking to avoid enforcement 
of a compensation recovery policy. Although we are not aware that any 
such laws have been adopted since publication of the proposed rule, and 
mindful of the length of time that has passed since 2015, in a 
modification from the proposal, the relevant home country law must have 
been adopted prior to the date of publication in the Federal Register 
of Rule 10D-1 rather than July 14, 2015, which was the date of 
publication of the proposed rule. This change will avoid any undue 
disruption for foreign issuers who may have entered the U.S. markets 
and listed on an exchange not anticipating a potential conflict with 
the final amendments and would now face an immediate decision about 
whether to maintain their U.S. listing. Going forward, however, we 
believe it is appropriate and consistent with the purposes of Section 
10D to require foreign issuers that avail themselves of the benefits of 
U.S. listing to comply with the mandatory recovery policy in the same 
manner as domestic issuers.
    We also decline to provide an exception or additional board 
discretion not to pursue recovery due to potential state law conflicts. 
As a threshold matter, a number of commenters asserted that it is 
unclear whether the mandated recovery would be in violation of any 
state laws. We are not aware of any state law that currently would 
clearly prohibit recovery, and commenters did not identify any.\280\ We 
recognize that executive officers seeking to oppose recovery could 
assert a number of defenses, including objections based on state law, 
and issuers may need to address such matters as part of the recovery 
process. Nevertheless, for the reasons discussed above, we believe 
issuers should have discretion not to pursue recovery only in the 
limited circumstances outlined in the final rule.
---------------------------------------------------------------------------

    \280\ As an example of a potentially conflicting state law, one 
commenter cited California Labor Code Section 221, which provides 
that it is ``unlawful for any employer to collect or receive from an 
employee any part of wages theretofore paid by said employer to said 
employee.'' See comment letter from Bishop. California Labor Code 
Section 224, however, also provides that Section 221 ``shall in no 
way make it unlawful for an employer to withhold or divert any 
portion of an employee's wages when the employer is required or 
empowered so to do by state or Federal law.''
---------------------------------------------------------------------------

    In any event, we believe that state law will not pose a significant 
obstacle to recovery because issuers should have strong arguments that 
state laws that conflict with Section 10D are preempted. With respect 
to preemption, as a general matter, listing standards adopted by 
national securities exchanges and associations at the direction of 
Congress and the Commission can preempt state laws in certain 
circumstances.\281\ In such a case, a court may consider whether a 
state law that prevents or interferes with the recovery required under 
this rule ``stands as an obstacle'' to accomplishing the objectives of 
Federal law.\282\ As discussed above, this rule will advance the 
objectives of Section 10D by ensuring recovery from all listed issuers 
for the benefit of shareholders of erroneously awarded compensation 
that would not have been paid had the issuer's financial statements not 
been in error. The recovery requirement would serve the interest of 
fairness to shareholders and improve the overall quality and 
reliability of financial reporting, which further benefits shareholders 
and the capital markets as a whole. Accordingly, issuers should be able 
to assert that state laws that would prevent or impede recovery are 
preempted, although the outcomes for any particular state law would 
depend on the details of that provision.
---------------------------------------------------------------------------

    \281\ See Credit Suisse First Bos. Corp. v. Grunwald, 400 F.3d 
1119, 1128 (9th Cir. 2005).
    \282\ See id. See also Geier v. Am. Honda Motor Co., 529 U.S. 
861, 873 (2000) (quoting Hines v. Davidowitz, 312 U.S. 52, 67 
(1941)). Some commenters argue that because Section 10D is addressed 
to exchanges and associations, state law would not be preempted 
because it is technically possible for an issuer to comply with both 
state and Federal law. This describes one type of implied 
preemption--``conflict preemption.'' Id. at 873-74. But a different 
type of implied preemption--``obstacle preemption''--may arise where 
a state law stands as an obstacle to Federal law. See, e.g., AT&T 
Mobility LLC v. Concepcion, 563 U.S. 333, 342-43, 352 (2011) 
(finding no conflict but ruling that state law was preempted as an 
obstacle to a Federal scheme); and Williamson v. Mazda Motors of 
Am., 562 U.S. 323, 330 (2011).
---------------------------------------------------------------------------

    In exercising our discretion to provide an exception for tax-
qualified retirement plans described in 26 U.S.C. 401(a), we have 
determined that a narrow exception is appropriate. Under 26 U.S.C. 
401(a)(13), a plan will not be tax-qualified unless it provides that 
the plan's benefits may not be assigned or alienated, subject to 
certain limited exceptions that are not applicable here. Commenters 
noted that this statutory anti-alienation rule would preclude a tax-
qualified plan from complying with a request for recovery. Commenters 
also expressed concerns that requiring recovery of amounts deferred 
under tax-qualified retirement plans may cause plans to violate the 
anti-alienation rule and other plan qualification requirements under 
the Internal Revenue Code. In recognition of those concerns, the final 
rule will permit issuers to forgo recovery from tax-qualified 
retirement plans.\283\ Without

[[Page 73103]]

this exception, such plans may fail statutory requirements for tax 
exemption, resulting in potentially adverse tax consequences for all 
plan participants. Thus, the change would avoid serious potential tax 
consequences for rank-and-file employees by providing a narrow 
exemption from recovery for a limited amount of incentive-based 
compensation.\284\ Erroneously awarded incentive-based compensation 
contributed to plans limited only to executive officers, SERPs, or 
other nonqualified plans and benefits therefrom, would still be subject 
to recovery.
---------------------------------------------------------------------------

    \283\ See Rule 10D-1(b)(iv)(C). One of these commenters noted 
that tax-qualified retirement plans are required to be non-
discriminatory in application and, thus, are not incentive-based 
compensation and are not subject to various ``incentive plan'' 
disclosure under Item 402. See comment letter from ABA 1. See also 
comment letter from Sutherland (also noting that tax-qualified 
retirement plans are not considered incentive-based compensation in 
the normal sense of that term). This commenter suggested that the 
Commission not interpret ``incentive-based compensation'' to include 
either tax-qualified or non-qualified plans, further suggesting that 
all such compensation is provided for retirement, rather than as a 
performance incentive. Because amounts contributed to qualified 
plans may be affected by incentive-based awards, such as in the case 
where the benefit formula for a plan includes amounts awarded as an 
annual bonus, we disagree with this commenter's characterization of 
such compensation as categorically lacking a performance incentive.
    \284\ We anticipate the effect will be modest. We believe that 
incentive-based compensation will typically have only small and 
indirect effects on amounts added to tax-qualified retirement plans. 
26 U.S.C. 401(a)(17) precludes a tax-qualified retirement plan from 
basing contributions or benefits on compensation in excess of an 
annual limit ($305,000 in 2022). The compensation of many covered 
executive officers will exceed this limit regardless of any 
incentive-based compensation they may have been erroneously awarded. 
In addition, 26 U.S.C. 415 provides a series of limits on benefits 
under qualified defined benefit plans and on contributions and other 
additions under qualified defined contribution plans. For example, 
under these limitations, in 2022, annual additions with respect to a 
participant in a defined contribution plan may not exceed $61,000 
and a participant's annual benefit under a defined benefit plan may 
not exceed $245,000.
---------------------------------------------------------------------------

    In order to mitigate potential conflicts of interest, any 
determination that recovery would be impracticable in any of these 
three circumstances must be made by the issuer's committee of 
independent directors that is responsible for executive compensation 
decisions. In the absence of a compensation committee, the 
determination must be made by a majority of the independent directors 
serving on the board. Such a determination, as with all determinations 
under Rule 10D-1, is subject to review by the listing exchange.
    We acknowledge that there are circumstances in which pursuing 
recovery of erroneously awarded compensation may not be in the interest 
of shareholders. We have determined that limited board discretion to 
determine when it would be impracticable to recover is necessary or 
appropriate in the public interest and consistent with the protection 
of investors. Permitting board discretion in these circumstances will 
save issuers the expense of pursuing recovery in circumstances where 
recovery would violate anti-alienation rules applicable to tax-
qualified retirement plans, or home country law, or where the direct 
costs of recovery could exceed or be disproportionate to the 
erroneously awarded compensation amounts. Balancing these concerns, the 
standard we are adopting appropriately permits boards of directors to 
evaluate whether to pursue recovery of erroneously awarded 
compensation, but only in these limited circumstances.
c. Board Discretion Regarding the Means 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.
i. Proposed Amendments
    In the Proposing Release, in addition to addressing board 
discretion regarding whether to recover excess incentive-based 
compensation, the Commission addressed whether boards may exercise 
discretion in effecting the means of recovery. The Proposing Release 
recognized that the appropriate means of recovery may vary by issuer 
and by type of compensation arrangement, and that consequently issuers 
should be able to exercise discretion in how to accomplish recovery. 
Regardless of the means of recovery utilized, the Proposing Release 
indicated that issuers should recover excess incentive-based 
compensation reasonably promptly, as undue delay would constitute 
noncompliance with an issuer's recovery policy.
ii. Comments
    We received various comments on the Proposing Release relating to 
whether boards may exercise discretion regarding the means of recovery.
    Commenters generally supported allowing board discretion regarding 
the means of recovery.\285\ Some commenters noted the concept of 
fungibility of assets, which would permit issuers to more readily 
recover erroneously awarded compensation.\286\ Based on this concept of 
fungibility, commenters recommended permitting issuers various means of 
recovery, such as through canceling unrelated unvested compensation 
awards,\287\ offsets against nonqualified deferred compensation and 
unpaid incentive compensation,\288\ future compensation 
obligations,\289\ or dividends on company stock owed to an executive 
officer.\290\ Some commenters also recommended including in the final 
rule specific instructions on how to compute the excess amount of 
specific forms of incentive-based compensation and sought discretion to 
recover the cash value of excess shares subject to recovery.\291\
---------------------------------------------------------------------------

    \285\ See comment letters from ABA 1; Bishop; CEC 1; Compensia; 
Exxon; and FSR. See also comment letters in response to the 
Reopening Release from CEC 2; McGuireWoods (recommending flexibility 
for boards to enter into settlement and repayment terms); and 
Hunton.
    \286\ See comment letters from AFL-CIO; and Exxon.
    \287\ See comment letters from ABA 1; CEC 1; and WAW.
    \288\ See comment letters from Exxon; and WAW.
    \289\ See comment letters from Duane; and WAW.
    \290\ See comment letter from Exxon.
    \291\ See, e.g., comment letters from ABA 1 (recommending that, 
for equity awards, recovery should first be sought from shares that 
remain held, and that for the equity awards where the shares were 
sold prior to recovery that the recovery be for the fair market 
value on the date the erroneously awarded compensation amount is 
determined, or if the shares were gifted, the fair market value on 
the date of the gift); Duane (noting potential restrictions on an 
executive's ability to liquidate securities and issuers' stock 
retention requirements, and recommending recovery of stock awards 
either in cash or in kind over reasonable periods of time); Exxon 
(recommending cash value should be calculated at the time the shares 
are ``received'' within the meaning of the rule to avoid 
incentivizing executives to sell shares immediately on vesting); and 
FSR (recommending basing the cash amount on the shares' value on the 
date the issuer is required to prepare a restatement to address 
manipulation concerns).
---------------------------------------------------------------------------

    Commenters also recommended that the final rules permit, or that 
the Commission provide guidance or other confirmation relating to the 
use of, nonqualified deferred compensation plans, holdback policies, or 
otherwise deferring payment of incentive-based compensation to 
facilitate potential future recovery.\292\ Other commenters highlighted 
potential benefits to such set-offs.\293\ Some commenters additionally 
recommended that netting overpayments with incentive-based compensation 
underpayments resulting from restating financial statements for

[[Page 73104]]

different periods be permitted under the rules.\294\
---------------------------------------------------------------------------

    \292\ See, e.g., comment letters from ABA 1; AFL-CIO; Compensia; 
and NACD.
    \293\ See, e.g., comment letters from Exxon (enhancing the 
ability to recover promptly); CEC 1 (ease of recovery and ability to 
recover the full pre-tax amount of excess compensation); and WAW 
(reduced cost of recovery and risk of litigation with executives).
    \294\ See, e.g., comment letters from ABA 1; Bishop; CEC 1 
(recommending disclosure to inform shareholders of recovery by 
netting); Compensia; Mercer (suggesting that without netting 
executives would be penalized and that making the executive whole 
could distort the pay for performance relationship); NACD; SCG 1; 
and SH&P. Two of these commenters suggested that this approach would 
be fair and consistent with the ``no-fault'' standard of the 
proposed rule. See comment letters from NACD; and SH&P.
---------------------------------------------------------------------------

    We also received varied comments regarding the timing requirements 
for recovery ranging from recommendations to require ``immediate 
recovery,'' \295\ input regarding the meaning of the ``reasonably 
promptly'' guidance,\296\ and recommendations opposing time 
limits.\297\ Some commenters recommended allowing deferred 
repayments,\298\ with one noting that immediate recovery could result 
in significant economic hardship to an executive officer and that a 
deferred payment plan could increase the likelihood of collecting and 
avoid potential litigation costs.\299\
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    \295\ See comment letter from CalPERS 1.
    \296\ See comment letter from Better Markets 1 (further 
recommending requiring an explanation of the timing to discourage a 
protracted recovery process).
    \297\ See, e.g., comment letters from Bishop (noting that 
issuers will face circumstances beyond their control, such as 
litigation by executives); CFA Institute 1 (recommending that the 
listing exchange determine whether an issuer is complying with its 
recovery policy); and NACD.
    \298\ See, e.g., comment letters ABA 1 (noting that there may be 
circumstances where the executive is otherwise unable to repay the 
excess amount); Bishop; Davis Polk 1; Ensco; and SCG 1 (recommending 
that the rule permit discretion where the board determines 
enforcement could affect the issuer's defense in a securities class 
action). One of these commenters sought clarification that repayment 
plans would not constitute prohibited personal loans under Exchange 
Act Section 13(k). See comment letter from Bishop. See also comment 
letters in response to the Reopening Release from ABA 2 
(recommending discretion to permit a deferred payment plan); 
McGuireWoods (recommending flexibility for boards to enter into 
settlement and repayment terms); and Hunton.
    \299\ See comment letter from Davis Polk 1.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering the views of commenters, we continue to believe 
that the adopted rules should provide boards discretion, subject to 
certain reasonable restrictions, regarding the means of recovery and 
are providing the following guidance to assist boards in exercising 
that discretion.\300\ Rule 10D-1 does not limit the amount of 
compensation the board is required to recover; however, the rule does 
not permit boards to settle for less than the full recovery amount 
unless they satisfy the conditions that demonstrate recovery is 
impracticable.\301\
---------------------------------------------------------------------------

    \300\ See Rule 10D-1(b)(1)(iii). For a discussion of how to 
determine the amounts, see supra note 235.
    \301\ In that circumstance, the same conditions would apply as 
for a determination to forgo recovery. See Section II.C.3.b.
---------------------------------------------------------------------------

    We recognize that the appropriate means of recovery may vary by 
issuer and by type of compensation arrangement. We agree with 
commenters that many different means of recovery may be appropriate in 
different circumstances. Consequently, the final amendments permit 
issuers to exercise discretion in how to accomplish recovery. 
Nevertheless, in exercising this discretion, issuers should act in a 
manner that effectuates the purpose of the statute: to prevent current 
or former executive officers from retaining compensation that they 
received and to which they were not entitled under the issuer's 
restated financial results.
    Regardless of the means of recovery used, issuers should recover 
erroneously awarded compensation reasonably promptly, because delays in 
recovering excess payments allow executive officers to capture the time 
value of money with respect to funds they did not earn, which should 
instead belong to shareholders. Consistent with the discussion of the 
timing in which the issuer must seek recovery in the Proposing Release, 
the final rule clarifies that the issuer must pursue recovery 
``reasonably promptly.'' \302\ The rule does not, however, adopt a 
definition of ``reasonably promptly.'' We recognize that what is 
reasonable may depend on the additional cost incident to recovery 
efforts. We expect that issuers and their directors and officers, in 
the exercise of their fiduciary duty to safeguard the assets of the 
issuer (including the time value of any potentially recoverable 
compensation), will pursue the most appropriate balance of cost and 
speed in determining the appropriate means to seek recovery. 
Furthermore, the rules do not prevent an issuer from securing recovery 
through means that are appropriate based on the particular facts and 
circumstances of each executive officer that owes a recoverable 
amount.\303\
---------------------------------------------------------------------------

    \302\ See Rule 10D-1(b)(1).
    \303\ We note that unpaid amounts will be subject to disclosure 
pursuant to 17 CFR 229.402(w)(1)(ii) and (iii).
---------------------------------------------------------------------------

    For example, an issuer may be acting reasonably promptly in 
establishing a deferred payment plan that allows the executive officer 
to repay owed erroneous compensation as soon as possible without 
unreasonable economic hardship to the executive officer, depending on 
the particular facts and circumstances.\304\ The final rules also do 
not prohibit an issuer from establishing compensation practices that 
account for the possibility of the need for future recovery; while we 
acknowledge the many suggestions by commenters in this regard, we 
decline to offer specific guidance on which methods may be appropriate, 
as it will depend on the particular facts and circumstances applicable 
to that issuer. Finally, we note that the final rules do not restrict 
exchanges from adopting more prescriptive approaches to the timing and 
method of recovery under their rules in compliance with Section 19(b) 
of the Exchange Act, including after they have observed issuer 
performance and use any resulting data to assess the need for further 
guidelines to ensure prompt and effective recovery.
---------------------------------------------------------------------------

    \304\ In response to the commenter who asked for clarification 
regarding whether a deferred repayment plan would be a prohibited 
personal loan under 15 U.S.C. 78m(k), as a general matter, we would 
not view such arrangements that are narrowly tailored to the 
compensation being recovered and in order to facilitate full payment 
as promptly as is reasonable under the circumstances as being a 
prohibited personal loan.
---------------------------------------------------------------------------

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.
1. Proposed Amendments
    The Commission proposed to require that issuers disclose their 
recovery policies as an element of the listing standards, so that 
exchanges could commence de-listing proceedings for issuers that fail 
to make the required disclosure, as well as those that fail to adopt 
recovery policies or those that fail to comply with the terms of their 
policy.
    In addition, the Commission proposed amendments to its rules and 
relevant forms to require disclosure about, and the filing of, the 
issuer's recovery policy. Specifically, the Commission proposed:
     Amending Item 601(b) of Regulation S-K to require that an 
issuer file its recovery policy as an exhibit to its annual report on 
Form 10-K;
     Adding Item 402(w) of Regulation S-K to require issuers to 
disclose certain information about how they have

[[Page 73105]]

applied their recovery policies, including the date of and amount of 
erroneously awarded compensation attributable to the accounting 
restatement, any estimates that were used in determining the amount, 
the amount that remains to be collected, and the names of, and amounts 
owed by, executive officers where amounts due are owed or forgone;
     Amending the Summary Compensation Table requirements of 
Item 402 of Regulation S-K to disclose the effect of any recovered 
amount;
     Amending rules to require the new compensation recovery 
disclosure pursuant to proposed Item 402(w) of Regulation S-K be 
structured using machine-readable eXtensible Business Reporting 
Language (``XBRL''); \305\ and
---------------------------------------------------------------------------

    \305\ The proposed structuring would be limited to block text 
tagging of the disclosures, rather than any additional detail tags 
for specific data points included within the compensation recovery 
disclosures. See Proposing Release at Section II.D.1.
---------------------------------------------------------------------------

     Amending forms applicable to FPIs and listed funds to 
require the same information called for by proposed Item 402(w) of 
Regulation S-K.
    In the Reopening Release, the Commission requested comment on 
whether additional disclosures would benefit investors, such as 
disclosure of how issuers calculated the erroneously awarded 
compensation, including their analysis of the amount of the executive 
officer's compensation that is recoverable under the rule, and, for 
incentive-based compensation based on stock price or TSR, disclosure 
regarding the determination and methodology that an issuer used to 
estimate the effect of stock price or TSR on erroneously awarded 
compensation. The Reopening Release also sought comment on whether to 
add check boxes to the Form 10-K cover page that indicate separately 
(a) whether the previously issued financial statements in the filing 
include an error correction, and (b) whether any such corrections are 
restatements that triggered a compensation recovery analysis during the 
fiscal year. The Commission additionally requested comment on whether 
any specific data points that are included within the new compensation 
recovery disclosure should be detail tagged using Inline XBRL.
2. Comments
    While commenters generally supported some level of disclosure about 
an issuer's recovery policy, comments were mixed regarding the specific 
disclosures that should be required. Some commenters generally 
supported the proposed disclosure requirements, with several commenters 
stating that required disclosure under the Federal securities laws 
would promote consistency.\306\ One commenter specifically supported 
the use of a listing standard requirement to disclose the issuer's 
recovery policy,\307\ and others supported the proposed structure of 
the disclosure requirements as they would facilitate exchanges' ability 
to commence delisting proceedings for issuers that fail to make the 
required disclosure.\308\ A few commenters recommended requiring the 
issuer's recovery policy be posted on the issuer's website rather than 
requiring it to be filed, as proposed.\309\
---------------------------------------------------------------------------

    \306\ See, e.g., comment letters from ABA 1; Better Markets 1; 
and CFA Institute 1.
    \307\ See comment letter from Compensia.
    \308\ See comment letters from ABA 1; and Better Markets 1.
    \309\ See, e.g., comment letters from ABA 1 (recommending 
following the compensation committee charter disclosure model which 
relies on website disclosure and noting that many issuers disclose 
their existing recovery policies on the corporate website and 
investors are familiar with accessing corporate governance policies 
there); and NACD.
---------------------------------------------------------------------------

    We received a range of comments on the specific proposed disclosure 
requirements.\310\ Some commenters supported proposed Item 402(w),\311\ 
noting its relevance to say-on-pay and director election voting 
decisions,\312\ and the insight the disclosure would provide into board 
decision-making.\313\ Some commenters further supported requiring the 
additional disclosure requirements on which we requested comment in the 
Reopening Release.\314\ Another commenter suggested that the disclosure 
would elicit a sufficient amount of detailed information about how a 
listed issuer has enforced its compensation recovery policy.\315\ Some 
commenters recommended expanding certain disclosure requirements.\316\ 
Another commenter recommended further clarification of the 
requirements.\317\
---------------------------------------------------------------------------

    \310\ We received limited comment regarding the proposal to 
adjust Summary Compensation Table disclosure, with one commenter 
expressly supporting the proposal (see comment letter from ABA 1) 
and another recommending that amounts recovered for periods earlier 
than the three years presented should be reported in a footnote (see 
comment letter from Mercer). One commenter questioned whether 
reducing amounts reported in the Summary Compensation Table Stock 
Awards and Option Awards columns would be inconsistent with 
reporting other modifications under ASC Topic 718 and whether a 
delay in grant date determination for share-based awards under ASC 
Topic 718 could result from a recovery policy consistent with Rule 
10-D-1. See comment letter from TCA. That commenter expressed 
concern that such a delay would have a substantial and material 
impact on the disclosure timing for those awards in the Summary 
Compensation Table and Grants of Plan-Based Awards Table. We note 
that, assuming the conditions for establishing a grant date under 
ASC Topic 718 are otherwise met, having such a recovery policy 
should not affect the issuer's determination.
    \311\ See, e.g., comment letters from As You Sow 1; Better 
Markets 1; CII 1; CalPERS 1; and OPERS 1.
    \312\ See, e.g., comment letters from CalPERS 1; and CII 1 
(noting its usefulness to institutional investors).
    \313\ See comment letter from OPERS 1.
    \314\ See, e.g., comment letters on the Reopening Release from 
Better Markets 2 (supporting disclosure of how issuers calculate the 
recoverable amount, especially with regards to compensation based on 
stock price or TSR); CFA Institute 2; CII 3 (noting that such 
disclosures could be particularly helpful in assessing the company's 
executive compensation policies and practices for purposes of 
shareholder voting); ICGN; Public Citizen 2; and Occupy. See also 
comment letter from the Second Reopening Release from AFR 2 
(supporting disclosure of how issuers calculate the recoverable 
amount). But see comment letter on the Reopening Release from ABA 2 
(generally supporting disclosure, but suggesting inclusion of stock 
price and TSR would lead to complex disclosures regarding 
determination and methodology).
    \315\ See comment letter from ABA 1 (supporting tracking any 
amount of incentive-based compensation subject to recovery through 
the duration of the recovery obligation until that amount either is 
recovered or the issuer concludes that recovery would be 
impracticable).
    \316\ See, e.g., comment letters from Better Markets 1; and 
Public Citizen 1. These commenters recommended requiring 
identification of each executive officer from whom recovery is 
sought or obtained, the respective amounts, how the amounts were 
determined, and the status of the recovery effort. See also comment 
letters on the Reopening Release from CFA Institute 2; and ICGN 
(supporting disclosure of the timing, and materiality 
determination); and comment letter from ABA 1 (recommending 
requiring the issuer to identify the incentive-based compensation 
arrangements that were subject to recovery, to provide context for 
the amount of excess incentive-based compensation resulting from the 
restatement).
    \317\ See comment letter from ABA 1 (recommending guidance as to 
when a restatement is considered completed for purposes of 
triggering the disclosure requirement and clarification that 
disclosure would be required where the issuer's calculation results 
in no erroneously awarded compensation and where no such 
compensation is recovered because the board determines recovery 
would be impracticable).
---------------------------------------------------------------------------

    In contrast, some commenters recommended reducing or omitting 
certain of the proposed disclosure requirements.\318\ A number of 
commenters expressed concern or objected to identifying specific 
executive officers from whom recovery has not yet been made or where

[[Page 73106]]

recovery was not pursued,\319\ others raised concerns that the 
disclosure could violate data privacy laws of foreign 
jurisdictions,\320\ and two others suggested that this disclosure would 
invite second-guessing the board's decisions.\321\ Several of these 
commenters offered various alternative approaches to the disclosure 
requirement.\322\
---------------------------------------------------------------------------

    \318\ See, e.g., comment letters from BRT 1; CAP; Compensia; 
Exxon; Japanese Bankers; Mercer; NACD; Pay Governance; S&C 1; and 
UBS. A few commenters objected to the inclusion of the disclosure in 
Item 402. See comment letter from Pay Governance (suggesting more 
disclosure in the proxy statement would be administratively 
burdensome); and comment letters from NACD; and Public Citizen 1 
(recommending disclosure on Form 8-K). See also comment letters on 
the Reopening Release from Davis Polk 3 (suggesting that disclosure 
of the methodology for calculating the recoverable amounts would be 
burdensome, lack comparability, and involve litigation risk); 
McGuireWoods; and SCG 2 (suggesting that the disclosure could be 
confusing and would add legal, audit, compensation consulting, and 
other expenses).
    \319\ See, e.g., comment letters from BRT 1 (recommending board 
discretion to omit individuals' names given the range of potential 
factors including, security or safety concerns, the likelihood of 
ongoing confidential legal negotiations, or the potential personal 
impact of disclosure); CAP (expressing reputational concerns); 
Mercer (recommending against the disclosure and suggesting that 
exchanges could require individualized information in an issuer's 
submission to the exchange if critical to their compliance 
analysis); S&C 1 (suggesting that the specific identity of an 
executive will in most cases not be material to the evaluation of 
the boards' determination not to pursue recovery); and UBS 
(suggesting that naming individuals from whom the issuer determines 
not to recover is irrelevant and provides no benefit to 
shareholders). See also comment letter on the Reopening Release from 
McGuireWoods (recommending that compensation recovery disclosure 
regarding non-named executive officers be generalized).
    \320\ See, e.g., comment letters from Exxon (expressing concern 
that identifying the status of specific individuals in certain 
European Union and other jurisdictions could violate local data 
privacy laws); Japanese Bankers (expressing concern that the 
proposed disclosure may violate local personal information 
protection acts and noting that under Japanese law the scope of 
separate disclosure for financial reporting purposes is limited to 
certain highly compensated executives); and UBS (suggesting data 
privacy laws or regulations in various foreign jurisdictions could 
affect a listed issuer's ability to disclose personal information).
    \321\ See comment letters from ABA 1 (further noting the 
requirement could subject executives to embarrassing disclosure as 
to why they are unable to pay); and Compensia.
    \322\ See, e.g., comment letters from CAP (recommending 
identifying only named executive officers); BRT 1 (recommending 
providing board discretion over whether to identify executive 
officers); and Japanese Bankers (recommending disclosure on forgone 
recovery only for those executive officers responsible for preparing 
and disclosing financial statements). See also comment letters from 
ABA 1; and Mercer (recommending aggregate disclosure of amounts 
forgone and outstanding together with the number of executives from 
whom recovery was not pursued and amounts outstanding).
---------------------------------------------------------------------------

    In response to the request for comment in the Reopening Release 
some commenters supported adding check boxes to the cover page of Form 
10-K.\323\ Other commenters believed the check boxes would not provide 
useful information to investors and were not consistent with the 
Commission's modernization and simplification efforts.\324\
---------------------------------------------------------------------------

    \323\ See, e.g., comment letters on the Reopening Release from 
CFA Institute 2; CII 3; ICGN (also supporting Form 8-K disclosure); 
and Occupy. See also comment letter on the Second Reopening Release 
from AFR 2.
    \324\ See, e.g., comment letters on the Reopening Release from 
Davis Polk 3; McGuireWoods (stating that information regarding 
restatements and recovery of compensation are sufficiently covered 
by other disclosure rules such that this check box would provide 
little additional informational value to investors); and SCG 2.
---------------------------------------------------------------------------

    We similarly received varied comments on our proposal to require 
the disclosure be tagged using XBRL. Some commenters expressed support 
for the proposed implementation of XBRL data tagging.\325\ Other 
commenters opposed the data tagging requirement,\326\ while some 
recommended making tagging optional,\327\ or exempting SRCs and EGCs in 
view of the burden.\328\ In response to the request for comment in the 
Reopening Release regarding compensation recovery disclosure being 
separately detail tagged using Inline XBRL, some commenters supported 
Inline XBRL requirements for the compensation recovery information, 
suggesting that such requirements would lead to more timely and less 
costly analysis of the new disclosures.\329\ In contrast, some other 
commenters expressed concern or opposed the Inline XBRL requirements 
discussed in the Reopening Release, citing compliance costs and lack of 
comparability across filers as specific concerns.\330\
---------------------------------------------------------------------------

    \325\ See, e.g., comment letters from CII 1; CalPERS 1; and 
OPERS 1 (contending that tagging would lower investors' costs to 
collect the data and permit the information to be analyzed more 
efficiently).
    \326\ See, e.g., comment letters from CCMC 1; Davis Polk 1; FSR; 
FedEx 1; Hay Group; Mercer (recommending a comprehensive approach to 
tagging the proxy statement); and Pearl Meyer. Many of these 
commenters expressed concern regarding the cost of implementation 
versus the perceived benefits, such as the utility of the 
information to investors. See, e.g., comment letters from CCMC 1; 
Davis Polk 1 (expressing concern about the comparability of the 
data); FSR; FedEx 1; and Pearl Meyer.
    \327\ See comment letter from Hay Group.
    \328\ See comment letters from ABA 1; and Hay Group.
    \329\ See, e.g., comment letters on the Reopening Release from 
CFA Institute 2; CII 3; and XBRL US (Aug. 30, 2021) (recommending 
that the disclosure be tagged using Inline XBRL and be incorporated 
into the definitive proxy or information statement).
    \330\ See, e.g., comment letters on the Reopening Release from 
ABA 2; Davis Polk 3; and McGuireWoods. These commenters suggested 
that varying recovery processes may necessitate custom tagging, 
which would undermine comparability issues and thus limit the 
benefits of tagging.
---------------------------------------------------------------------------

3. Final Amendments
    After considering the views of commenters, we are adopting 
substantially as proposed rules to require that listed issuers disclose 
their recovery policies as an element of the listing standards and to 
require disclosure about, and the filing of, the issuer's recovery 
policy, in Commission filings. After considering comments to the 
Reopening Release, and in a change from the proposal, the final rules 
will additionally require: disclosure relating to an issuer's 
compensation recovery policy and recovery; tagging of the additional 
information in Inline XBRL; and additional check box disclosure on the 
cover of the Forms 10-K, 20-F, and 40-F.
    We believe Sections 10D(a) and (b) are intended to require listed 
issuers to adopt, comply with, and provide disclosure about their 
compensation recovery policies. Accordingly, Rule 10D-1 requires the 
listing standards adopted by exchanges to include that listed issuers 
disclose their recovery policies.\331\ As noted above, as a result of 
implementing the disclosure requirement as an element of the listing 
standards, we would expect exchanges to commence delisting proceedings 
for issuers that fail to make the required disclosure. 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 permits 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.
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    \331\ See 17 CFR 240.10D-1(b)(2).
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    The 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. To provide consistent disclosure across exchanges, Rule 10D-1 
provides that the required disclosure about the issuer's recovery 
policy must be filed in accordance with the disclosure requirements of 
the Federal securities laws. \332\ Amended Item 601(b) of Regulation S-
K requires that an issuer file its recovery policy as an exhibit to its 
annual report on Form 10-K.\333\ Structuring the provision in this

[[Page 73107]]

manner provides that, in addition to making the disclosure a condition 
to listing, it is also subject to Commission oversight to the same 
extent as other disclosure required in Commission filings.
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    \332\ Id.
    \333\ 17 CFR 229.601(b)(97). In a modification from the 
proposal, we are designating the exhibit containing the compensation 
recovery policy as Item 601(b)(97) rather than Item 601(b)(96) as 
was proposed because Item 601(b)(96) is currently in use. In 
addition, we are moving the definition of the affected registrant to 
the operative text rather than defining ``listed registrant'' for 
purposes of Item 601(b)(97). Corresponding filing requirements will 
apply to listed FPIs and registered management investment companies 
subject to Rule 10D-1. We are correspondingly amending the Form 20-F 
Instructions as to Exhibits to add new Instruction 97 and Form 40-F 
to add new paragraph 19(a) to General Instruction B. Form N-CSR is 
also being amended to renumber Item 18 (Exhibits) as Item 19 and add 
new paragraph (a)(2) to that item (and redesignating current 
paragraph (a)(2) as paragraph (a)(3)) for those registered 
management investment companies that are subject to the requirements 
of Rule 10D-1.
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    In connection with our implementation of Section 10D(b)(1), we are 
also using our discretionary authority to amend Item 402 of Regulation 
S-K, Form 40-F, and Form 20-F to require listed issuers to disclose how 
they have applied their recovery policies.\334\ In addition to new Item 
402(w), we are adding substantially as proposed a new instruction to 
the Summary Compensation Table to require that any amounts recovered 
pursuant to a listed issuer's compensation recovery policy reduce the 
amount reported in the applicable column, as well as the ``total'' 
column'' for the fiscal year in which the amount recovered initially 
was reported and be identified by footnote.\335\
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    \334\ See new Item 402(w) of Regulation S-K, Item 6.F. of Form 
20-F, and Instruction 19 of Form 40-F.
    \335\ See Instruction 5 to 17 CFR 229.402(c), and Instruction 5 
to 17 CFR 229.402(n). The language from the proposal has been 
revised for clarity but the revisions do not affect the substance of 
the instructions.
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    As adopted,\336\ 17 CFR 229.402(w)(1) (``Item 402(w)(1)'') \337\ 
applies if at any time during or after its last completed fiscal year 
the issuer was required to prepare an accounting restatement that 
required recovery of erroneously awarded compensation pursuant to the 
listed issuer's compensation recovery policy required by the listing 
standards adopted pursuant to Rule 10D-1, or there was an outstanding 
balance as of the end of the last completed fiscal year of erroneously 
awarded compensation to be recovered from the application of that 
policy to a prior restatement.\338\
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    \336\ In a nonsubstantive modification from the proposed rules 
and in order to streamline the rule, we have removed the separate 
definitions of certain terms and incorporated the substance of the 
definition into the text of the rule.
    \337\ All domestic listed issuers are subject to Item 402(w) 
disclosure and are required to provide the disclosure along with the 
issuer's other Item 402 disclosure as part of an issuer's annual 
reporting obligation. See Item 11. Executive Compensation of Form 
10-K.
    \338\ See Item 402(w)(1). The revised language of Item 402(w)(1) 
more clearly delineates when the disclosure is required and also 
addresses the commenter who asked for clarification of when a 
restatement is considered ``completed.'' This is because the trigger 
for disclosure is now when the issuer determines that it is required 
to prepare the restatement, which is the same event that triggers 
the issuer to comply with its compensation recovery policy pursuant 
to Rule 10D-1.
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    In these circumstances, an issuer will be required to provide the 
following information in its Item 402 disclosure:
     The date on which the listed issuer was required to 
prepare an accounting restatement and the aggregate dollar amount of 
erroneously awarded compensation attributable to such accounting 
restatement (including an analysis of how the recoverable amount was 
calculated) \339\ or, if the amount has not yet been determined, an 
explanation of the reasons and disclosure of the amount and related 
disclosures in the next filing that is subject to Item 402 of 
Regulation S-K; \340\
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    \339\ In a modification from the proposal, 17 CFR 
229.402(w)(1)(i)(B) will require an analysis of how the amount of 
erroneously awarded compensation was calculated. We believe that 
investors will benefit from disclosure of the analysis of how the 
amount was calculated and agree with commenters that suggested such 
disclosures could be particularly helpful in assessing the issuer's 
executive compensation policies and practices for purposes of 
shareholder voting.
    \340\ See 17 CFR 229.402(w)(1)(i)(A), (B), and (E). In another 
modification from the proposal, proposed Instruction 4 to Item 
402(w) has been incorporated into the rule as 17 CFR 
229.402(w)(1)(i)(E) (``Item 402(w)(1)(i)(E)'') and provides as 
proposed that if the aggregate dollar amount of erroneously awarded 
compensation has not yet been determined, the listed issuer must 
disclose this fact and explain the reasons. Item 402(w)(1)(i)(E) 
also now includes a requirement, when the amount has not yet been 
determined, to disclose the amount and related disclosures in the 
next filing that is subject to Item 402 of Regulation S-K. This 
modification was necessary, because otherwise the issuer would not 
be required to disclose the determined amount in a subsequent year 
unless the amount is still outstanding at the end of the year.
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     The aggregate dollar amount of erroneously awarded 
compensation that remains outstanding at the end of its last completed 
fiscal year; \341\
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    \341\ See 17 CFR 229.402(w)(1)(i)(D). To the extent that a 
company determines recovery is impracticable in reliance on the 
exceptions in 17 CFR 240.10D-1(b)(1)(iv), the balance would no 
longer be outstanding and disclosure under this section would no 
longer be provided.
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     If the financial reporting measure related to a stock 
price or TSR metric, the estimates used to determine the amount of 
erroneously awarded compensation attributable to such accounting 
restatement and an explanation of the methodology used for such 
estimates; \342\
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    \342\ See 17 CFR 229.402(w)(1)(i)(C).
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     If recovery would be impracticable pursuant to 17 CFR 
240.10D-1(b)(1)(iv) (``Rule 10D-1(b)(1)(iv)''), for each current and 
former named executive officer and for all other current and former 
executive officers as a group, disclose the amount of recovery forgone 
and a brief description of the reason the listed registrant decided in 
each case not to pursue recovery; \343\ and
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    \343\ See 17 CFR 229.402(w)(1)(ii).
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     For each current and former named executive officer, 
disclose the amount of erroneously awarded compensation still owed that 
had been outstanding for 180 days or longer since the date the issuer 
determined the amount owed.\344\
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    \344\ In response to commenters' concerns regarding the privacy 
of executive officers, in a modification from the Proposing Release 
the final amendments limit these detailed disclosures to current and 
former named executive officers. We are requiring the more detailed 
disclosure for current and former named executive officers for the 
same reasons as those discussed at note 343 supra. See 17 CFR 
229.402(w)(1)(iii). More general information about amounts remaining 
outstanding is required by 17 CFR 229.402(w)(1)(i)(D).
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    We continue to believe that disclosure regarding the use of the 
impracticability exception in Rule 10D-1(b)(1)(iv) will provide 
information to shareholders and exchanges that will help them monitor 
the implementation of an issuer's recovery policy. Any brief 
description of the reason an issuer determined not to pursue recovery 
should include the element of Rule 10D-1(b)(1)(iv) that caused the 
impracticability, and should provide additional context relating to 
that element, such as:
     A brief explanation of the types of direct expenses paid 
to a third party to assist in enforcing the recovery policy, if the 
issuer is relying on Rule 10D-1(b)(1)(iv)(A);
     Identification of the provision of foreign law the 
recovery policy would violate if the issuer is relying on Rule 10D-
1(b)(1)(iv)(B); or
     A brief explanation of how the recovery policy would cause 
an otherwise tax-qualified retirement plan to fail to meet the 
requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a), if the issuer 
is relying on Rule 10D-1(b)(1)(iv)(C).
    Upon further consideration and in response to commenters concerns 
regarding the privacy of executive officers,\345\ in a modification 
from the Proposing Release the final amendments require specific 
disclosure regarding use of the impracticability exception with respect 
only to the current and former named executive officers. The final 
amendments require more generalized disclosure regarding use of the 
impracticability exception with respect to other current and former 
executive officers as a group. Aggregated disclosure of recovery from 
the group of officers other than named executive officers is consistent 
with the registrant's reporting obligations for executive compensation 
purposes, and will help investors to monitor the registrant's 
implementation of its recovery obligation. However, we believe that 
more detailed information

[[Page 73108]]

for the named executive officers is appropriate, as it will be relevant 
to investors' understanding of current and prior compensation 
disclosures.
---------------------------------------------------------------------------

    \345\ See notes 319 through 322.
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    We are also adopting the amendment to Item 404(a) providing that an 
issuer that complies with its Item 402(w) disclosure requirements need 
not disclose any incentive-based compensation recovery pursuant to Item 
404(a).\346\
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    \346\ Item 404(a) requires a description of certain transaction 
between the issuer and a related person. To avoid duplicative 
disclosure, we are amending Instruction 5.a.iii to Item 404(a) of 
Regulation S-K largely as proposed. We are clarifying the 
description of affected compensation in the instruction to indicate 
that it applies to erroneously awarded compensation computed as 
provided in 17 CFR 240.10D-1(b)(1)(iii) and the applicable listing 
standards for the registrant's securities. See also Instruction 1 to 
Item 22(b)(20) of Schedule 14A for registered management investment 
companies (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)). See also Item 7.B to Form 20-F for 
FPIs (disclosure need not be provided pursuant to this Item if the 
transaction involves the recovery of erroneously awarded 
compensation that is disclosed pursuant to Item 6.F).
---------------------------------------------------------------------------

    The requirements elicit disclosure regarding an issuer's activity 
to recover erroneously awarded compensation during its last completed 
fiscal year. In a nonsubstantive modification from the proposal, we are 
adopting the substance of Instruction 5 to Item 402(w) as new 17 CFR 
229.402(w)(3), which limits the disclosure requirement to proxy or 
information statements that call for Item 402 disclosure and the 
issuer's annual report on Form 10-K and provides that the information 
required by 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. As this information is similar to other executive 
compensation information required by Item 402 and is likely to serve a 
similar purpose for investors in evaluating the issuer and making 
voting decisions, we believe that the information is most relevant to 
shareholders in an issuer's proxy or information statements that call 
for Item 402 disclosure and the issuer's annual report on Form 10-K.
    As proposed, the disclosure will be required as a separate item 
rather than as an amendment to the CD&A requirement because the 
requirements apply to any current or former executive officer, not just 
``named executive officers'' and CD&A requirements do not apply to 
SRCs, EGCs, and FPIs,\347\ all of which are subject to the new 
requirements.\348\
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    \347\ SRCs and EGCs are not required to provide CD&A in 
accordance with the scaled disclosure requirements contained in Item 
402 of Regulation S-K. See 17 CFR 229.402(l) and Section 102(c) of 
the JOBS Act. FPIs 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, FPIs 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 17 CFR 
229.402(a)(1) of Regulation S-K.
    \348\ We note that a listed issuer required to provide CD&A 
could choose to include the Item 402(w) disclosure in its CD&A 
discussion of its recovery policies and decisions pursuant to 17 CFR 
229.402(b)(2)(viii) of Regulation S-K, which could benefit investors 
by disclosing all compensation recovery information together in the 
filing.
---------------------------------------------------------------------------

    With respect to registered management investment companies subject 
to Rule 10D-1, the final rules will require information mirroring the 
Item 402(w) disclosure to be included in annual reports on Form N-CSR 
and in proxy statements and information statements relating to the 
election of directors.\349\ Similarly for listed FPIs, the same 
information called for by Item 402(w) will be required in their annual 
reports filed with the Commission pursuant to Section 13(a) or Section 
15(d) of the Exchange Act, such as on Form 20-F or, if the issuer 
elects to use the registration and reporting forms that U.S. issuers 
use, on Form 10-K.\350\ MJDS filers will be required to provide this 
information in annual reports on Form 40-F.\351\
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    \349\ See Item 18 of Form N-CSR; Item 22(b)(20) of Schedule 14A. 
We are also amending General Instruction D to Form N-CSR to permit 
registered management investment companies subject to Rule 10D-1 to 
answer the information required by Item 18 by incorporating by 
reference from the company's definitive proxy statement or 
definitive information statement. In addition, we are amending 17 
CFR 270.30a-2 to reflect the new item numbers in Form N-CSR. We are 
also cross-referencing Item 18 of Form N-CSR in Item 22(b)(20) of 
Schedule 14A rather than restating the requirements of Form N-CSR in 
Schedule 14A.
    \350\ Because securities registered by these listed issuers are 
exempt from Section 14(a) of the Exchange Act, these issuers are not 
required to disclose any proxy or consent solicitation materials 
with respect to their securities under that provision. See Item 6.F 
of Form 20-F.
    \351\ See Paragraph (19) of General Instruction B of Form 40-F.
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    In addition, we are amending the cover page of Form 10-K, Form 20-
F, and Form 40-F to add check boxes that indicate separately (a) 
whether the financial statements of the registrant included in the 
filing reflect correction of an error to previously issued financial 
statements, and (b) whether any of those error corrections are 
restatements that required a recovery analysis of incentive-based 
compensation received by any of the registrant's executive officers 
during the relevant recovery period pursuant to Sec.  240.10D-
1(b).\352\ Comments in response to the Reopening Release generally 
supported the addition of check boxes to the cover page of Form 10-
K.\353\ Particularly as it relates to ``little r'' restatements which 
typically are not disclosed or reported as prominently as ``Big R'' 
restatements, the check boxes provide greater transparency around such 
restatements and easier identification for investors of those that 
triggered a compensation recovery analysis. Although the Reopening 
Release did not specifically ask about Forms 20-F and 40-F, these forms 
serve corresponding purposes as Form 10-K, and for similar reasons, we 
believe it will be beneficial to investors to include similar check 
boxes on the cover pages of these forms and note that their inclusion 
will be a relatively low burden. We are not adopting the check-box 
requirement for annual reports filed on Form N-CSR because the current 
content and formatting requirements for registered management 
investment companies' annual reports do not otherwise include check 
boxes, and because we anticipate that a limited number of registered 
management investment companies will be affected by the final 
rules.\354\
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    \352\ In a nonsubstantive change from the Reopening Release, we 
have refined certain terminology for clarity.
    \353\ While we recognize some commenters' concerns regarding the 
usefulness of the information provided by the check boxes and their 
views that additional check boxes do not simplify the disclosure, we 
believe that the check boxes will help investors more readily 
identify restatements by issuers and whether any of the restatements 
triggered a compensation recovery analysis. See supra note 324. We 
agree with those commenters that suggested that compensation 
recovery analysis is relevant to investors such that a check box 
appropriately highlights the issue. See supra note 323.
    \354\ We estimate that only seven registered management 
investment companies that are listed issuers and are internally 
managed may have executive officers who receive incentive-based 
compensation, and thus could be subject to the new rules.
---------------------------------------------------------------------------

    Relatedly, in a modification from the proposal, to allow investors 
to understand the check boxes in the appropriate context of the 
issuer's application of its recovery policy, we are adding a disclosure 
requirement in a new 17 CFR 229.402(w)(2) to require that, if at any 
time during its last completed fiscal year a registrant prepared an 
accounting restatement, and the registrant concluded that recovery of 
erroneously awarded compensation was not required pursuant to the 
registrant's

[[Page 73109]]

compensation recovery policy required by the listing standards adopted 
pursuant to Rule 10D-1, the issuer must briefly explain why application 
of its recovery policy resulted in this conclusion. The additional 
disclosure will provide useful context to investors and the exchanges 
when an issuer has issued an accounting restatement and facilitates a 
better understanding of how an issuer is applying its recovery policy.
    Finally, in a modification from the proposal, we are requiring 
tagging of any specific data points included within the compensation 
recovery disclosures, as well as block text tagging of those 
disclosures, in Inline XBRL.\355\ Because existing Commission rules 
require the Inline XBRL tagging of all cover page information on Forms 
10-K, 20-F, and 40-F, the two new cover page check boxes will be tagged 
in Inline XBRL.\356\ We recognize some commenters' concerns relating to 
the costs of implementing the use of XBRL and their additional concerns 
that the data may lack comparability across filers, including as a 
result of custom tagging, which may limit its utility to investors. 
However, we agree with other commenters that Inline XBRL requirements 
will facilitate analysis of the new compensation recovery disclosures, 
even in situations where the particular characteristics of compensation 
recovery programs, such as the methods by which filers calculate the 
amount of erroneously awarded compensation, may not be fully comparable 
across filers (e.g., by enabling analysis of trends in a single filer's 
disclosures over multiple reporting periods). Requiring Inline XBRL 
tagging of the compensation recovery disclosure benefits investors by 
making the disclosures more readily available and easily accessible to 
investors, market participants, and others for aggregation, comparison, 
filtering, and other analysis, as compared to requiring a non-machine-
readable data language such as ASCII or HTML. At the same time, we do 
not expect the incremental compliance burden associated with tagging 
the additional information to be unduly burdensome, because issuers 
subject to the tagging requirements are, or in the near future will be, 
subject to similar Inline XBRL requirements in other Commission 
filings.\357\
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    \355\ See 17 CFR 229.402(w)(4) of Regulation S-K and 17 CFR 
232.405 (Rule 405 of Regulation S-T). In a nonsubstantive 
modification from the proposal, we have moved the appearance and 
formatting requirement to 17 CFR 229.402(w)(3) and have separately 
addressed requirements relating to interactive data in 17 CFR 
229.402(w)(4).
    \356\ See 17 CFR 229.601(b)(104) and 17 CFR 232.406 (Rule 406 of 
Regulation S-T). Issuers will thus be required to use the most 
updated versions of all taxonomies used to tag the filing to comply 
with the rule.
    \357\ As noted in the Reopening Release, subsequent to the 
proposal, the Commission adopted rules replacing XBRL tagging 
requirements for issuer financial statements and open-end fund risk/
return summary disclosures with Inline XBRL tagging requirements. 
Inline XBRL embeds the machine-readable tags in the human-readable 
document itself, rather than in a separate exhibit. See Inline XBRL 
Filing of Tagged Data, Release No. 33-10514 (June 28, 2018) [83 FR 
40846 (Aug. 16, 2018)]. As a result of those changes, we are using 
Inline XBRL, rather than XBRL, for the tagging requirements. See 
also Securities Offering Reform for Closed-End Investment Companies, 
Release No. 33-10771 (Apr. 8, 2020) [85 FR 33290 (June 1, 2020) at 
33318]. Inline XBRL requirements for business development companies 
will take effect beginning Aug. 1, 2022 (for seasoned issuers) and 
Feb. 1, 2023 (for all other issuers).
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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. In the context of Securities 
Act registration statements, a registrant is required to state the 
general effect of any statute, charter provisions, bylaws, contract or 
other arrangements under which any controlling person, director, or 
officer of the registrant is insured or indemnified in any manner 
against liability which he may incur in his capacity as such.\358\
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    \358\ See 17 CFR 229.702.
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1. Proposed Amendments
    The Commission proposed that listed issuers would be prohibited 
from indemnifying any executive officer or former executive officer 
against the loss of erroneously awarded compensation. 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 officer for premiums for such an insurance policy.
Comments
    We received mixed comments on the proposal that listed issuers be 
prohibited from indemnifying any executive officer or former executive 
officer against the loss of erroneously awarded compensation. A number 
of commenters expressly supported the proposed treatment of 
indemnification and insurance.\359\ Some of these commenters suggested 
that permitting indemnification would fundamentally undermine the 
purpose of the statute and effectively nullify the mandatory nature of 
the compensation recovery.\360\ Some commenters recommended that the 
Commission go even further, such as by discouraging or prohibiting 
executive officers from procuring their own insurance.\361\
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    \359\ See, e.g., comment letters from; AFL-CIO; AFR 1; CalPERS 
1; and Rutkowski 1. See also comment letter from ABA 1 (expressing 
qualified support, but stating that issuers should not be prohibited 
from indemnifying executives' litigation expenses in compensation 
recovery actions consistent with state law, noting that these 
arrangements permit advancement of legal expenses incurred in 
defending a claim by the issuer if the executive ``acted `in good 
faith' and in a manner reasonably believed to be, or not opposed to, 
the best interests of the issuer'').
    \360\ See, e.g., comment letters from AFL-CIO; AFR 1; and 
Rutkowski 1.
    \361\ See, e.g., comment letters from American Insurance 
Association (``AIA''); Better Markets 1; FSR; and TCA.
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    In contrast, a number of commenters expressed concerns with the 
proposed prohibition.\362\ Some of these commenters contended that 
Section 10D does not prohibit indemnification.\363\ One commenter 
recommended the approach in 17 CFR 229. 512(h) where the Commission 
expresses its opinion regarding indemnification, but does not prohibit 
it by rule.\364\ Some others asserted that a prohibition on 
indemnification or issuer-paid insurance would be appropriate only 
where recovery is premised on fraud or

[[Page 73110]]

misconduct.\365\ Commenters additionally expressed concern that the 
rule could be construed to conflict with state law provisions providing 
for indemnification under certain circumstances.\366\
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    \362\ See, e.g., comment letters from Bishop (expressing concern 
over retroactive application to existing compensation agreements); 
CCMC 1; Compensia (suggesting compensation payments in the ordinary 
course of business could be mistaken for indemnification and 
recommending guidance); NACD; Pearl Meyer (expressing concern that a 
prohibition on indemnification could adversely affect a public 
company's ability to hire executive officers); and SCG 1.
    \363\ See, e.g., comment letters from Bishop (suggesting that 
``will'' in Section 10D expresses ``a simple futurity'' whereas 
``shall'' expresses an obligation); CCMC 1 (suggesting the proposal 
may exceed the Commission's authority as it would touch on state 
regulation of insurance products); and SCG 1.
    \364\ See comment letter from CCMC 1. 17 CFR 229.512(h) provides 
that if acceleration of a Securities Act registration statement is 
requested, the registration statement is required to include an 
undertaking stating that the registrant has been advised that in the 
opinion of the Securities and Exchange Commission indemnification of 
directors, officers and controlling persons for liabilities arising 
under the Securities Act is against public policy as expressed in 
the Securities Act and is therefore unenforceable. The undertaking 
further provides that in the event that such a claim for 
indemnification is asserted, the registrant will, unless in the 
opinion of its counsel the matter has been settled by controlling 
precedent, submit to a court of appropriate jurisdiction the 
question whether such indemnification by it is against public policy 
as expressed in the Securities Act and will be governed by the final 
adjudication of such issue.
    \365\ See comment letters from NACD; and SCG 1.
    \366\ See comment letters from Bishop; and SCG 1 (suggesting 
that the risk of private litigation would justify issuer 
indemnification and insurance and citing to the General Corporation 
Law of Delaware that provides for indemnification where the agent 
has been successful on the merits).
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3. Final Amendments
    After considering the views of commenters, we are adopting as 
proposed rules to prohibit issuers from insuring or indemnifying any 
executive officer or former executive officer against the loss of 
erroneously awarded compensation.\367\ While an executive officer may 
be able to purchase a third-party insurance policy to fund potential 
recovery obligations, the indemnification provision prohibits an issuer 
from paying or reimbursing the executive officer for premiums for such 
an insurance policy.\368\
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    \367\ See 17 CFR 240.10D-1(b)(1)(v).
    \368\ Such indemnification or reimbursement would also be 
prohibited through modification to current compensation arrangements 
or other means that would amount to de facto indemnification, such 
as, for example, by providing an executive a new cash award which 
the issuer would then ``cancel'' to effect recovery of outstanding 
recoverable amounts.
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    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.'' \369\ The Proposing Release acknowledged 
that 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.\370\ However, 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.\371\ 
Indemnification arrangements that permit executive officers to retain 
or recover compensation that they were not entitled to receive based on 
restated financial statements would fundamentally undermine the purpose 
of Section 10D.\372\
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    \369\ See Senate Report at 136.
    \370\ See Proposing Release at Section II.F.
    \371\ See Cohen v. Viray, 622 F.3d 188, 195 (2d Cir. 2010) 
(holding that an indemnification agreement cannot be used to release 
the CEO and CFO from liability to repay compensation under Sarbanes-
Oxley Act Section 304, 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 officer's 
purchase of this coverage, the executive officer retains the excess 
compensation to which he or she was not entitled.
    \372\ See 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'').
---------------------------------------------------------------------------

    We further believe that Section 29(a) of the Exchange Act would 
render any indemnification agreement void and unenforceable to the 
extent that the agreement purported to relieve the issuer of its 
obligation under Section 10(D), Rule 10D-1, and a resulting listing 
standard to recover erroneously paid incentive-based compensation. 
Section 29(a) provides that any 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.\373\ 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.' '' \374\
---------------------------------------------------------------------------

    \373\ 15 U.S.C. 77cc. National securities exchanges and national 
securities associations are self-regulatory organizations. 15 U.S.C. 
78c(a)(26).
    \374\ See 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)). See also Cohen v. Viray, 
622 F.3d at 195 (citing Section 29(a) in rejecting indemnification 
against Sarbanes-Oxley Act Section 304 liability); and 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).
---------------------------------------------------------------------------

    We acknowledge commenters who raised various concerns with respect 
to the prohibition on issuers insuring or indemnifying executive 
officers with respect to recoverable compensation. While we acknowledge 
that states may have specific provisions permitting issuers to 
indemnify or insure their executive officers in certain circumstances, 
we are unaware of any provisions that mandate such indemnification or 
insurance, and as such, we do not believe the final rules are in 
conflict with such provisions. We also acknowledge, as one commenter 
observed, that states regulate certain insurance products. 
Nevertheless, we believe Rule 10D-1's prohibition is necessary to 
ensure that the recovery policy mandated by Congress for issuers listed 
on U.S. national exchanges is given actual effect. Additionally, 
because the rules apply to all listed issuers, with limited exceptions, 
we do not find the assertions by commenters that such prohibitions 
would put issuers at a disadvantage in the ability to hire executive 
officers to be compelling. In light of Section 10D's mandate to return 
to issuers and shareholders compensation that was erroneously awarded, 
we agree with commenters who asserted that any issuer indemnification 
or insurance of an executive officer's obligation to return erroneously 
awarded compensation would be contrary to the statute, and therefore, 
we continue to believe it is appropriate to restrict an issuer's 
ability to do so.

F. Transition and Timing

    Section 10D does not address transition and timing of 
implementation of the rules.
1. Proposed Amendments
    The Commission proposed that each exchange be required to file its 
proposed listing standards no later than 90 days following publication 
of the final rules in the Federal Register, and that such listing 
standards be effective no later than one year following that same 
publication date. Further, each listed issuer would be required to 
adopt a compliant recovery policy no later than 60 days following the 
date on which the listing rules to which it is subject become 
effective. The Commission also proposed that each listed issuer be 
required to recover pursuant to the issuer's recovery policy 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

[[Page 73111]]

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.
    Finally, the Commission proposed that an issuer be required to file 
the required disclosures in the applicable Commission filings required 
on or after the date on which the listing standards become effective.
2. Comments
    We received limited comment on transition and timing. One commenter 
found the proposed schedule for the exchanges to file their proposed 
listing standards and have them declared effective to be ``workable and 
appropriate.'' \375\
---------------------------------------------------------------------------

    \375\ See comment letter from ABA 1.
---------------------------------------------------------------------------

    Commenters that addressed the issue generally supported applying 
recovery policies only to incentive-based awards granted or performance 
periods that begin after the effective date of the relevant exchange 
listing standards \376\ or the effective date of the final rules.\377\ 
Some of these commenters expressed concerns regarding retroactive 
application of the rules,\378\ with one noting that applying the rule 
to awards earned or vested after the effective date of Rule 10D-1 could 
pick up awards granted prior to the effective date.\379\ A number of 
commenters also expressed concern regarding the effect of the rules on 
existing contracts, noting that existing contracts typically can be 
amended only with consent.\380\ Finally, some commenters thought the 
proposed 60-day period for issuers to adopt their recovery policies 
following the effective date of the exchanges' listing rules was too 
short and recommended additional time.\381\
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    \376\ See, e.g., comment letters from ABA 1; BRT 1; Compensia; 
Chevron; Mercer; and NACD.
    \377\ See, e.g., comment letters from CCMC 1; Coalition; 
Meridian; and SCG 1.
    \378\ See comment letters from CCMC; and Coalition.
    \379\ See comment letter from Chevron.
    \380\ See, e.g., comment letters from ABA 1 (stating that if the 
rule is not applied on a wholly prospective basis, it should apply 
only to erroneously awarded compensation granted after the effective 
date of final Rule 10D-1); BRT 1; CCMC 1; Coalition; Mercer; 
Meridian; NACD (stating that questions of contractual violations are 
serious and may not be resolved merely through an amendment to by-
laws); and SCG 1 (suggesting that issuers may only be able to amend 
plans on a prospective basis, as plans often prohibit amendments 
that impair a participant's rights to an outstanding award, unless 
the participant consents). See also comment letters in response to 
the Reopening Release from ABA 2; Cravath; Hunton; McGuireWoods; and 
SCG 2. Some of these commenters recommended exceptions for existing 
contracts or awards (Cravath and Hunton) or an exception for 
compensation paid pursuant to existing employment and equity award 
agreements (SCG 2).
    \381\ See comment letters from ABA 1 (recommending an exemption 
or a delayed phase-in of at least two years for SRCs and EGCs); NACD 
(recommending 90 days); and Davis Polk 1 (recommending six months).
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3. Final Amendments
    After considering the views of commenters, we are adopting 
transition and timing requirements substantially as proposed, with a 
modification in response to commenters (as described below). Under the 
final amendments, issuer compliance is 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.
    Under the rules we are adopting: (i) each exchange will be required 
to file its proposed listing standards no later than 90 days following 
the November 28, 2022, (ii) the listing standards must be effective no 
later than one year following the November 28, 2022, and (iii) each 
issuer subject to such listing standards will be required to adopt a 
recovery policy no later than 60 days following the date on which the 
applicable listing standards become effective.\382\ We would not expect 
compliance with the disclosure requirement until issuers are required 
to have a policy under the applicable exchange listing standard.
---------------------------------------------------------------------------

    \382\ See 17 CFR 240.10D-1(a)(2) and (3).
---------------------------------------------------------------------------

    As noted above, several commenters raised concerns about 
application of the mandated recovery policy to compensation that was 
granted prior to the effective date of the rules. In a modification 
from the proposal in response to these concerns, and to provide an 
additional transition period, the final rules provide that each listed 
issuer is required to comply with the recovery policy for all 
incentive-based compensation received (as defined in 17 CFR 240.10D-
1(d) \383\) by current or former executive officers on or after the 
effective date of the applicable listing standard (as opposed to the 
effective date of Rule 10D-1).\384\ In addition, each listed issuer is 
required to provide the disclosures required by the rule and Item 
402(w) in the applicable Commission filings required on or after the 
date on which the exchanges' listing standards become effective.\385\
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    \383\ Rule 10D-1 states ``[i]ncentive-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.''
    \384\ See 17 CFR 240.10D-1(a)(3)(ii). Notwithstanding the look-
back requirement in 17 CFR 240.10D-1(b)(1)(i)(D), an issuer is only 
required to apply the recovery policy to incentive-based 
compensation received after the effective date of the applicable 
listing standard.
    \385\ See 17 CFR 240.10D-1(a)(3)(iii). Issuers subject to such 
listing standards will be required to adopt a recovery policy no 
later than 60 days following the date on which the applicable 
listing standards become effective and must begin to comply with 
these disclosure requirements in proxy and information statements 
and the issuer's annual report on Form 10-K on or after the issuer 
adopts its recovery policy.
---------------------------------------------------------------------------

    Notwithstanding these extended transition periods, we recognize 
that there could be incentive-based compensation that is the subject of 
a compensation contract or arrangement that existed prior to the 
effective date of Rule 10D-1 which was not received until after the 
effective date of the applicable listing standards--and therefore would 
be subject to recovery under the final amendments. We do not believe 
this would be an inappropriate application of the mandated recovery 
policy. In our view, executives do not have a reasonable settled 
expectation in retaining compensation that was erroneously awarded 
based on misreported financial metrics, particularly when those 
financial metrics were attained on or after the effective date of the 
applicable listing standards, as contemplated by the final amendments. 
For similar reasons, we do not believe it is inappropriate to apply the 
mandated recovery policy to pre-existing compensation contracts or 
arrangements.
    While we acknowledge commenter concerns about the need for adequate 
time to prepare for the application of the listing standards and the 
development of appropriate recovery policies, including in some cases 
the renegotiation of certain contracts, we believe the final rules 
provide ample time for such preparations. In that regard, we note that 
issuers will have more than a year from the date the final rules are 
published in the Federal Register to prepare and adopt compliant 
recovery policies. We believe the prescriptive nature of Rule 10D-1 
provides issuers with sufficient notice to begin such preparations 
concurrently with listing standards being finalized.

III. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.

[[Page 73112]]

    Pursuant to the Congressional Review Act, the Office of Information 
and Regulatory Affairs has designated these rules a ``major rule,'' as 
defined by 5 U.S.C. 804(2).

IV. 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 exchanges and associations to prohibit the listing of issuers 
that do not develop and implement policies to recover erroneously 
awarded incentive-based compensation.\386\ The policies must provide 
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,\387\ 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. 
From an economic perspective, when implemented, this change will 
effectively return the erroneously awarded compensation to the 
shareholders. 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 adopting a new rule and rule amendments to 
satisfy the statutory mandates of Section 10D. As discussed above, we 
believe the intent of these statutory mandates is to require the return 
of executive compensation that was awarded erroneously to the issuer 
and its shareholders.
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    \386\ See Section I.
    \387\ The trigger events would include both ``Big R'' and 
``little r'' restatements that correct errors in previously issued 
financial statements. See Section II.B.
---------------------------------------------------------------------------

    We have reviewed the letters and information provided by 
commenters, and performed an analysis of the main economic effects that 
may flow from the rules being adopted in this release. We consider the 
economic impact--including the costs and benefits and the impact on 
efficiency, competition, and capital formation--of the final rule 
requirements on issuers and other affected parties, relative to the 
baseline discussed below. 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.\388\ Further, 
Section 23(a)(2) of the Exchange Act requires us, when making rules 
under the Exchange Act, to consider the impact any new rule would have 
on competition and 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.\389\ Where practicable, we have attempted 
to quantify the effects of the final rules; however, in many cases, we 
are unable to do so because we lack the data necessary to provide a 
reasonable estimate. For purposes of this economic analysis, we address 
the costs and benefits resulting from the statutory mandate and from 
our exercise of discretion together, recognizing that it is difficult 
to separate the costs and benefits arising from these two sources.
---------------------------------------------------------------------------

    \388\ See 15 U.S.C. 78c(f); 15 U.S.C. 80a-2(c).
    \389\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

A. Baseline

    To assess the economic impact of the final rules, 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. We begin by analyzing affected issuers, 
including the prevalence of incentive-based compensation. Next, we 
provide information on the frequency of restatements as triggering 
events. We also provide information on the regulatory baseline. 
Finally, we provide information on how many issuers currently have 
compensation recovery provisions, as well as descriptive information 
regarding those provisions.
    We recognize that a substantial number of issuers \390\ will be 
affected, since incentive-based compensation \391\ is widely used. 
Although statistics reflecting the prevalence of incentive-based 
compensation precisely as defined in this rulemaking are not available, 
one study \392\ found that 97% of a representative sample of the S&P 
500 companies grant performance-based compensation as part of their 
long-term incentive plans, though the prevalence might be lower among 
smaller companies.\393\
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    \390\ As a starting point to describe the number of affected 
issuers, we identify the number of exchange listed companies. As of 
Dec. 31, 2021, there were approximately 5,300 exchange listed 
companies (excluding closed end funds and REITs). We recognize that 
there are many companies that, because they are not exchange listed, 
will not be affected by these rules. For instance, on Aug. 22, 2022, 
there were 12,454 securities quoted on OTCmarket.com, (see OTC 
Markets Grp. Inc., Current Market, OTC Markets (Aug. 22, 2022), 
https://www.otcmarkets.com/market-activity/current-market) and from 
2013-2015 there were roughly 10,000 stocks quoted on OTC markets. 
See Josh White, Outcomes of Investing in OTC Stocks, (working paper, 
Dec. 16, 2016), available at https://www.sec.gov/files/White_OutcomesOTCinvesting.pdf.
    \391\ Compensation that may trigger recovery under the final 
rules includes amounts awarded under long-term incentive plans (such 
as performance-based equity) or short-term incentive plans (such as 
cash bonuses) that are granted, vested, or whose size is determined 
based on a financial metric.
    \392\ See Meridian Compensation Partners, 2021 Corporate 
Governance and Incentive Design Survey (Fall 2021), available at 
https://www.meridiancp.com/insights/2021-corporate-governance-and-incentive-design-survey/ (``Meridian Report'') (97% of a 
representative sample of S&P 500 companies grant performance-based 
vehicles as part of their long-term incentive plans as of 2021); see 
also Andrea Pawliczek, Performance-Vesting Share Award Outcomes and 
CEO Incentives, 96 Acct. Rev. 337 (2021) (``As of 2014, about 60 
percent of S&P 1500 companies granted some form of performance-based 
equity awards''). These studies describe performance-based incentive 
awards, which may often, but not always, be included in the 
incentive-based compensation affected by this rulemaking. For 
example, as described in Section II.C.2.a.iii, incentive-based 
compensation would not include awards based on nonfinancial events, 
such as opening a specified number of stores, and it would include 
cash awards based on satisfaction of a performance target that is 
based on a financial reporting measure even if the performance 
target was not pre-established or communicated, or the outcome was 
not substantially uncertain.
    \393\ The three most common performance metrics used by the 
representative sample of the S&P 500 companies in long-term 
incentive plans were relative TSR (74%), return measures (46%), and 
earnings per share (31%). See Meridian Report. An alternative sample 
of firms, including smaller and foreign firms, yields slightly 
different results. Based on Commission staff analysis of 145 
randomly sampled issuers drawn from the full population of issuers 
that filed an annual proxy statement in calendar year 2021, we 
estimate that approximately 42% of proxy statement filers used stock 
price and/or TSR as an element of their incentive-based 
compensation. Staff manually examined the CD&A in each of the 145 
proxy statements to identify issuers that disclosed the use of stock 
price and/or TSR as compensation performance metrics in 2021. For 
purposes of this analysis, TSR may refer to relative TSR as well as 
TSR. This estimate is broadly consistent (see Scott Allen, et al., 
The Latest Trends in Incentive Plan Design as Firms Adjust Plans 
Amid Uncertainty, Humancapital/Aon Blog (Oct. 2020), available at 
https://humancapital.aon.com/insights/articles/2020/the-latest-trends-in-incentive-plan-design-as-firms-adjust-plans-amid-uncertainty (indicating, in Figure 9, that TSR is the most commonly 
used metric in the CEO's long-term incentive plan among S&P 500 
companies in most industries, where the use of TSR ranges from 22% 
to 61% of companies depending on the industry). See also comment 
letter from CEC 2, noting that in 2020, the average portion of 
equity awards tied to performance metrics (not including stock 
options) surpassed 50%, and that the average portion of at risk pay 
in a CEO's compensation package exceeds 80%.
---------------------------------------------------------------------------

    The incidence of events where incentive-based compensation would be

[[Page 73113]]

required to be recovered is affected by the number of restatements. One 
report indicates that 4.8% of companies disclosed a restatement in 
2020.\394\ As discussed above, both ``Big R'' and ``little r'' 
restatements may trigger compensation recovery analysis under the final 
rules.\395\ As reported in the 2022 staff memorandum, we estimate that 
``little r'' restatements may account for roughly three times as many 
restatements as ``Big R'' restatements.\396\ Similarly, one recent 
study of accounting restatements between 2008 and 2015 identifies 634 
``Big R'' restatements and 1,653 ``little r'' restatements.\397\
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    \394\ See A Twenty-One Year Review. In 2021, the number of 
restatements was substantially higher due to Special Purpose 
Acquisition Company (``SPAC'') restatements. Excluding SPAC 
restatements, there was a 10% year-over-year decrease in the number 
of restatements. See A Twenty-One-Year Review. Studies cited and 
data included in this release on ``little r'' restatement frequency 
may define ``little r'' restatements differently than the definition 
included in Section II, and are generally based on the total number 
of revisions to previously issued financial statements where the 
issuer did not file an Item 4.02 8-K. We note that one commenter 
observed that, ``if Dodd-Frank section 954 were in place in 2009, 
executive officers at up to 674 companies would have been subject to 
the clawback provisions,'' see comment letter from Kovachev, 2015. 
The commenter cited Audit Analytics, 2009 Financial Restatements, A 
Nine Year Comparison. The number of restatements has substantially 
declined since 2009 to 338 in 2021, after excluding SPAC 
restatements, see A Twenty-One Year Review (non-SPAC restatements 
comprise 23% of the total 1,470 restatements). We note that another 
commenter observed that since the initial 2015 proposal, 
``improvements in checks and balances--such as board governance, 
audit committee oversight, and company systems of internal control 
over financial reporting--along with increased regulatory scrutiny 
by the SEC and PCAOB have occurred and act to help mitigate the 
likelihood of misstatements in financial statements filed with the 
Commission,'' see comment letter from CCMC (Nov. 22, 2021) (``CCMC 
2'').
    \395\ See Section II.B.1.c. The following estimates are based on 
historical rates and types of restatements, which may not be 
indicative of future rates and types of restatements.
    \396\ This estimate, based on exchange-listed companies during 
calendar year 2021, excluding SPACs, reflects approximately 54 ``Big 
R'' restatements and 173 ``little r'' restatements; including SPACs 
would have yielded 837 ``Big R'' and 474 ``little r'' restatements. 
These estimates were obtained from the Audit Analytics Restatement 
database which covers all Commission registrants who have disclosed 
a financial statement restatement in electronic filings since Jan. 
1, 2000. To remove SPACs from the restatements, these calculations 
exclude blank check companies (SIC code 6770) and shell companies. 
SPAC restatements were excluded because they were unusually high in 
2021 due to Commission guidance that year that SPACs account for 
their warrants as liabilities instead of equity, prompting a wave of 
one-time restatements.
    \397\ These figures were provided in the 2022 staff memorandum. 
That memo also noted that ``little r'' restatements as a percentage 
of total restatements rose to nearly 76% in 2020, up from 
approximately 35% in 2005.
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    We note that not all accounting restatements will trigger a 
recovery of compensation that was earned as a result of meeting 
performance measures. Using incentive-based compensation tied to net 
income as an example, in order for that compensation to be required to 
be recovered, there would have to be an accounting error that increased 
net income. Based on one recent study, 60% of all ``Big R'' 
restatements made between 2008 and 2015 had a negative impact on net 
income, and only 25% of ``little r'' restatements had a negative impact 
on net income.\398\ Thus, not every restatement would trigger a 
recovery of compensation that is tied to net income.\399\ Also, we 
expect that recovery of incentive-based compensation that is tied to 
TSR would be relatively small and infrequent as a result of ``little 
r'' restatements, since these restatements are less likely to be 
associated with significant stock price reactions.\400\
---------------------------------------------------------------------------

    \398\ See Choudhary et al., supra note 61. See also Thompson, 
supra note 79 (finding that 74% of ``Big R'' and 31% of ``little r'' 
restatements have a negative effect on net income); Christine Tan 
and Susan Young, An Analysis of `Little r' Restatements, 29 Acct. 
Horizons 667 (2015) (finding that 11.8% of ``little r'' restatements 
revise net income downwards).
    \399\ Incentive-based compensation is more likely to be 
recovered if it is tied to more reported items on the financial 
statements. For example, incentive-based compensation tied to 
earnings or operating income is more likely to be recovered than 
incentive-based compensation tied to only revenue or only expenses. 
Between 2008 and 2015, approximately eight% of restatements involved 
expense recording (such as payroll or selling, general and 
administrative expenses). See Choudhary et al., supra note 61.
    \400\ See Choudhary et al., supra note 61 (finding an average 
stock price reaction of -3.3% to ``Big R'' restatements and -0.3% 
for ``little r'' restatements); Thompson, supra note 79 (finding an 
average stock price reaction of -1.5% to ``Big R'' restatements and 
-0.3% for ``little r'' restatements).
---------------------------------------------------------------------------

    The final rules will require exchanges to apply the compensation 
recovery requirement to all listed issuers, including EGCs, SRCs, FPIs, 
debt-only issuers, and controlled companies, with only limited 
exceptions. As outlined in the table below, we estimate that Rule 10D-1 
would be applicable to approximately 5,364 registrants.\401\ We 
estimate that, of those 5,364 registrants, there are 1,039 SRCs (that 
are not also EGCs), 160 EGCs (that are not also SRCs or FPIs),\402\ 757 
issuers that are both SRCs and EGCs, 722 FPIs (filing annual reports on 
Form 20-F), and 132 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 final rules.\403\
---------------------------------------------------------------------------

    \401\ We estimate the number of issuers subject to the final 
rule based upon Commission staff analysis of issuers that filed 
annual reports on Form 10-K, Form 20-F, or Form 40-F in calendar 
year 2021, regardless of the fiscal year of the filing, and that 
filed a proxy statement in 2021. The staff verified an issuer's Form 
10-K to determine if the issuer is an SRC. The staff also checked an 
issuer's Form 10-K and registration statement to determine if the 
issuer is an EGC. The issuer's 12B status was used to identify 
exchange-listed companies. Staff determined an issuer's Section 
12(b) registration status based, in part, on the self-reported 
status disclosed on the annual report cover page, as well as other 
determining factors such as the number or holders of record, the 
issuer's total assets, and the issuer's filing history of long- and 
short-form registrations (on Form 10-12 or Form 8-A12, 
respectively), deregistration filings (on Form 15), and delisting 
filings (on Form 25 or Form 25-NSE). 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.
    \402\ We include the U.S. EGCs only (that are not also SRCs or 
FPIs) in our estimate. The total count of EGCs (that are not also 
SRCs) including U.S. EGCs, FPI EGCs, and MJDS EGCs (that are not 
also SRCs) was 434 based on 2021 registrant filings).
    \403\ See supra note 41. Certain commenters describe the costs 
associated with compliance for registered management investment 
companies. We recognize that, in addition to internally managed 
funds, some externally managed funds may incur compliance costs if, 
for instance, they employ a chief compliance officer and include 
incentive based compensation as part of their pay package. See, 
e.g., comment letter from ICI.

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[[Page 73114]]

    As described in the 2022 staff memorandum, compared to the baseline 
for the Proposing Release, in today's markets, many more companies have 
adopted compensation recovery policies.\404\ For instance, one study of 
more than 17,000 companies from 1996 to 2017 reports that as of 
December 2017, 5,358 companies had a compensation recovery policy in 
place.\405\ The rate of adoption may be higher among the larger U.S.-
listed companies. Survey results indicate that 98% of a representative 
sample of S&P 500 companies have adopted compensation recovery policies 
as of 2021,\406\ and 83% of a representative sample of mid-cap (S&P 
400) companies as of 2020.\407\
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    \404\ See 2022 staff memorandum.
    \405\ Ilona Babenko, et al., Clawback Provisions and Firm Risk 
(working paper 2021), available at http://ssrn.com/abstract=4006661 
(retrieved from SSRN Elsevier database) (``Babenko et al.''). One 
commenter reports 100% of the S&P 500 companies, and 99.7% of the 
remaining 2,500 companies in the Russell 3000 index, have some form 
of compensation recovery policy, according to the ISS QualityScore 
database, see comment letter from the Office of the Comptroller of 
the State of New York. See also comment letter from CEC 2 
(indicating based on an Oct. 2021 survey of their subscribers, more 
than 90% maintain a clawback policy, and citing a study finding that 
the number of large companies with clawback policies may be as high 
as 97%). As discussed below, we expect that most of these policies 
will require revision to meet the requirements in this rule. See, 
e.g., note 413.
    \406\ See Meridian Report.
    \407\ See Clearbridge Compensation Grp., Executive Compensation 
Policies, The Clearbridge 100 Report for Mid-Cap Companies (Dec 
2020) available at https://www.clearbridgecomp.com/wp-content/uploads/CB100-Report-for-Mid-Cap-Companies-Exec-Comp-Policies-12-11-20.pdf (``Clearbridge Report'').
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    As outlined in the table below, we estimate that approximately 46% 
of all filers currently disclose some form of an executive compensation 
recovery policy.\408\ We further estimate that approximately 34% of 
SRCs, 19% of EGCs, nine % of issuers that are both SRCs and EGCs, 25% 
of FPIs, and 13% of MJDS issuers disclose some form of a recovery 
policy.
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    \408\ 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, et al.). In 
contrast to the analysis provided in the Proposing Release, we 
modified the keyword search because the searches identified issuers 
that disclosed they had not adopted or were considering adopting, 
compensation recovery provisions. Specifically, 3 out of 5,367 
(0.6%) of companies did not file DEF 14A in 2021. We further 
eliminated 235 out of 5,364 (4%) of issuers flagged by the keyword 
search because the disclosures indicated the absence or 
consideration of compensation recovery provisions rather than their 
presence. 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)..................................            2,451            5,364              46%
SRCs.........................................................              352            1,039               34
EGCs.........................................................               31              160               19
SRC and EGCs.................................................               71              757                9
FPIs.........................................................              178              722               25
MJDS.........................................................               17              132               13
All other filers.............................................            1,804            2,554               71
----------------------------------------------------------------------------------------------------------------

    In addition to the issuers with company-specific executive 
compensation recovery policies, under the baseline there are existing 
provisions of law concerning the recovery of such compensation under 
certain circumstances, as well as certain disclosure requirements. 
Sarbanes-Oxley Act Section 304 contains a recovery provision that is 
triggered when a restatement is the result of issuer misconduct. This 
provision applies only to CEOs and 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.\409\ In addition, interim final 
rules under Section 111 of the Emergency Economic Stabilization Act of 
2008 (``EESA'') required institutions receiving assistance under the 
Troubled Asset Relief Program (``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, or other criteria were later found to be materially 
inaccurate.\410\ As discussed above, relative to either the Sarbanes-
Oxley Act or EESA, the compensation recovery requirement of the final 
rules has a different scope because it would affect any current or 
former executive officer of a listed issuer 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 officer in preparing the 
financial statements. Finally, we note that currently issuers other 
than SRCs, EGCs, and FPIs are required to disclose in their 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.\411\
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    \409\ See 15 U.S.C. 7243.
    \410\ 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 
Exchange Act. See Department of Treasury interim final rule, TARP 
Standards for Compensation and Corporate Governance, 74 FR 28394 
(June 15, 2009).
    \411\ See 17 CFR 229.402(b)(2)(viii).
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    Although there has been a large increase in the percentage of 
filers that disclose a compensation recovery policy since 2015,\412\ 
recent studies indicate that these policies establish more limited 
circumstances in which a compensation recovery analysis would be 
triggered than would be the case under the final rules.\413\ Many of 
the issuers that disclose having recovery policies require misconduct 
on the part of the executive officer to trigger recovery. For instance, 
a recent study reports that 52 out of 98 firms with misstatements and 
compensation recovery provisions required the employee to have 
contributed to the

[[Page 73115]]

restatement with fraudulent actions or misconduct, whereas 46 of the 98 
do not explicitly require fraud or misconduct as a condition of the 
recovery.\414\ By contrast, the final rules would require a listed 
issuer to have a recovery policy that applies to ``Big R'' and ``little 
r'' restatements, without regard to misconduct.
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    \412\ See 2022 staff memorandum.
    \413\ See, e.g., Tor-Erik Bakke et al., The Value Implications 
of Mandatory Clawback Provisions (working paper June 28, 2018), 
available at https://ssrn.com/abstract=2890578 (retrieved from SSRN 
Elsevier database) (as of 2014-2015, only 5% (43 of 1,123) of 
companies with a voluntarily adopted compensation recovery policy 
have policies that are comparable to the Proposing Release); see 
also Meridian Report and ClearBridge Report. Cf. Erkens et al., 
supra note 62 (developing a ``Clawback Strength Index,'' and finding 
that adopters of stronger policies experience more benefits).
    \414\ See Thompson, supra note 78. Similarly, according to a 
study of a representative sample of S&P 500 companies, 53% of 
compensation recovery policies are triggered by financial 
restatements without requirement of ethical misconduct, regardless 
of cause, see Meridian Report. In addition, Babenko et al. (finding 
that 69% of compensation recovery policies specify that recovery 
applies only to persons directly responsible for the triggering 
event, and that 63% of companies have a disclosed ``statute of 
limitations'' for the recovery policy that is less than three 
years). In an earlier study of 2,326 companies in the Corporate 
Library database, DeHaan et al. supra note 62 find that 39% had 
compensation recovery policies that did not require executive 
misconduct in order to be triggered.
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    There appears to be considerable variation in the coverage of 
executive officers subject to recovery under currently disclosed 
recovery policies.\415\ Under the final rules, a listed issuer's 
compensation recovery policy will require recovery of erroneously 
awarded compensation received after an individual began serving as an 
executive officer of the issuer during the recovery period. As a 
result, in some cases, recovery will 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. By contrast, most of the 
issuer-specific executive compensation recovery policies do not apply 
to former executive officers. For example, in a representative sample 
of firms from the S&P 500, only 13% of executive compensation recovery 
policies would apply to former executive officers as well as current 
executive officers,\416\ and a study of mid-cap companies reports that 
19% of executive compensation recovery policies would apply to former 
executive officers.\417\ Therefore, according to recent studies, the 
majority of issuers disclose having recovery policies that require 
compensation recovery from a narrower range of individuals than a 
recovery policy that would comply with the final rule requirements.
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    \415\ As of 2021, approximately 60% of a representative sample 
of S&P 500 companies had recovery policies that applied to current 
key executives (e.g., Section 16 officers); approximately 23% 
applied to all incentive (annual and/or equity) plan participants; 
approximately 13% applied to current and former key executives 
(e.g., Section 16 officers); and the remaining 4% applied to current 
named executive officers only. See Meridian Report. See also 
Shearman & Sterling, Corporate Governance & Executive Compensation 
Survey 2021 (2021), available at https://www.shearman.com/Perspectives/2021/11/Shearman-Releases-19th-Annual-Corporate-Governance-and-Executive-Compensation-Survey (reporting similar 
results from a survey of the 100 largest U.S. public companies) 
(``S&S Report''). One commenter estimated that the rule may cover 
approximately 50,000 executives, if there are on average ten 
executive officers subject to recovery provisions at each issuer 
subject to Rule 10D-1. See comment letter from Fried. Although in 
some cases, there may be many affected executive officers, we expect 
that the number of affected executive officers will vary depending 
on several factors, including the structure of the issuer and its 
history of executive turnover.
    \416\ See Meridian Report. See also S&S Report.
    \417\ See Clearbridge Report.
---------------------------------------------------------------------------

    While recent studies have shown that many issuers' current recovery 
policies differ from the requirements of the final rules, certain 
aspects of currently disclosed recovery policies are generally 
consistent with the final rules. For example, in a representative 
sample of firms from the S&P 500, 98% of issuers that disclosed 
recovery policies indicate that both cash and equity incentives would 
be included in the policy.\418\ Also, most mid-cap issuers (74%) 
specified a look-back period of three years.\419\ Thus a number of 
issuers with disclosed recovery policies include compensation scope and 
look-back provisions that may be consistent with the requirements under 
the final rules.
---------------------------------------------------------------------------

    \418\ See Meridian Report. Similarly, a study of the largest 100 
U.S. public companies shows that 79 of the 95 companies that 
maintain a compensation recovery policy may recoup both cash and 
equity incentives (see S&S Report), and a study of midcap companies 
shows that 95% of companies with a compensation recovery policy 
would include the annual cash bonus and 90% would include PSUs (see 
Clearbridge Report).
    \419\ See Clearbridge Report.
---------------------------------------------------------------------------

    In summary, many issuers have voluntarily adopted compensation 
recovery policies. However, studies suggest that there may be 
substantial gaps between those voluntarily adopted policies and the new 
requirements, particularly with respect to inclusion of former 
executive officers, the events that would trigger recovery analyses, 
and the ``no-fault'' nature of the final rules.

B. Analysis of Potential Economic Effects

    The final rules require exchanges and associations to establish 
listing standards that will require each issuer to implement and 
disclose a policy providing for the recovery of erroneously awarded 
incentive-based compensation. Consistent with Section 10D, the final 
rules 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.\420\ The final rules are 
predicated on the premise that an executive officer should not retain 
compensation that, had the issuer's accounting been done properly in 
the first instance, would never have been received by the executive 
officer, regardless of any fault of the executive officer for the 
accounting errors. One benefit of the rule is that it will effectively 
return the erroneously awarded compensation to issuers and 
shareholders. In addition, the rule may reduce the likelihood of 
accounting errors because executive officers--insofar as they have the 
ability to affect financial reporting--may have an enhanced incentive 
to ensure that greater care is exerted in preparing accurate financial 
reports, and a reduced incentive to engage in inappropriate accounting 
practices for the purpose of increasing incentive-based compensation 
awarded to them.\421\ While these incentives could result in higher-
quality financial reporting \422\ that would benefit investors, they 
may also distort capital allocation decisions.
---------------------------------------------------------------------------

    \420\ The set of relevant restatements includes those that 
correct errors in previously issued financial statements that are 
material to those previously issued financial statements or that 
would result in a material misstatement if the errors were corrected 
in or left uncorrected in the current report. See Section II.B.1.
    \421\ We recognize that some of the executive officers affected 
by the amendments may not have the ability to directly affect the 
financial reporting of the issuer.
    \422\ For purposes of this economic analysis, high-quality 
financial reporting means that the financial disclosure is 
informative about the actual performance and condition of the 
issuer, and should be informative about its value.
---------------------------------------------------------------------------

    The requirement that an issuer implement a recovery policy may 
introduce uncertainty about the amount of incentive-based compensation 
the executive officer will be able to retain.\423\ As a result, 
executive officers may demand that incentive-based compensation 
comprise a smaller portion of their compensation packages, or that they 
receive a greater total amount of compensation, to adjust for the 
possibility that the awarded

[[Page 73116]]

incentive-based compensation may be reduced due to future recovery. And 
to the extent that executive officers respond negatively to the 
expected effects of the compensation recovery policies developed and 
implemented by issuers, the final rules may cause affected issuers to 
be less able to attract and retain executive talent. But we expect that 
investors may benefit to the extent that incentive based compensation 
will become more sensitive to the true performance of the issuer, which 
would better align the interests of the executive officers with those 
of the shareholders.
---------------------------------------------------------------------------

    \423\ The recovery policy would require listed issuers to 
recover excess compensation paid, but it would not require them to 
provide additional payment to executive officers in cases where a 
restatement would have resulted in a greater amount of compensation. 
We recognize that, absent any requirements and under the baseline, 
issuers may voluntarily compensate executives under such 
circumstances. But if executives are not compensated when a 
restatement would have resulted in a greater amount of compensation, 
this asymmetry may further reduce the value executive officers place 
on compensation subject to such a recovery policy.
---------------------------------------------------------------------------

    Thus, as previewed above and discussed in more detail below, the 
final rule may produce both benefits and costs for the affected 
parties. Economists have analyzed the effects of the benefits and costs 
of issuer compensation recovery policies on issuer valuation. 
Specifically, one study analyzed the stock price reactions to the 
issuance of the Proposing Release and a second study examined stock 
price reactions to the adoption of voluntary compensation recovery 
provisions. The studies find, with certain caveats and limitations, 
positive average stock price reactions to the announcement of the 
events--whether the proposal of the regulations, or a particular 
issuer's adoption of voluntary compensation recovery provisions.\424\ 
These stock price reactions indicate that market participants have 
assigned an overall positive value to the adoption of such provisions, 
leading to the observed increase in stock price on the date of the 
announcement.\425\ These results support the inference that the 
benefits associated with adoption of compensation recovery provisions 
may justify the costs.\426\
---------------------------------------------------------------------------

    \424\ We note that the events studied may reflect the 
expectation and adoption of less stringent recovery provisions than 
required by the new rules. The studies report that issuers with more 
powerful management teams (see Bakke et al.) and issuers with 
previous restatements (see Iskandar-Datta et al.) experience larger 
economic gains associated with the Proposing Release and the 
adoption of voluntary recovery provisions.
    \425\ There are certain limitations on these event studies. The 
results reflect market participants' response to the new information 
released in the event, relative to the expectations prior to the 
event. As a result, the positive market reaction to the Proposing 
Release reflects the difference between expectations and the actual 
proposing release. We also note that the observed stock price 
reaction to individual issuer's adoption of compensation recovery 
provisions would reflect the benefits associated with the specific 
provisions adopted by those firms, which were likely tailored to the 
issuer's needs and also unlikely to fully comply with the new rules.
    \426\ Bakke et al., supra note 413, find that issuers without a 
compensation recovery provision experienced positive abnormal 
returns of 0.6% on average around the announcement of the Proposing 
Release, relative to issuers with an existing compensation recovery 
provision. These results suggest that the effects of the proposed 
rules would provide a net benefit to issuers that do not have a 
compensation recovery provision, but that the aggregate benefits of 
the rulemaking would be reduced due to the increase in issuers with 
compensation recovery provisions in place. More broadly, there is 
evidence regarding the benefits to issuers of adopting compensation 
recovery provisions. See, e.g., Mai Iskandar-Datta and Yonghang Jia, 
Valuation Consequences of Clawback Provisions, 88 Acct. Rev. 171 
(2013) (finding that shareholders of issuers that adopt voluntary 
recovery provisions experience statistically significant positive 
stock-valuation consequences ranging between 0.79% and 1.23%, and 
that issuers with previous financial restatements had the largest 
gains).
---------------------------------------------------------------------------

    The discussion below analyzes the economic effects of the final 
rules, 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 direct effects of the final rule on issuers and shareholders. We 
also discuss the effects on U.S. exchanges and discuss the costs of 
recovery. We then examine the indirect effects the final rule may have 
on financial reporting and executive compensation. We analyze the 
expected effects of the rule's disclosure requirements, as well as the 
effects from the rule's provisions on indemnification and insurance. 
Finally, we note that these effects may differ for different types of 
issuers.
1. Direct Effects on Issuers and Shareholders
    The most immediate outcome of the final rules will be the 
establishment of listing standards that will result in issuers 
implementing recovery policies consistent with Section 10D.\427\ Such 
recovery policies, when triggered, will provide a direct benefit for a 
listed issuer as well as its shareholders, when the company recovers 
incentive-based compensation that was erroneously paid to current or 
former executive officers. The recovered amounts will be available for 
the issuer to return to investors or invest in productive assets to 
generate value for shareholders.\428\ Thus when erroneously awarded 
compensation is recovered, the recovered amounts will directly benefit 
issuers and shareholders.
---------------------------------------------------------------------------

    \427\ Although, as described in the baseline section, many 
issuers have already implemented recovery policies that may be 
somewhat consistent with the final rule requirements, we recognize 
that most of the existing recovery policies will require revision to 
comply with the listing standards.
    \428\ Given the number of affected issuers and size of executive 
compensation packages, the amount of compensation recovered by 
issuers under the policies could be substantial. Although recovery 
of erroneously paid compensation would provide an immediate benefit 
for issuers and shareholders, these funds may not be large relative 
to the issuer's business operations. Based on an analysis of 
executive compensation using Standard & Poor's Compustat and 
Executive Compensation databases, in fiscal year 2020 non-salary 
compensation for all named executive officers combined was 0.7% of 
net income, and 0.44% of its market value of equity. This represents 
an upper bound for the amount of incentive-based compensation for 
named executive officers. These ratios do not include current and 
former executive officers that would be covered by the final rule 
but are not named executive officers.
---------------------------------------------------------------------------

    We also expect a number of direct costs for issuers resulting from 
the final rules. To ensure that issuers have a recovery policy that 
meets the final rule requirements, issuers will likely incur legal and 
consulting fees to develop or revise recovery policies, and to modify 
the compensation packages of executive officers to conform to those 
policies. We expect that these costs may decrease over time, after 
initial development.
    We have received several comment letters describing direct 
implementation costs. For example, several commenters have noted that 
even those issuers that already have recovery policies would likely 
incur some costs to revise those policies to comply with the final rule 
requirements.\429\ One commenter indicated that issuers will likely 
incur significant costs including legal fees and litigation risks 
because they will need to revise existing policies.\430\ Another 
commenter indicated that existing recovery plans include restrictions 
that may prohibit or restrict amendments to those plans, and noted that 
plan participants, particularly those no longer employed by the issuer, 
may not consent to an amendment that results in significant economic 
costs to themselves.\431\ We acknowledge that

[[Page 73117]]

issuers will incur direct implementation costs, and recognize that even 
those issuers that have implemented recovery provisions will likely 
incur costs to revise them and those costs will likely be higher for 
issuers that have implemented recovery plans with restrictions that 
prohibit or restrict amendments to those plans. 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, and may be initially substantial in a number of 
cases. However, as stated above, we expect once issuers adopt a 
recovery policy or revise their existing recovery policy, these costs 
may decrease over time. We also note that issuers will have additional 
time between adoption of these rules and exchange listing standards 
implementing the rules to amend any contracts to accommodate recovery.
---------------------------------------------------------------------------

    \429\ See, e.g., comment letter from CEC (noting that the rules 
would impose additional implementation costs and require issuers to 
adjust their policies); Davis Polk 3 (noting that issuers will incur 
compliance costs associated with formulating recovery policies and 
modifying them over time); and Pay Governance (noting that the new 
rules will require substantive changes to many existing compensation 
recovery policies). See also comment letter from FedEx Corporation 
(Nov. 22, 2021) (noting that publicly traded corporations that 
adopted compensation recovery provisions based on the proposed rule 
issued in 2015 would incur implementation costs to adapt to the 
expanded scope of the final rule).
    \430\ See comment letter from Bishop (stating that issuers that 
have adopted recoupment policies specifying the ``3-year period 
preceding the date on which the issuer is required to prepare an 
accounting restatement'' will likely incur significant costs, such 
as legal fees and litigation risks because the rule specifies 
``three completed fiscal years immediately preceding the date the 
issuer is required to prepare an accounting restatement'').
    \431\ See comment letter from SCG 1.
---------------------------------------------------------------------------

2. Effects on U.S. Exchanges and Listings
    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 final rules. 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 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 small as exchanges likely already have robust 
compliance tracking systems and personnel that are dedicated to 
ensuring listing standards are met.\432\ 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 final rules and delist 
the issuer for noncompliance. This would also result in a loss of the 
revenue from listing if the issuer were ultimately delisted.\433\
---------------------------------------------------------------------------

    \432\ See comment letter from NYSE, supporting the approach to 
delisting in the Proposing Release, and describing the existing 
functions of exchange personnel.
    \433\ If an issuer chooses to delist or is delisted by the 
exchange or association, the issuer's securities may become less 
liquid in the U.S. market, and the issuer's share price may be 
negatively affected. For issuers that fail to adopt or implement a 
recovery policy, delisting under the rule would be expected to 
increase the issuer's cost of capital. We also note that other 
factors may affect the decision for an issuer to delist and any 
effect from the final rules would be incremental to these other 
factors.
---------------------------------------------------------------------------

    One commenter specifically requested an economic analysis 
addressing whether the rule will create conditions that will lead to a 
decrease in the number of U.S. public companies.\434\ While we 
recognize that the rules are associated with costs for listed issuers, 
we also recognize and describe the benefits for listed issuers 
associated with the rules. In light of the significant uncertainty 
regarding the net effects for issuers, it is unclear whether the net 
effects of the rules would lead to a decrease in the number of issuers 
listed on U.S. exchanges.
---------------------------------------------------------------------------

    \434\ See comment letters from CCMC (noting that the number of 
public companies has steadily declined to the point that it is half 
what it was in 1996, and that a similar rate of decline in the 
number of IPOs occurred concurrently, while the same period 
experienced the explosion of the size of the proxy and emergence of 
disclosure overload issues). See also comment letter from NACD 
(noting that the rule might have a dampening effect on the market 
for public companies themselves if it and other rules like it 
influence private companies to remain private or push public 
companies to go private).
---------------------------------------------------------------------------

    In the event that issuers alter their decisions regarding where to 
list due to the final rules, 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 final rule to securities listed on U.S. exchanges, 
we do not believe it is likely that the final rule requirements would 
compel a typical issuer in the short-term to find a new trading venue 
not subject to these requirements.\435\ The final rules 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 final 
rule requirements, choose to forgo listing or delay listing until the 
issuers' circumstances change.\436\ The magnitude of this effect on 
exchanges and issuers 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 time, thus having lasting impact on the exchanges' 
revenue. Finally, the final rules apply to issuers who list securities 
on a national securities exchange. As such there are unlikely to be 
competitive effects among national securities exchanges due to all 
national securities exchanges being affected by the final rule 
requirements.
---------------------------------------------------------------------------

    \435\ We note that changes in laws in foreign jurisdictions 
regarding compensation recovery after the publication of the final 
rules in the Federal Register could potentially reduce the relative 
value of a U.S. listing. We also note that the revenue effect on 
U.S. exchanges resulting from the behavior of FPIs is unclear, 
because while some FPIs may choose to delist as a result of the 
final rules, it is at least theoretically possible that others may 
choose to list because of them. Although issuers can voluntarily 
adopt compensation recovery provisions without listing on a U.S. 
exchange, the decision to list on a U.S. exchange after the adoption 
of the final rule would reflect a stronger commitment to enforcing 
such provisions. See Section IV.B.8.
    \436\ We note that capital formation could be hindered if an 
issuer chooses to forgo or delay listing because of the final rules 
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 final rules would be 
incremental to these other factors.
---------------------------------------------------------------------------

3. Costs of Recovery
    We recognize that, as a result of this rulemaking, issuers will 
face costs to calculate the amount to be recovered should an event 
trigger the compensation recovery provision. The calculations could be 
done internally or the issuer could choose to retain an outside 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 issuers' compensation structure, the type of compensation involved, 
the periods affected, and the method selected for calculation.
    The costs of calculating an amount to be recovered are expected to 
be higher when incentive-based compensation that is based on stock 
price or TSR is subject to recovery. In this context, issuers will need 
to determine the amount of compensation that was erroneously awarded 
based on the extent to which an inflated stock price results from an 
accounting error. One key input for such calculations would be the 
difference between the historical stock prices and the ``but for'' 
stock price, where the ``but for'' stock price is the price at which 
the security would have sold, absent the accounting error. This section 
provides background information on methods to estimate the amount of 
inflation in stock prices as a result of accounting errors.
    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

[[Page 73118]]

related costs.\437\ One such method, which is often used in accounting 
fraud cases to determine the effects of restatements 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 \438\ that 
restated financial information is required, separate from any change in 
the stock price due to market factors.\439\ An event study therefore 
measures the net-of-market drop in the stock price, 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 need 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.\440\ 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.\441\
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    \437\ 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.
    \438\ 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.
    \439\ Note that the ``announcement'' may take a variety of 
forms. For instance, an analyst or reporter may publicly disclose 
information about the company that serves as a corrective 
disclosure, even if the company does not make an announcement. In 
addition, since companies would generally not issue a Form 8-K 
release for a ``little r'' restatement, the publication of revised 
financials may serve as a public disclosure.
    \440\ 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 Mark L. Mitchell and Jeffrey 
M. Netter, The Role of Financial Economics in Securities Fraud 
Cases: Applications at the Securities and Exchange Commission, 49 
Bus. Law 565 (Feb. 1994); S. P. Kothari and Jerold B. Warner, 
Econometrics of Event Studies (B. Espen Eckbo ed.), Handbook Corp. 
Fin. Empirical Corp. Fin vol. I (Elsevier/North-Holland 2004); and 
John Y. Campbell et al., The Econometrics of Event Studies, 
Princeton University Press (1997).
    \441\ Issuers may conduct event studies of restatement effects 
for a variety of reasons, including the possibility of shareholder 
litigation and government investigations. If an issuer has already 
conducted an event study to estimate the amount of inflation in the 
stock price due to a restatement, that would reduce the costs of 
conducting an event study for purposes of compensation recovery 
analysis while also limiting the latitude associated with utilizing 
different design choices.
---------------------------------------------------------------------------

    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.\442\ Because certain 
executive officers may have influence over the timing of the release of 
issuer-specific information, they may have the ability to affect 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, certain executive officers may have an incentive 
and 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 the board of directors to evaluate the effect of the restatement on 
the stock price.
---------------------------------------------------------------------------

    \442\ 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 economy, and information about expected 
inflation).
---------------------------------------------------------------------------

    As discussed above, the final rules do not require an event study 
to calculate a reasonable estimate of the erroneously awarded 
compensation tied to stock price to be recovered after an accounting 
error leading to a restatement. Instead, the final rules permit an 
issuer to use any reasonable estimate of the effect of the restatement 
on stock price and TSR. In addition, we note that an issuer may 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 final rules. In choosing a methodology to derive a reasonable 
estimate of the effect of the accounting restatement on stock price and 
TSR, issuers would likely weigh the costs of implementing any 
methodology and the potential need to justify that estimate, under 
their unique facts and circumstances. We have received a number of 
comments regarding the costs of calculating the recoverable amount. For 
example, some commenters noted that determining the amount of 
compensation that was based on or derived from the financial reporting 
measure may be challenging because incentive compensation award amounts 
may include multiple metrics, and reflect judgment and discretion 
rather than a formulaic calculation.\443\ In addition, commenters 
indicated that the calculations will expose managers and boards of 
directors to litigation risk.\444\
---------------------------------------------------------------------------

    \443\ See comment letters from Chevron; Coalition; Osler; and 
TELUS.
    \444\ See, e.g., comment letters from Chevron; and Coalition. To 
the extent that issuers perceive more costly estimation methods to 
be a preferred approach in the context of potential litigation, the 
risk of litigation may increase the costs of compliance with the 
final rules.
---------------------------------------------------------------------------

    Commenters have also noted that issuers will face additional costs 
associated with estimating the amount of incentive-based compensation 
when the compensation is linked to stock price and TSR because of the 
complexity of the calculations.\445\ A number of commenters requested 
additional guidance and examples of calculations,\446\ and some 
expressed concern that issuers may consider moving away from TSR-based 
incentive plans to avoid the potential costs and uncertainty that may 
result should a recovery be triggered.\447\ Some commenters noted that 
there would be increased litigation risk regarding recoveries of 
compensation linked to stock price and TSR due to the potential range 
of reasonable estimates.\448\
---------------------------------------------------------------------------

    \445\ See, e.g., comment letters from CAP; CEC 1; Chevron; 
Compensia; NAM; SH&P (stating that incentive compensation based on 
performance metrics such as stock price or total shareholder return 
cannot be accurately recalculated); Pearl Meyer; Davis Polk 1; and 
Kovachev. For example, CAP noted that estimates of the impact of the 
restatement when stock price/TSR metrics are involved, ``will be 
extremely difficult to put into practice and will force Boards to 
hire outside experts to perform the calculations. We predict that 
this will benefit professional service firms willing to perform the 
analyses, but will return little value to shareholders.''
    \446\ See, e.g., comment letters from Chevron; Compensia; Hay 
Group; Pay Governance; Pearl Meyer; and WAW.
    \447\ See comment letters from Compensia; and WAW.
    \448\ See, e.g., comment letters from Chevron; Coalition; 
Compensia; IBC (stating ``[o]ften [the methods] produce ranges of 
numbers, rather than a definite amount, introducing more uncertainty 
and opportunity to second guess the company's decision on how much 
to recover, therefore opening the door for potential additional 
shareholder derivative litigation''); and Pearl Meyer (noting the 
possibility of challenges from interested parties, including current 
executive officers as well as individuals who were executive 
officers at some point during the lookback period but are no longer 
holding such position).

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[[Page 73119]]

    Since there is considerable variation in incentive compensation 
plans as well as restatements, and in addition, issuers may choose 
different reasonable approaches to calculation, we cannot estimate the 
total costs of calculating the amounts to be recovered. Nor can we 
estimate the likelihood that companies will move away from TSR-based 
incentive plans.\449\ These uncertainties also may undermine issuers' 
incentives to enforce their recovery policies and make it more 
difficult for exchanges to monitor compliance.\450\ 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 issuers to carefully 
document the considerations that went into the determination to enforce 
(or not enforce) their recovery policy.
---------------------------------------------------------------------------

    \449\ See Section IV.B.5 for additional discussion of the 
economic effects of the potential decision to move away from 
incentive based compensation that is subject to recovery, such as 
TSR-based incentive plans.
    \450\ 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 erroneously awarded compensation required to be recovered. 
This may make it more difficult for exchanges to monitor compliance.
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    Although the costs of hiring outside experts may vary depending on 
the circumstances, we estimate that if outside professionals are 
retained to assist with the calculations, they will likely charge 
between $80 and $1,800 per hour for their services.\451\ One commenter 
indicated that the expert fees will be closer to $800 per hour when 
determining the impact of an accounting restatement on stock price or 
TSR.\452\ Another commenter indicated that the cost of an event study 
may range from $100,000 to $200,000.\453\
---------------------------------------------------------------------------

    \451\ The range is based on comment letters from TCA and Davis 
Polk 1 as well as the SEAK, Inc., 2021 Survey of Expert Witness Fees 
report indicating that the hourly fee for case review/preparation 
ranges from $80 to $1,800 with an average fee of $422 per hour. See 
SEAK, Inc., 2021 Survey of Expert Witness Fees, SEAKexperts.com Blog 
(July 25, 2022, 3:54 p.m.), available at https://
blog.seakexperts.com/expert-witness-fees-how-much-should-an-expert-
witness-charge/
#:~:text=According%20to%20SEAK%27s%202021%20Survey,experts%20respondi
ng%20is%20%24500%2Fhour. We note that this range is also roughly 
consistent with the 90th percentile of wage information compiled by 
the U.S. Bureau of Labor Statistics, Occupational Employment 
Statistics for the Financial and Investment Analyst occupation. As 
of May 2021, the median hourly wage for a financial and investment 
analyst was $44.03 and the 90th percentile hourly wage was $80.08.
    \452\ See comment letter from TCA.
    \453\ See comment letter from Davis Polk 1 (citing a study by 
Marsh & McLennan Companies).
---------------------------------------------------------------------------

    We acknowledge the costs and the potential complexity associated 
with calculating amounts to be recovered and acknowledge that the 
hourly rate may exceed its estimated values in some cases, depending on 
the complexity of the calculations. In addition, we recognize the 
likelihood of higher costs associated with the recovery calculations 
for incentive-based compensation linked to stock price and TSR as well 
as the widespread use of this type of incentive-based 
compensation.\454\ However, we are adopting the new rule and rule 
amendments to implement the statutory mandates of Section 10D, which is 
intended to require the return of executive compensation that was 
awarded erroneously to the issuer and its shareholders. The costs of 
calculating amounts to be recovered may be mitigated as issuers 
exercise flexibility to determine the method of calculation that is 
most appropriate given the circumstances. Also the costs of calculating 
recovery amounts may be lower to the extent that the calculations would 
have been performed in the context of the restatement, because the 
effect of the misstatement on management's compensation is a 
qualitative factor in a materiality analysis.\455\
---------------------------------------------------------------------------

    \454\ See supra note 393.
    \455\ See supra, note 80.
---------------------------------------------------------------------------

    Depending on the circumstances, there may be other costs associated 
with enforcing the mandatory recovery policy. If the current or former 
executive officer is unwilling to return erroneously awarded 
compensation, the issuer may incur legal expenses to pursue recovery 
through litigation or arbitration.\456\ However, if the direct expense 
paid to a third party to assist in enforcing the recovery policy from 
an executive or former executive officer would exceed the erroneously 
paid incentive-based compensation, the final rules allow the issuer, 
under certain circumstances, to determine that recovery would be 
impracticable, and therefore not pursue the recovery. This may mitigate 
the direct costs of enforcement to issuers.\457\ 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.
---------------------------------------------------------------------------

    \456\ Issuers may incur additional costs associated with the 
rules to the extent that they create an impediment to litigation 
settlements because they do not include an exception for releases of 
potential recoupment claims. This may impose costs directly on 
issuers and indirectly on the economy as litigation could 
potentially be prolonged. See, e.g., comment letter from SCG 1.
    \457\ Since the final rule will permit issuers to forgo recovery 
from tax-qualified retirement plans, we expect that issuers and plan 
participants will avoid the costs associated with such recovery.
---------------------------------------------------------------------------

4. 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 
assessment of the issuer's performance and should be informative about 
its value. Erroneous financial reporting can mislead investors about 
the issuer's value. For instance, improper financial reporting may 
overstate demand for the issuer's products, or exaggerate its ability 
to manage costs. 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.
    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. For example, in some instances, 
executives might have incentives to pursue impermissible accounting 
methods under GAAP that result in a material misstatement of financial 
performance, to realize higher compensation.\458\ This potential for 
deliberate misreporting reflects a principal-agent problem that is 
detrimental for shareholders.\459\

[[Page 73120]]

Although civil and criminal penalties already create disincentives to 
deliberate misreporting, the recovery requirements under the final 
rules will 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 will depend on the particular circumstances of 
an issuer.
---------------------------------------------------------------------------

    \458\ We also note that some estimates and judgments permissible 
under GAAP may allow executive officers to realize higher 
compensation, without resulting in a material misstatement of 
financial performance and thus without triggering recovery 
consistent with Section 10D.
    \459\ Among other decisions, executive officers 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 and 
condition of the issuer. To the extent 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, 
executive officers 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 officer's incentive to 
allocate the appropriate amount of resources to produce high-quality 
financial statements, which reduces the information value of 
financial reporting. In addition, the issuer may not realize all of 
the benefits from high quality financial reporting. For example, 
accurate financial reporting by one issuer provides a useful 
benchmark to investors in evaluating other issuers. As a result, 
issuers may underinvest in the production of high-quality financial 
statements, relative to the benefits for investors.
---------------------------------------------------------------------------

    The final rules may also provide executive officers with an 
increased incentive to take steps to reduce the likelihood of 
inadvertent misreporting.\460\ Most directly, because executive 
officers are less likely to benefit from reporting errors, they have 
stronger incentives to increase the amount of time and resources they 
spend on the production of high-quality financial reporting, and may 
also, for instance, increase the staffing of the internal audit 
function.\461\ These actions would reduce the likelihood of an 
accounting error that requires restatement.
---------------------------------------------------------------------------

    \460\ One commenter noted while intentional reporting errors are 
relatively infrequent between 1996 and 2005 (1% error rate), 
unintentional misstatements are far more frequent (2.89% error 
rate). See comment letter from Vivian Fang.
    \461\ See, e.g., comment letters from NYCRS; Fried; and Public 
Citizen 1. We recognize that there may be some limit beyond which 
the utilization of additional resources in order to further limit 
the likelihood of small, inadvertent accounting errors may not be 
the optimal use of these resources. It is unclear where the current 
expenditures of issuers stand relative to these limits. We also 
recognize that financial reporting decisions may be outside of the 
scope of responsibilities of some of the executive officers who will 
be subject to compensation recovery as a result of the final rules, 
see Section II.C.1.
---------------------------------------------------------------------------

    Research studies provide mixed results on the impact of 
compensation recovery on financial reporting accuracy and reliability. 
Several studies have analyzed outcomes after the implementation of a 
voluntary recovery policy, finding results that are consistent with 
issuers devoting more resources to internal control over financial 
reporting.\462\ In addition, some studies show that adoption of 
voluntary recovery provisions is associated with improved managerial 
decision making.\463\ However, we acknowledge that multiple studies 
find that the adoption of recovery provisions may lead to outcomes such 
as real earnings management to achieve short-term earnings goals.\464\ 
To the extent that the final rules lead some issuers to increase real 
earnings management, investors and issuers could bear increased costs.
---------------------------------------------------------------------------

    \462\ See Michael H.R. Erkens et al., Not All Clawbacks Are the 
Same: Consequences of Strong Versus Weak Clawback Provisions, 66 J. 
Acct. & Econ. 291 (2018) (finding that companies that voluntarily 
adopt stronger clawback measures experience improvements in 
reporting quality); Lillian H. Chan et al., The Effects of Firm-
Initiated Clawback Provisions on Earnings Quality and Auditor 
Behavior 54 J. Acct. & Econ. 180 (2012) (finding that after the 
adoption of clawback provisions, incidence of accounting 
restatements declines, firms' earnings response coefficients 
increase, and auditors are less likely to report material internal 
control weaknesses, charge lower audit fees, and issue audit reports 
with a shorter lag); DeHaan, et al., supra note 62 (finding 
improvements in financial reporting quality following clawback 
adoption, including decreases in meet-or-beat behavior and 
unexplained audit fees, a decrease in restatements, a significant 
increase in earnings response coefficients and a significant 
decrease in analyst forecast dispersion). See also Henry K. Mburu 
and Alex P. Tang, Voluntary Clawback Adoption and Analyst Following, 
Forecast Accuracy, and Bias, 18 J. Acct & Fin. 106 (2018) (finding 
that voluntary adoption of compensation recovery provisions leads to 
an increase in analyst coverage and analyst accuracy, as well as 
reduced optimistic bias by analysts); Mark A. Chen et al., The Costs 
and Benefits of Clawback Provisions in CEO Compensation, 4 Rev. 
Corp. Fin. Stud. 108 (2015) (finding lower earnings variability and 
reduced aggressiveness in financial reporting after voluntary 
adoption of a compensation recovery provision); Bradley Benson et 
al., Will the Adoption of Clawback Provisions Mitigate Earnings 
Management?, 18 J. Acct. & Fin. 61 (2018) (finding that when 
compensation recovery provisions are implemented by a company with 
an independent board, earnings quality improves).
    \463\ See, e.g., Yu-Chun Lin, Do Voluntary Clawback Adoptions 
Curb Overinvestment?, 25 Corp. Govern. Int'l Rev. 255 (2017) 
(finding that compensation recovery provisions mitigate 
overinvestment); Dina El-Mahdy, The Unintended Consequences of 
Voluntary Adoption of Clawback Provisions on Managerial Ability, 60 
Acct. & Fin. 2493 (2020) (finding that voluntary adoption of 
compensation recovery provisions is associated with an increase in 
productivity as measured by revenues generated for a given level of 
costs); Thomas Kubrick, Thomas Omer, and Zac Wiebe, The Effect of 
Voluntary Clawback Adoptions on Corporate Tax Policy, 95 Acct. Rev. 
259 (2020) (finding that adoption of compensation recovery 
provisions may lead to more effective tax planning and lower 
effective tax rates); Anna Brown et al., M&A Decisions and US Firms' 
Voluntary Adoption of Clawback Provisions in Executive Compensation 
Contracts, 42 J. Bus. Fin. & Acct. 237 (2015) (finding that adoption 
of compensation recovery provisions leads to improved decisions in 
the context of mergers and acquisitions); Matteo P. Arena and Nga 
Nguyen, Compensation Clawback Policies and Corporate Lawsuits, 27 J. 
Fin. Reg. & Compliance 70 (2019) (finding that after the adoption of 
compensation recovery provisions, litigation risk significantly 
declines). One paper finds that firms' investment risk decreases 
with the voluntary adoption of a compensation recovery provision, 
but notes that this effect may be either value-increasing or value-
decreasing, depending on the circumstances. See Yu Chen and Carol 
Vann, Clawback Provision Adoption, Corporate Governance, and 
Investment Decisions, 44 J. Bus. Fin. Acct. 1370 (2017) (finding 
that after adopting a compensation recovery provision, firms' 
abnormal investment decreases and the firms' investments are less 
risky).
    \464\ See, for instance, Lilian Chan et al., Substitution 
between Real and Accruals Based Earnings Management after Voluntary 
Adoption of Compensation Clawback Provisions, 90 Acct. Rev. 147 
(2015) (finding that the total amount of earnings management does 
not decrease after recovery provisions are adopted, and that 
companies are more likely to lower research and development expenses 
to achieve short term earnings goals after adoption). Similar 
results are provided by Gary Biddle et al., Clawback adoptions, 
managerial compensation incentives, capital investment mix and 
efficiency, (working paper Dec. 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3042973 (retrieved from 
SSRN Elsevier database). A related paper, Dichu Bao et al., Can 
Shareholders Be at Rest After Adopting Clawback Provisions? Evidence 
from Stock Price Crash Risk, 35 Contemp. Acct. Res., 1578 (2018), 
finds that voluntary recovery provision adoption is associated with 
an increase in stock price crash risk, that after the adoption some 
companies reduce the readability of their Form 10-K filings, and 
increase real earnings management through abnormal production costs, 
abnormal expenses, and abnormal cash flows. See also Hangsoo Kyung 
et al., The Effect of Voluntary Clawback Adoption on non-GAAP 
Reporting, 67 J. Acct. & Econ. 175 (2019) (finding that issuers 
adopting recovery provisions increase the frequency of disclosure of 
non-GAAP earnings, and non-GAAP exclusion quality decreases after 
the adoption); Thompson, supra note 69 (finding that issuers with 
compensation recovery provisions are more likely to report 
misstatements as ``little r'' restatements instead of ``Big R'' 
restatements). Consistent with the possibility that the rules as 
proposed may create incentives to reduce research and development 
expenditures, Bakke et al., supra note 413, find that the stock 
price reaction to the Proposing Release was less positive for 
issuers with high cash flow activity and companies engaged in 
research and development activity, and it was negative for issuers 
that have already adopted a compensation recovery provision and are 
engaged in research and development. See also comment letter from 
Fried (noting the potential to incentivize executive officers ``to 
shift from value-reducing earnings manipulation to even more 
destructive real earnings management'').
---------------------------------------------------------------------------

    Executive officers may also take other steps to reduce the 
likelihood of inadvertent misreporting. An executive officer could 
change the business practices of the issuer, thereby affecting the 
opportunity for an accounting error to arise. For example, an executive 
officer 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, which may reduce 
the likelihood of accounting errors. As another example, the executive 
officer could make accounting judgments on loan loss reserves that are 
less likely to result in

[[Page 73121]]

an accounting restatement. 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.\465\
---------------------------------------------------------------------------

    \465\ One academic study finds 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, issuers 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 Christopher S. Armstrong et al., When Does Information Asymmetry 
Affect the Cost of Capital, 49 J. Acct. Rsch. 1, (Mar. 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 Patricia M. Dechow and Ilia D. Dichev, The Quality 
of Accruals and Earnings: The Role of Accrual Estimation Errors, 77 
Acct. Rev. 35, (2002); and Jennifer Francis et al., The Market 
Pricing of Accruals Quality 29 J. Acct. & Econ. 295, (2005).
---------------------------------------------------------------------------

    As a result of the final rules, we believe that the increased 
incentives to generate high-quality financial reporting may improve the 
overall quality of financial reporting. For some issuers that are 
already producing high-quality financial reports, there may be limits 
to the benefits of incremental increases in financial reporting 
quality. However, we believe that a substantial number of issuers will 
benefit from an increase in the quality of financial reporting. These 
improvements 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.\466\ While we lack the data to quantify 
the potential benefits to shareholders from a reduced likelihood of an 
accounting error, evidence suggests that penalties imposed by the 
market for accounting restatements can be substantial. For example, one 
recent study \467\ found that over the period 2008 to 2015 the market 
value of equity of the average issuer declined by 3.3% upon 
announcement of a ``Big R'' financial restatement, and by 0.3% upon 
announcement of a ``little r'' restatement.
---------------------------------------------------------------------------

    \466\ In addition, to the extent that investors cannot 
differentiate between issuers with high quality financial reporting 
and issuers with low quality financial reporting, they may 
underinvest in issuers with high quality financial reporting. But an 
improvement in the reporting of issuers with low quality financial 
reporting would raise the average issuer's quality of financial 
reporting. This improvement for the average issuer may mitigate the 
underinvestment in issuers with high quality financial reporting and 
therefore lower their cost of capital as well.
    \467\ See Choudhary et al., supra note 61. See also Christine 
E.L. Tan et al., An Analysis of ``Little r'' Restatements, 29 Acct. 
Horizons 667 (2015) and Susan Scholz, Financial Restatement: Trends 
in the United States: 2003-2012, Center for Audit Quality, (July 24, 
2014), available at https://www.thecaq.org/financial-restatement-trends-united-states-2003-2012.
---------------------------------------------------------------------------

    More broadly, the availability of more informative or accurate 
information regarding the financial performance of issuers may also 
have the effect of increasing the efficient allocation of capital among 
corporate issuers. Because investors will be better informed about the 
potential investment opportunities at any given point in time, they 
will 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 final 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 final rule requirements.\468\ 
In contrast, without the final rules, 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.
---------------------------------------------------------------------------

    \468\ See Brian J. Bushee et al., Economic Consequence of SEC 
Disclosure Regulation: Evidence From the OTC Bulletin Board, 39 J. 
Acct. & Econ. 233 (2005).
---------------------------------------------------------------------------

    We are aware, however, that these potential benefits of the final 
rules are not without associated costs. Under the final rules, as a 
commenter asserted, the increased allocation of resources to the 
production of high-quality financial reporting may divert resources 
from other activities that may be value enhancing.\469\ Moreover, while 
the increased incentive to produce high-quality financial reporting and 
thus reduce the likelihood of accounting errors should increase the 
informational efficiency of investment opportunities, it may also 
encourage, as a few commenters noted, executive officers to forgo 
value-enhancing projects if doing so would decrease the likelihood of a 
financial restatement.\470\ For example, when choosing among investment 
opportunities for the issuer, executive officers may have an increased 
incentive to avoid those projects that would require more complicated 
accounting judgments, because such projects may be more likely to 
trigger a restatement.\471\ That is, the final rules may reduce 
incentives for an executive officer to choose projects for which it is 
more difficult to generate high-quality financial reporting.\472\ This 
could have a beneficial impact on the value of the issuer to the extent 
that the forgone projects would have resulted in lower value than those 
that were ultimately chosen.\473\ The final rules may also be value-
enhancing to listed issuers by reducing the likelihood of accounting 
errors because executive officers may be

[[Page 73122]]

incentivized to ensure that greater care is exerted in preparing 
accurate financial statements, thus avoiding the costs associated with 
a restatement.
---------------------------------------------------------------------------

    \469\ See, e.g., comment letter from NACD (noting the proposal 
could divert resources to financial reporting that would otherwise 
be used for other value enhancing activities).
    \470\ 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 a 
restatement. See Patricia M. Dechow et al., Predicting Material 
Accounting Misstatements, 28 Contemp. Acct. Rsch. 17 (Spring 2011). 
Consistent with these findings that riskier operations are 
associated with an increased likelihood of restatements, Babenko et 
al. find that firms that adopt a recovery provision subsequently 
reduce their research and development spending, file fewer patents, 
and decrease their capital expenditures. The authors also find that 
firms adopting a recovery provision subsequently hold more cash, 
issue less net debt, and experience an increase in credit rating. 
See, e.g., comment letters from Fried; NACD; and NAM.
    \471\ 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. See comment letter from NAM.
    \472\ See Babenko et al. The study finds that executives respond 
to the implementation of a compensation recovery policy by reducing 
firm risk. For example, the authors report that issuers spend less 
on research and development, and file for fewer patents. This is 
consistent with executives changing their project selection policy 
as the result of implementing a compensation recovery policy. 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.
    \473\ See Babenko et al. The authors address the question of 
whether the reduction in risk associated with the voluntary adoption 
of a compensation recovery policy is beneficial for shareholders. 
They find a positive and significant relation between adoption of 
such a policy and long-term stock and accounting performance and a 
positive and significant short-term stock-market reaction around the 
date of the adoption. The stock market response to compensation 
recovery policy adoption, as well as stock and accounting 
performance over the year subsequent to adoption, are significantly 
larger the greater the reduction in actual and predicted firm risk 
associated with the recovery provision. See also California Public 
Employees' Retirement System (Nov. 22, 2021) (``CalPERS 2'') (noting 
that ``clawback policies potentially mitigate excessive risk-taking 
that certain compensation may incentivize'').
---------------------------------------------------------------------------

    As described above, some studies suggest that a compensation 
recovery policy could result in an increased likelihood of an executive 
officer 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.\474\ For example, if an executive officer is under 
pressure to meet an earnings target, rather than manage earnings 
through accounting judgments, an executive officer 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.
---------------------------------------------------------------------------

    \474\ See supra note 464. See also Sohyung Kim et al., Other 
Side of Voluntary Clawback Provisions in Executive Compensation 
Contracts: Evidence From the Investment Efficiency, 25 Rev. Pacific 
Basin Fin. Mkts. & Policies 1 (2022) (finding evidence that the 
voluntary adoption of compensation recovery policies decreases the 
investment efficiency in the post-adoption period, especially for 
issuers whose ex ante probability of underinvestment is high).
---------------------------------------------------------------------------

    Under the final rules, if it appears that previously issued 
financial statements may contain an accounting error, there would be a 
potential incentive for issuers or individual executive officers (to 
the extent they are in a position to do so) to cause the company to 
avoid characterizing the accounting error in such a way that would 
trigger application of the final rules. Such an incentive exists 
because compensation recovery is only required after the conclusion 
that an accounting restatement is required to correct an error in 
previously issued financial statements that is material to the 
previously issued financial statements or that would result in a 
material misstatement if the error were corrected in or left 
uncorrected in the current period. 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.
    However, we note that there are serious consequences, including 
criminal penalties, that help to deter either a delay or 
mischaracterization. In addition, the rule discourages delays by 
defining the trigger date as the date on which the issuer concludes, or 
reasonably should have concluded, that the issuer's previously issued 
financial statements contain an error that requires a restatement. In 
addition, the inclusion of ``little r'' restatements eliminates the 
incentive to mischaracterize ``Big R'' restatements as ``little r'' 
restatements. Finally, oversight by audit committees and outside 
auditors may serve as an additional mitigating factor.
5. Effects on Executive Compensation
    When setting the compensation for executive officers, 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.\475\ The purpose of tying compensation to 
performance is to provide an incentive for executive officers to 
maximize the value of the enterprise, thus aligning their incentives 
with other shareholders. The proportion of the compensation 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 officer's 
risk aversion may make compensation packages with strong performance 
incentives undesirable for the executive officer 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.\476\
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    \475\ Executive compensation may be tied to issuer performance 
implicitly, as in the case of awards of options or restricted stock 
that have only service-based vesting conditions, or more explicitly, 
as in the case of incentive-based compensation with market or 
performance conditions that affect the amount of compensation or 
whether it vests.
    \476\ Executive officers typically have personal preferences 
regarding the form of compensation received. To the extent that 
executive officers have different levels of risk aversion, they can 
arrive at different personal valuations of the same incentive-based 
compensation package. Hence, more risk-averse executive officers may 
require additional compensation when paid in the form of less 
certain incentive-based compensation.
---------------------------------------------------------------------------

    Several commenters have indicated that the requirements of the 
final rules could meaningfully affect the size and composition of the 
compensation packages awarded to executive officers of listed 
issuers.\477\ In particular, some commenters argued that the final 
rules would encourage executive officers to favor compensation that 
would not be subject to potential recovery, such as base salary, over 
incentive-based compensation.\478\ The Commission acknowledges that the 
composition of executive compensation could be impacted by the final 
rules. On the one hand, the final rules could encourage greater use of 
certain kinds of incentive-based compensation. The implementation of a 
mandatory recovery policy may make it less costly for the issuer to use 
the types of incentive-based compensation that would be subject to 
recovery (those with explicit market or performance conditions tied to 
the issuer's financial reporting or stock price).\479\ Most directly, 
such a policy would reduce the cost of such compensation by recovering 
overpayments associated with misstatements. Further, adopting a 
recovery policy may reduce the potential incentives that may arise from 
incentive-based compensation to engage in practices resulting in 
inaccurate reporting.
---------------------------------------------------------------------------

    \477\ See, e.g., comment letters from TCA; Ensco; WAW; NAM; CAP; 
NACD; and American Vanguard.
    \478\ See, e.g., comment letters from American Vanguard, NAM, 
and WAW. Further, some commenters argued that the final rules would 
encourage the use of incentive-based compensation tied to 
performance measures that fall outside the scope of the rules, such 
as strategic measures, subjective measures, or operational measures. 
See, e.g., comment letter from Ensco.
    \479\ This effect was observed in a recent study examining 
voluntarily adopted compensation recovery provisions. See, e.g., 
Peter Kroos et al., Voluntary Clawback Adoption and the use of 
Financial Measures in CFO Bonus Plans, 93 Acct. Rev. 213 (2018) 
(finding that adoption of compensation recovery provisions is 
associated with greater CFO bonus incentives because such 
compensation recovery provisions serve as an effective check on the 
ability of CFOs to manipulate the performance metrics that could 
influence their performance-based compensation). The final 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 relative to 
voluntarily adopted recovery provisions.
---------------------------------------------------------------------------

    On the other hand, as noted by some commenters, the final rules 
could discourage the use of certain kinds of incentive-based 
compensation. As noted at the beginning of this section, risk-averse 
executive officers prefer predictable compensation, and the mandatory 
implementation of a recovery policy that meets the requirements of the 
final rules would introduce an additional source of uncertainty in the 
compensation of the executive officer.\480\ In addition, the expected 
value of executive compensation subject to the rule could decrease 
because, to the extent any such compensation is erroneously awarded, it

[[Page 73123]]

must be recovered. Therefore, because incentive compensation based on 
financial metrics could be both more uncertain and lower in expected 
value, executives may seek a shift away from such compensation and 
towards base salary or other forms that are not recoverable, such as 
options or restricted stock with time-based vesting, incentive-based 
compensation tied to operational metrics, or bonuses awarded at the 
discretion of the board. To the extent these forms of compensation have 
reduced incentive alignment between executive pay and shareholder 
interests, i.e., pay-for-performance sensitivity,\481\ this potential 
shift in compensation composition, as noted by several commenters, may 
lessen the alignment with the interests of shareholders.\482\
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    \480\ The ``no-fault'' nature of the recovery policy, which 
mandates that executive officers return erroneously awarded 
compensation even if they had no role in the accounting error, along 
with the issuer's choice of a calculation methodology and the 
variation in assumptions that underlie it could also add to this 
uncertainty.
    \481\ 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., Michael Jensen and Kevin Murphy, 
Performance Pay and Top Management Incentives, 98 J. Pol. Econ. 225 
(1990).
    \482\ See, e.g., comment letter from Davis Polk 3 (suggesting 
that decreasing the use of accounting-based incentive compensation 
by increasing base salary may weaken the alignment between 
executives' incentives and those of the company and shareholders). 
See also comment letters from TCA; Ensco; Pearl Meyer; WAW; NAM; 
CAP; NACD; and American Vanguard.
---------------------------------------------------------------------------

    We acknowledge this potential cost but believe a number of factors 
and findings mitigate this concern. First, as noted earlier in this 
section, the issuer, in contrast to the executive, has incentives to 
push for more incentive-based compensation. This is because erroneous 
payments can now be recouped, and incentive-based compensation will 
generate less temptation to manipulate financial metrics, potentially 
leading to more accurate reporting. Thus issuer incentives could offset 
executive desire to shift away from incentive-based compensation. 
Second, it is not obvious that a shift away from incentive-based 
compensation covered by this rule lessens the alignment with the 
interests of shareholders. Less incentive-based compensation reduces 
incentives for financial misreporting, contributing to more reliable 
financial statements, which benefits issuers and shareholders. In 
addition, recent evidence indicates some investor dissatisfaction with 
performance-based pay \483\ as well as a growing interest in 
nonfinancial metrics pay.\484\ Third, to the extent that financial 
reporting quality improves because of the rule and reduces the 
likelihood of a restatement, this may reduce the uncertainty in 
executive compensation resulting from the rule. Lastly, other factors, 
such as shareholder engagement, other governance controls, and market 
forces play an important role in the level and design of executive 
compensation and may mitigate changes due to the final rules.\485\
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    \483\ See, e.g., Council of Institutional Investors, Policies on 
Corporate Governance Sec.  5 Executive Compensation (rev. Mar. 7, 
2022), available at https://www.cii.org/corp_gov_policies#exec.
    \484\ See, e.g., ISS Governance, 2021 Global Benchmark Policy 
Survey (Oct. 2021), available at https://www.issgovernance.com/file/publications/2021-global-policy-survey-summary-of-results.pdf 
(reporting that while there has been an upsurge in interest in 
environmental, social, and governance (ESG) metrics in executive 
compensation, some observers have criticized the increasing use of 
poorly defined ESG metrics).
    \485\ Recent regulatory changes have not always impacted 
executive compensation in ways that may have been expected, perhaps 
because of the offsetting effect of heightened investor engagement 
on pay structure since the introduction of say-on-pay votes. See, 
e.g., Lisa De Simone, Charles McClure and Bridget Stomberg, 
Examining the Effects of the TCJA on Executive Compensation (Apr. 
15, 2022). Kelley School of Business Research Paper No. 19-28, 
available at https://ssrn.com/abstract=3400877 (finding no evidence 
that the repeal of a long-standing exception under Section 162(m) of 
the tax code that allowed companies to deduct executives' qualified 
performance-based compensation in excess of $1 million reversed a 
related shift in executive compensation away from cash compensation 
and towards performance pay). In addition, the board, via the 
compensation committee, has oversight over executive compensation, 
and typically weighs a number of considerations in determining how 
best to incentivize performance. See, e.g., Alex Edmans, et al., 
Executive Compensation: A Survey of Theory and Evidence (Eur. Corp. 
Governance Inst. (ECGI) Fin. Working Paper No. 514/2016), available 
at https://ssrn.com/abstract=2992287 (retrieved from SSRN Elsevier 
database) (describing the influences of boards, executives, and 
institutional factors such as legislation, taxation, accounting 
policy, compensation consultants, and proxy advisory firms on 
compensation outcomes).
---------------------------------------------------------------------------

    Separate from changes to the composition of compensation, the size 
of total compensation may also be impacted by the rule. In response to 
potential increased uncertainty, risk-averse executives may demand an 
offset to bear this uncertainty. Executives may also demand higher 
total compensation to offset the expected loss from potential recovery. 
This possibility was noted by a number of commenters, who suggested 
this increase in executive compensation would harm shareholders.\486\
---------------------------------------------------------------------------

    \486\ See, e.g., comment letters from TCA; Ensco; Pearl Meyer; 
WAW; NAM; NACD; and American Vanguard.
---------------------------------------------------------------------------

    We acknowledge that an increase in executive pay is a possibility. 
Some research suggests that as a result of recovery provisions, the 
total compensation of executive officers may increase, but other 
studies do not support this hypothesis.\487\ The extent of any such 
increase will depend on the structure and conditions of the labor 
market for executive officers as well as other economic factors, 
including the negotiating environment and particular preferences of 
executives. We also note that although executives may demand and 
receive an increase in total compensation relative to the baseline to 
offset potential losses from recovery, their new compensation 
agreements would reasonably be expected to tie more closely to true 
firm performance, as misstatement-driven determinants of pay are 
replaced by base pay or pay tied to accurate financial or operational 
metrics. This could improve alignment between executives and 
shareholders. In addition, improved financial reporting quality that 
may result from the rule and reduced likelihood of a restatement would 
benefit the issuer and shareholders, mitigating costs associated with 
any increase in executive compensation. Finally, as noted earlier in 
this section, shareholder engagement, other governance controls, and 
market forces may mitigate changes due to the final rules.
---------------------------------------------------------------------------

    \487\ See DeHaan et al., supra note 62; Chen et al., supra note 
462 (finding that compensation recovery provisions are associated 
with higher CEO compensation); and Kroos et al., supra note 479. See 
also Ramachandran Natarajan and Kenneth Zheng, Clawback Provision of 
SOX, Financial Misstatements, and CEO Compensation Contracts, 34 J. 
Acct., Auditing & Fin. 74 (2019) (finding that compared with control 
firms, companies with a high restatement likelihood where the CEO is 
the chair of the board exhibit an increase in CEO salaries between 
the pre- and post-Sarbanes-Oxley Act periods, suggesting that in the 
post-Sarbanes-Oxley Act period influential CEOs are able to receive 
higher salaries that are not subject to the Sarbanes-Oxley Act 
Section 304 clawback provision). By contrast, Erkens et al., supra 
note 462, finds results suggesting that while CEO incentive-based 
compensation may be reduced for adopters of strong compensation 
recovery provisions, for those companies, CEO total compensation is 
also reduced. The authors suggest that the findings may indicate 
that the adoption of strong compensation recovery provisions is 
associated with a broader reform package. Similarly, Iskandar-Datta 
et al., supra note 426, find no evidence that compensation recovery 
provisions entail costs in the form of higher CEO compensation 
following adoption nor do they influence the design of compensation 
contracts.
---------------------------------------------------------------------------

    A number of commenters stated that the final rules may affect the 
competition among issuers to hire and retain executive officers, as 
well as recruitment for specific board committees.\488\ Increased 
uncertainty

[[Page 73124]]

that reduces the perceived value of the expected incentive-based 
compensation of an executive officer, or expectation of lower total 
compensation due to recovery, could cause listed issuers to have more 
difficulty attracting talented executives. As a result, listed issuers 
could potentially experience a comparative disadvantage relative to 
companies that are not covered (i.e., unlisted issuers and private 
companies).\489\
---------------------------------------------------------------------------

    \488\ See, e.g., comment letter from Compensia (noting that no-
fault recovery would have dramatic adverse effects on issuers such 
as individuals negotiating to avoid executive officer status). In 
addition, Compensia contends that the rule would put increased 
pressure on the boards and managers responsible for reviewing 
financial statements and executive compensation, making audit 
committee and compensation committee service less attractive. See 
also comment letters from Ensco; Kovachev; NAM; Pearl Meyer; and 
American Vanguard. Another commenter, however, suggests that 
clawback rules should not impede the ability of issuers to recruit 
executives. See comment letter from Occupy.
    \489\ See, e.g., comment letter from IBC (noting that narrowing 
the market of available and interested executives in any increment 
is not in the shareholders' best interest). See also comment letter 
from Davis Polk 3 (noting that having compensation subject to change 
for matters out of their control (``no-fault'') could lower 
executives' morale and satisfaction, causing executives to shy away 
from working with public companies). See also comment letters from 
NAM; and American Vanguard.
---------------------------------------------------------------------------

    While we acknowledge this possibility, this concern is mitigated if 
the potential impacts to compensation discussed earlier in this 
section, that total executive compensation may increase or shift to 
forms that are not recoverable, manifest to some degree. To the extent 
issuers adjust total compensation for executive officers and design 
alternative incentive packages, we expect that the competitiveness of 
listed issuers in the executive labor market may remain unchanged. In 
addition, studies have shown that listed firms offer higher total 
executive compensation than unlisted firms of comparable size and other 
characteristics.\490\ We thus believe it is unlikely executives will 
significantly disfavor listed firms from their choice set of employment 
opportunities.
---------------------------------------------------------------------------

    \490\ See Huasheng Gao and Kai Li, A Comparison of CEO Pay-
Performance Sensitivity in Privately-Held and Public Firms, J. Corp. 
Fin. 35 (2015) available at https://www.sciencedirect.com/science/article/pii/S0929119915001261 (finding that CEOs in public firms are 
paid 30% more than CEOs in comparable private firms).
---------------------------------------------------------------------------

    One commenter suggested that ``clawback risk may deter executives 
from undertaking or approving business strategies with more complex 
accounting methods, since the complexity may add to the likelihood of a 
reporting error and corresponding clawback of their compensation.'' 
\491\ We acknowledge this concern but note research shows that adoption 
of voluntary recovery provisions is associated with improved managerial 
decision making.\492\
---------------------------------------------------------------------------

    \491\ See comment letter from NAM.
    \492\ As noted above, some research shows that adoption of 
voluntary recovery provisions is associated with improved managerial 
decision making. See supra notes 463 and 473.
---------------------------------------------------------------------------

6. Effects of Disclosure and Tagging Requirements
    Under the final rules, the listed 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. To the extent that listed issuers that 
currently have compensation recovery policies might not disclose the 
existence or the specific terms of that policy, there may be direct 
benefits of this disclosure requirement separate from any pecuniary 
recovery following an accounting restatement. The disclosure 
requirements are intended to inform shareholders and the listing 
exchange as to the substance of a listed issuer's recovery policy and 
how the listed issuer implements that policy in practice. For instance, 
the disclosure requirements include the date of and amount of 
erroneously awarded compensation attributable to the accounting 
restatement, certain estimates that were used in determining the 
amount, and the amounts that have been collected, are still owed, and 
are forgone. The final rules also require issuers to indicate by a 
check box on the cover page of their annual reports whether the 
financial statements of the registrant included in the filing reflect 
correction of an error to previously issued financial statements and 
whether any of those error corrections are restatements that required a 
recovery analysis.
    The final rules also require the disclosure (including the cover 
page check boxes) be provided in Inline XBRL, a structured (i.e., 
machine-readable) data language. This may facilitate the extraction and 
analysis (e.g., comparison, aggregation, filtering) of the disclosed 
information across a large number of issuers or, eventually, over 
several years. XBRL requirements for public operating company financial 
statement disclosures have been observed to mitigate information 
asymmetry by reducing information processing costs, thereby making the 
disclosures easier to access and analyze.\493\ While these observations 
are specific to operating company financial statement disclosures and 
not to disclosures outside the financial statements, such as the 
compensation recovery disclosures, they suggest that the Inline XBRL 
requirements could directly or indirectly (i.e., through information 
intermediaries such as financial media, data aggregators, and academic 
researchers) provide investors with increased insight into information 
related to compensation recovery at specific issuers and across 
issuers, industries, and time periods.\494\ Additionally, requiring 
Inline XBRL tagging of the compensation recovery disclosure benefits 
investors by making the disclosures more readily available and easily 
accessible to investors, market participants, and others for 
aggregation, comparison, filtering, and other analysis, as compared to 
requiring a non-machine readable data language such as ASCII or HTML.
---------------------------------------------------------------------------

    \493\ See, e.g., Jeff Zeyun Chen et al., Information Processing 
Costs and Corporate Tax Avoidance: Evidence From the SEC's XBRL 
Mandate (Jan. 11, 2021), 40 J. Acct. & Pub. Pol'y 2 (finding XBRL 
reporting decreases likelihood of firm tax avoidance because ``XBRL 
reporting reduces the cost of IRS monitoring in terms of information 
processing, which dampens managerial incentives to engage in tax 
avoidance behavior''); see also Paul A. Griffin et al., The SEC's 
XBRL Mandate and Credit Risk: Evidence on a Link Between Credit 
Default Swap Pricing and XBRL Disclosure, Am. Acct. Ass'n Ann. 
Meeting, (2014) (finding XBRL reporting enables better outside 
monitoring of firms by creditors, leading to a reduction in firm 
default risk); see also Elizabeth Blankespoor, The Impact of 
Information Processing Costs on Firm Disclosure Choice: Evidence 
from the XBRL Mandate, 57 J. Of Acc. Res. 919, 919-967 (2019) 
(finding ``firms increase their quantitative footnote disclosures 
upon implementation of XBRL detailed tagging requirements designed 
to reduce information users' processing costs,'' and ``both 
regulatory and non-regulatory market participants play a role in 
monitoring firm disclosures,'' suggesting ``that the processing 
costs of market participants can be significant enough to impact 
firms' disclosure decisions'').
    \494\ See, e.g., Nina Trentmann, Companies Adjust Earnings for 
Covid-19 Costs, But Are They Still a One-Time Expense?, Wall St. J. 
(Sept. 24, 2020, 3:54AM) (citing an XBRL research software provider 
as a source for the analysis described in the article), available at 
https://www.wsj.com/articles/companies-adjust-earnings-for-covid-19-costs-but-are-they-still-a-one-time-expense-11600939813 (retrieved 
from Factiva database); see also XBRL Int'l, Bloomberg Lists BSE 
XBRL Data (Mar. 17, 2019), available at https://www.xbrl.org/news/bloomberg-lists-bse-xbrl-data/; see also Rani Hoitash and Udi 
Hoitash, Measuring Accounting Reporting Complexity With XBRL, 93 
Acct. Rev. 259 (2018), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2433677 (retrieved from SSRN Elsevier 
database).
---------------------------------------------------------------------------

    The compliance costs associated with the final rules, which apply 
only to listed issuers, would include costs attributable to the Inline 
XBRL tagging requirements. Various preparation solutions have been 
developed and used by operating companies to fulfill XBRL requirements, 
and some evidence suggests that, for smaller companies, XBRL compliance 
costs have decreased over time.\495\ The incremental

[[Page 73125]]

compliance costs associated with Inline XBRL tagging requirements under 
the final rules are mitigated by the fact that most issuers subject to 
the tagging requirements are or will be subject to other Inline XBRL 
requirements for other disclosures in Commission filings, including 
financial statement and cover page disclosures in certain periodic 
reports and registration statements.\496\ Such issuers may be able to 
leverage existing Inline XBRL preparation processes and expertise in 
complying with the Inline XBRL tagging requirements under the final 
rules.
---------------------------------------------------------------------------

    \495\ An AICPA survey of 1,032 reporting companies with $75 
million or less in market capitalization in 2018 found an average 
cost of $5,850 per year, a median cost of $2,500 per year, and a 
maximum cost of $51,500 per year for fully outsourced XBRL creation 
and filing, representing a 45% decline in average cost and a 69% 
decline in median cost since 2014. See Michael Cohn, AICPA Sees 45% 
Drop in XBRL Costs for Small Companies, Acct. Today (Aug. 15, 2018), 
available at https://www.accountingtoday.com/news/aicpa-sees-45-drop-in-xbrl-costs-for-small-reporting-companies (retrieved from 
Factiva database). In addition, a 2018 NASDAQ survey of 151 listed 
registrants found an average XBRL compliance cost of $20,000 per 
quarter, a median XBRL compliance cost of $7,500 per quarter, and a 
maximum XBRL compliance cost of $350,000 per quarter in XBRL costs. 
See Letter from Nasdaq, Inc. (Mar. 21, 2019) (to the Request for 
Comment on Earnings Releases and Quarterly Reports); see Request for 
Comment on Earnings Releases and Quarterly Reports, Release No. 33-
10588 (Dec. 18, 2018) [83 FR 65601 (Dec. 21, 2018)].
    \496\ See 17 CFR 229.601(b)(101), General Instruction C.4 of 
Form N-CSR, and 17 CFR 232.405.
---------------------------------------------------------------------------

    With the new disclosures, investors may 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 listed issuers will be required to 
adopt and comply with a recovery policy satisfying the requirements of 
the final rules, issuers will 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-back 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 marginally improve allocative 
efficiency by allowing investors to make more informed investment 
decisions based on a better understanding of the incentives of the 
executive officers. The requirement to publish recovery policies may 
make such variation more likely to emerge.\497\
---------------------------------------------------------------------------

    \497\ 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 final rules 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 an issuer to recover 
erroneously awarded compensation, the final rules will require the 
issuer to disclose details of the recovery efforts under Item 402(w) of 
Regulation S-K. These disclosures will allow existing and prospective 
shareholders to observe whether issuers are enforcing their recovery 
policies consistent with Section 10D. This will 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 
(e.g., because the expense of enforcing recovery rights would exceed 
the amount of erroneously awarded compensation 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.
    As a commenter noted, there are a number of direct costs for 
issuers resulting from the disclosure requirements of the final 
rules.\498\ First, issuers will incur direct costs to file their 
compensation recovery policies as an exhibit to their Exchange Act 
annual reports. For purposes of our Paperwork Reduction Act Analysis, 
we estimate that the exhibit filing requirement would impose a minimal 
burden of 0.4 hours per issuer. Second, if an issuer is required to 
recover erroneously awarded compensation, or if there is an outstanding 
balance from application of the recovery policy to a prior restatement, 
the issuer would incur a direct cost to prepare and disclose the 
information required by Item 402(w) of Regulation S-K, Item 6.F of Form 
20-F, or paragraph B.19 of Form 40-F, as applicable (or, for registered 
management investment companies, Item 18 to Form N-CSR and Item 
22(b)(20) of Schedule 14A) and the corresponding narrative. For 
purposes of our PRA, we estimate that the final disclosure requirement, 
including costs to tag the required disclosure in Inline XBRL, as 
described above, would impose a burden of 25 hours per issuer.\499\
---------------------------------------------------------------------------

    \498\ See, e.g., comment letter from IBC (noting that the 
``necessity for additional disclosures as well as the XBRL 
requirement increase the administrative cost to the registrant due 
to the substantial increase in the amount of information required 
for disclosure and the complexity of formatting data in XBRL'')
    \499\ See Section V.C., for a more extensive discussion of these 
disclosure burdens, including the monetization and aggregation 
across issuers of these direct costs.
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7. Indemnification and Insurance
    Many of the benefits discussed above would result from an executive 
officer's changes in behavior as a result of incentive-based 
compensation being at risk for recovery should a ``Big R'' or ``little 
r'' restatement be required. These benefits would be substantially 
undermined if the issuer were able to indemnify the executive officer 
for the loss of compensation.\500\ Moreover, as a commenter noted, 
shareholders would bear the cost of providing such 
indemnification.\501\ Therefore, the indemnification provision 
prohibits listed issuers from indemnifying current and former executive 
officers against the loss of erroneously awarded compensation or paying 
or reimbursing such executives for insurance premiums to cover losses 
incurred under the recovery policy.\502\
---------------------------------------------------------------------------

    \500\ Several commenters offered suggestions on this issue, see 
Section II.E.2.
    \501\ See, e.g., comment letter from Rosanne D. Balfour, 
discussing this potential outcome.
    \502\ As an example of the type of indemnification that is 
prohibited, one commenter noted that when Wilmington Trust was 
required to recover $2 million from an executive under the TARP 
clawback rules, the company responded by increasing the executive's 
base salary by 25%. See comment letter from Kovachev. See also the 
discussion infra at note 368.
---------------------------------------------------------------------------

    Although reimbursement of insurance premiums by issuers would be 
prohibited, the insurance market may develop an insurance product that 
would allow an executive officer, 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 officer would be able to hedge some of the risk 
that results from a recovery policy. If an executive officer 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 officer'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 officer, then incentives would remain for the 
executive to avoid inappropriate actions.
    The development of this type of private insurance policy for 
executive officers would also have implications for issuers. Overall, 
it could make it less costly for an issuer to compensate an executive 
officer after implementing a recovery policy. If an active insurance

[[Page 73126]]

market develops such that the executive officer 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 indemnification provision prohibits issuers from 
reimbursing a current or former executive officer 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 officer's compensation. This increase may be less than 
the increase in the market-determined compensation packages if an 
insurance policy was unavailable because an insurance company may be 
more willing to bear uncertainty than a risk-averse executive.
8. Effects May Vary for Different Types of Issuers
    The effects of the final rules 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 have different compensation structures, financial 
reporting complexity, or quality than other issuers. Analysis by 
Commission staff indicates that SRCs, on average, use a lower 
proportion of incentive-based compensation than non-SRCs, suggesting a 
lower potential impact of the final rules on SRCs.\503\ On the other 
hand, as discussed in Section IV.A., only 34% of SRCs currently have a 
recovery policy in place in contrast to 71% of larger domestic issuers. 
As a result, SRCs may experience more dramatic benefits as well as 
larger costs, relative to the baseline. 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 restatements and recoveries at SRCs.\504\ Academic studies 
suggest that the likelihood of reporting a material weakness in 
internal control over financial reporting decreases as the size of the 
issuer increases.\505\ This may imply that, relative to non-SRCs, the 
final rules may cause executive officers at SRCs to devote 
proportionately more resources to the production of high-quality 
financial reporting. Finally, to the extent that implementation of the 
final rules entails fixed costs, SRCs, because of their smaller size, 
would incur a greater proportional compliance burden than larger 
issuers.
---------------------------------------------------------------------------

    \503\ 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 2021. 
Staff found that, on average, SRCs pay 47% of total compensation in 
base salary versus 20% for non-SRCs; SRCs pay 19% of total 
compensation in stock awards versus 45% for non-SRCs; SRCs pay 7% of 
total compensation in non-equity incentive plan compensation versus 
18% for non-SRCs; SRCs pay 6% of total compensation as a bonus 
versus 2% for non-SRCs; and SRCs pay 16% of total compensation in 
option awards versus 8% 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 rule, these 
differences should be taken as maximum estimated differences of 
incentive-based compensation for named executive officers. Staff did 
not find significant differences between SRCs and non-SRCs in the 
percent of compensation paid in nonqualified deferred compensation, 
or in other compensation. We also note that the final rule covers a 
broader set of employees than the named executive officers required 
to report within the Summary Compensation Table.
    \504\ See Susan Scholz, Financial Restatement: Trends in the 
United States 2003-2012, Ctr. Audit Quality, Washington, DC, (2013).
    \505\ See, e.g., Jeffrey T. Doyle et al., Determinants of 
Weaknesses in Internal Control Over Financial Reporting, 44 J. Acct. 
& Econ. 193 (2007) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=770465 (retrieved from SSRN Elsevier 
database).
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    The final rules 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.\506\ 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 above, 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, including both ``Big R'' and ``little r'' 
restatements. This reduced incentive could have a greater impact for 
EGCs, relative to non-EGCs, to the extent that executive officers at 
EGCs are more likely to forgo value-enhancing growth opportunities as a 
result of the final rules, 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,\507\ which may 
imply that EGCs have a higher likelihood of an accounting restatement 
and a higher likelihood of reporting a material weakness in internal 
control over financial reporting. Similar to SRCs, this may imply that, 
relative to non-EGCs, the final rules may cause executive officers at 
EGCs to devote proportionately more resources to the production of 
high-quality financial reporting. Also, as discussed in Section IV.A., 
only 19% of EGCs currently have a recovery policy in place compared to 
71% of larger domestic issuers . As a result, EGCs may experience more 
dramatic changes relative to the baseline.
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    \506\ In an analysis of 446 EGCs with fiscal year 2021 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. 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 above 
that level; and staff restricted the analysis to companies that 
issued common equity and were listed on NYSE, NYSE MKT, or NASDAQ.
    \507\ Using the same dataset referenced in note 322, staff found 
the average market capitalization of EGCs is approximately $1.5 
billion while the average market capitalization of non-EGCs is 
approximately $14.6 billion. Staff also found the smallest EGCs tend 
to be relatively close 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 $40.6 
million and $60.5 million, respectively. Conversely, staff found 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 $2.9 billion and $21.9 billion.
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    Some commenters have noted that SRCs and EGCs may face 
disproportionate costs.\508\ One commenter noted that these companies 
may benefit disproportionately,\509\ and another commenter indicated 
that the benefits may be lower for companies immediately following the 
IPO process.\510\ We acknowledge that SRCs and EGCs may face 
disproportionate costs of compliance as compared to other companies, 
but also note that our baseline analysis suggests that fewer of these 
companies may have implemented compensation recovery policies \511\ and

[[Page 73127]]

consequently may realize disproportionate benefits.\512\
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    \508\ See, e.g., comment letter from ABA 1 (indicating that SRCs 
and EGCs are likely to bear significant costs in enforcing a 
mandatory compensation recovery policy and that the proposed rule 
would create a costly incentive for newly public issuers to avoid 
the use of incentive based compensation); CCMC 2 (indicating that 
the costs would be disproportionate); Compensia (indicating that 
SRCs and EGCs would face disproportionate costs); Mercer (indicating 
that the rule could impede the facilitation of capital formation for 
SRCs and EGCs); and NACD (suggesting the rule ``puts an inordinate 
burden on smaller companies, which cannot always afford the kind of 
compliance costs entailed by new rules'').
    \509\ See, e.g., comment letter from Public Citizen 1 
(suggesting that ``the chance for manipulation [at SRCs] is perhaps 
even greater at such companies than at larger firms with a wider and 
arguably more vigilant shareholder base'').
    \510\ See, e.g., comment letter from Compensia (suggesting that 
for EGCs, ``the likelihood of a financial restatement in the period 
immediately following an IPO would be minimal given the degree of 
scrutiny the issuer must undergo during the offering process'').
    \511\ See Section IV.A.
    \512\ See supra note 413.
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    In addition, we recognize that there may be additional specific 
costs and benefits for FPIs. While we believe the typical issuer is 
unlikely to transfer listing in the short-term as a result of the final 
rules, the potential response of FPIs is less clear. On one hand, by 
virtue of listing on a U.S. exchange, an FPI 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.
    Commenters have noted that the final rules would increase the 
compliance burden on FPIs and could thereby potentially reduce the 
advantage of listing on a U.S. market.\513\ One commenter noted that 
the final rules would cause a competitive disadvantage for domestic 
issuers as compared to foreign issuers,\514\ and others noted that they 
may encourage foreign governments to pass laws that disadvantage or 
penalize U.S. corporations.\515\ In addition, commenters noted that 
U.S. corporations operating in jurisdictions outside the United States 
would face similar compliance hurdles as FPIs.\516\
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    \513\ See, e.g., comment letters from CCMC 1; and Coalition. See 
also, e.g., comment letter from Freshfields (noting that the rules 
will require FPIs to identify and keep track of executive officers 
consistent with Section 16, and stating that, as a result of such 
requirements, the Economic Analysis in the Proposing Release 
understates the compliance burden for FPIs, especially if the FPI 
becomes subject to two clawback regimes); and Kaye Scholer (stating 
that the proposal does not give due consideration to or address the 
complications that would arise where an FPI is also required to 
recover compensation under home country rules, such as situations 
where the home country has a different definition of incentive-based 
compensation). In addition, see comment letter from UBS (noting that 
it may lose attractiveness as an employer as a result of the 
proposed rules).
    \514\ See comment letter from Bishop.
    \515\ See comment letters from CCMC 1; and Coalition.
    \516\ See, e.g., comment letters from CCMC 1; and Coalition.
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    We recognize that FPIs may bear additional compliance costs, as 
noted by commenters, relative to non-FPI listed issuers. As a result, 
FPIs could choose to delist from U.S. exchanges.\517\ Further, FPIs 
that are not currently listed on U.S. exchanges, but are considering 
listing on a non-home country exchange, may choose to list on another 
non-home foreign exchange because of the increased burden of our final 
rules. At the same time, we understand that one of the benefits of 
listing on a U.S. exchange is that an issuer can signal the high 
quality of its corporate governance, which is achieved by subjecting 
itself to the rigorous corporate governance rules and regulations of a 
U.S. exchange.\518\ By listing on U.S. exchanges, many FPIs may gain 
the ability to raise capital at a reduced cost compared to their home 
market. Hence, some FPIs seeking access to U.S. capital markets may 
view the requirements as beneficial.
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    \517\ See supra note 261, describing feedback from commenters 
who note that the rules may create potential disincentives for FPIs 
to list on U.S. exchanges. See also comment letter from Davis Polk 1 
(noting that ``adoption of Section 404 of the Sarbanes-Oxley Act of 
2002 led 51.6% of foreign firms to consider delisting from U.S. 
exchanges, and led 76.8% of small foreign firms to consider 
delisting, with 98 foreign firms de-listing in 2002,'' citing SEC 
Office of Economic Analysis, Study of the Sarbanes-Oxley Act of 2002 
Section 404 Internal Control over Financial Reporting Requirements 
(Sep. 2009), available at https://www.sec.gov/news/studies/2009/sox-404_study.pdf.)
    \518\ See, e.g., Craig Doidge et al., Why do Foreign Firms Leave 
U.S. Equity Markets?, 65 J. Fin., 1507 (2010), (noting that by 
subjecting themselves to U.S. laws and institutions, insiders of 
foreign firms credibly bond themselves to avoid some types of 
actions that might decrease the wealth of minority shareholders.) 
But see comment letter from Kaye Scholer (arguing that U.S. 
standards for corporate governance may not be more rigorous than 
other jurisdictions, and further that it is not clear that FPIs list 
on a U.S. exchange to signal their high quality corporate governance 
rather than to access U.S. capital markets or to provide more 
liquidity for their stock).
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    We also recognize that the final rule may have different effects on 
listed funds. One commenter noted that listed funds' financial 
statements are less complex than operating company financial statements 
and that accounting restatements are relatively rare for funds.\519\ 
The commenter also stated that the proposal could affect more than the 
small number of internally managed listed funds that the Commission 
estimated in the proposal, because some externally managed listed funds 
may pay some or all of the funds' chief compliance officers' 
compensation.
---------------------------------------------------------------------------

    \519\ See comment letter from ICI.
---------------------------------------------------------------------------

    We recognize that there is a wide range of complexity in issuer 
financial reporting. Issuers with less complex financial reporting, 
such as some listed funds, may realize fewer benefits from the final 
rule. We also anticipate that such issuers may experience fewer costs, 
as fewer compensation contracts may be affected, and potential trigger 
events would be relatively rare. In addition, we recognize that listed 
funds that pay for their chief compliance officers' compensation would 
be affected by the final rule, and that as a result, the number of 
affected funds likely exceeds the estimate provided in the Proposing 
Release.

C. Alternatives

    Below we discuss possible alternatives to the final rules 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 final 
rules may impose certain disproportionate costs on SRCs and EGCs. 
However, smaller issuers, SRCs and EGCs, may have an increased 
likelihood of reporting an accounting error and may be more likely to 
report a material weakness in internal control over financial 
reporting.\520\ As more fully discussed in Section II.A.3, while the 
Commission has the authority to exercise its discretion to exempt such 
issuers, Congress did not direct the Commission to consider 
differential treatment for recovery of incentive-based compensation 
that was not earned and should not have been paid for SRCs or EGCs. As 
such, we see no reason why shareholders of smaller issuers should not 
benefit from recovery of erroneously awarded compensation in the same 
manner as shareholders of larger issuers.
---------------------------------------------------------------------------

    \520\ See, Choudhary et al., supra note 61 (finding that future 
restatements are less likely for larger firms). See also comment 
letter from Public Citizen 1 (arguing that the risk of manipulation 
is greater at smaller companies).
---------------------------------------------------------------------------

    A number of commenters suggested that we consider exempting FPIs, 
arguing that home countries would generally have a greater interest in 
determining whether issuers should have recourse against executive 
officers.\521\ Another commenter suggested that some issuers may be 
required to implement two different recovery policies, and also noted 
that FPIs are not currently required to identify Section 16 officers. 
As a result, the commenter stated that the economic analysis in the 
Proposing Release understated the costs for FPIs.\522\
---------------------------------------------------------------------------

    \521\ See, e.g., comment letters from the ABA 1; Bishop; and 
Davis Polk 1.
    \522\ See supra footnotes 32 through 37; see also comment letter 
from Freshfields (``we expect all UK companies that are FPIs either 
already have a clawback in place, or will implement one when their 
directors' remuneration policy is next submitted for shareholder 
approval,'' and ``we believe that the Economic Analysis in the 
Release understates the compliance burden for FPIs especially if the 
FPI becomes subject to two clawback regimes'').
---------------------------------------------------------------------------

    As discussed previously in the context of FPIs generally, the 
potential effect of the final rules on FPIs is difficult to predict. On 
the one hand, due to the potential differences in home

[[Page 73128]]

country law, the final rule requirements may be especially burdensome 
for FPIs relative to non-FPIs.\523\ On the other hand, there is 
evidence that many FPIs may be listing on U.S. exchanges in part to 
credibly signal to investors their willingness and ability to be 
subjected to stricter governance standards.\524\ While FPIs may face a 
relatively higher burden from the final rules, they also may experience 
a relatively higher benefit. As more fully discussed in Section II.A.3, 
while the Commission has the authority to exercise its discretion to 
exempt such issuers, the concerns expressed by commenters do not in our 
view justify exempting all FPIs from the obligation to recover 
incentive-based compensation that was erroneously awarded. Moreover, 
the recovery requirements will help to encourage reliable financial 
reporting by listed issuers, which is as important for investors in 
FPIs as for other issuers. Studies have shown that foreign companies 
present a similar risk of restatement as other companies \525\ and that 
U.S. issuers who are non-accelerated filers accounted for approximately 
53% of restatements.\526\ To the extent that recovery under Rule 10D-1 
would be wholly inconsistent with a foreign regulatory regime, we have 
included an impracticability accommodation, as discussed in Section 
II.C.3.b., which may alleviate some of the implementation challenges 
faced by FPIs.
---------------------------------------------------------------------------

    \523\ We note that if recovery of erroneously awarded 
compensation would violate home country laws that were in effect as 
of the date of publication of Rule 10D-1 in the Federal Register, 
the final rules may permit the board of directors discretion to 
forgo recovery as impracticable, subject to certain conditions.
    \524\ See Craig Doidge et al., supra note 518.
    \525\ See supra note 56.
    \526\ See A Twenty-Year Review.
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    Certain commenters also suggested we unconditionally exempt listed 
funds, rather than the conditional exemption we are adopting. Listed 
funds, unlike most other issuers, are generally externally managed and 
often have few, if any, employees that are compensated by the fund 
(i.e., the issuer). As discussed above, the final rules are designed to 
reflect the structure and compensation practices of listed funds by 
requiring funds to implement compensation recovery policies only when 
they in fact award incentive-based compensation covered by Section 10D. 
As such, we believe the rules are appropriately tailored as applied to 
funds in that they will only apply to the small subset of listed funds 
that award incentive-based compensation covered by Section 10D.
2. Excluding Incentive-Based Compensation Tied to Stock Price
    The final rule encompasses incentive-based compensation tied to 
measures such as stock price and TSR because improper accounting 
affects such financial reporting measures and in turn results in excess 
compensation. As discussed above, the final rules may result in 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 final rules, 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 final rules 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.\527\ To this end, accounting-based measures of performance--
although not directly tied to issuer value enhancement--may better 
capture the effect of an executive officer's actions during the 
relevant performance period. Therefore, if incentive-based compensation 
tied to stock price were 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 officer's actions during the performance period. Since 
changes in compensation practices away from the current market 
practices may be either beneficial to issuers or not, depending on 
whether current practices are optimal, it is unclear that shifting 
compensation toward forms tied to market-based metrics would be 
beneficial.
---------------------------------------------------------------------------

    \527\ All of the seven most frequently used metrics to award 
compensation in short-term incentive plans were accounting-based 
measures. Those measures are operating income, revenue, cash flow, 
EPS, return measures, operating income margin, and net income. See 
Meridian Report. See also supra note 356.
---------------------------------------------------------------------------

    The optimal compensation package may contain 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.\528\ Using market-based measures of performance in 
short-term incentive plans may be undesirable for the executive officer 
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 
officer'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 officer'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 consequently may 
adversely affect the incentives of the executive officer.
---------------------------------------------------------------------------

    \528\ See Meridian Report.
---------------------------------------------------------------------------

3. Including Only ``Big R'' Restatements as Trigger Events
    The Commission considered adopting final rules that would provide 
that recovery is required with respect to only ``Big R'' restatements 
that correct errors that are material to previously issued financial 
statements. Under that alternative, ``little r'' restatements would not 
trigger a potential recovery.
    As discussed above, some commenters have provided feedback

[[Page 73129]]

indicating that there are substantial benefits associated with 
including ``little r'' restatements as trigger events, including the 
likelihood that the final rules will provide stronger incentives for 
managers to monitor the accuracy of financial statements.\529\ Were we 
to include only ``Big R'' restatements, those benefits would not be 
realized. However, other commenters have noted that the inclusion of 
``little r'' restatements as trigger events may increase the costs of 
compliance with the final rules compared to an alternative of including 
only ``Big R'' restatements.\530\ Although it is possible that certain 
compliance costs may be higher as a result of the inclusion of ``little 
r'' restatements in the scope of potential trigger events, as discussed 
above, not every restatement would trigger a recovery of compensation 
that was earned as a result of meeting performance measures.\531\ In 
addition, issuers are already required to perform a materiality 
analysis on each error that is identified in order to determine how to 
account for and report the correction of that error, and in that 
context, issuers may have already calculated the impact of the error on 
executive compensation. Furthermore, the broader scope of encompassing 
``little r'' restatements addresses concerns that issuers could 
manipulate materiality and restatement determinations to avoid 
application of the compensation recovery policy.\532\
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    \529\ See supra note 84.
    \530\ See supra note 88. Also, as noted in the Second Reopening 
Release, the inclusion of ``little r'' restatements as potential 
trigger events increases the number of potential trigger events.
    \531\ We expect that recovery of incentive-based compensation 
that is tied to TSR would be relatively small and infrequent as a 
result of ``little r'' restatements, since these restatements are 
less likely to be associated with significant stock price reactions. 
See Choudhary et al., supra note 61 (finding an average stock price 
reaction of -3.3% to ``Big R'' restatements and -0.3% for ``little 
r'' restatements); Thompson, supra note 79 (finding an average stock 
price reaction of -1.5% to ``Big R'' restatements and -0.3% for 
``little r'' restatements).
    \532\ See supra note 107.
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4. Other Alternatives Considered
    Some commenters suggested that issuers may choose to implement a 
nonqualified deferred compensation plan (e.g., a ``holdback plan'') to 
aid in the recovery of erroneously awarded incentive-based 
compensation.\533\ One commenter suggested that the Commission 
specifically require the use of a holdback plan,\534\ and another 
commenter noted that such a plan may raise significant tax issues and 
recommended that the Commission provide the board of directors with 
broad discretion.\535\ A holdback plan would likely reduce the costs of 
recovering erroneously awarded incentive-based compensation. On the 
other hand, a holdback plan may further augment any increase in 
compensation necessary to offset the expected cost to the executive 
officer of a recovery policy. This is due to the executive officer not 
having access to the funds she has earned and having to delay 
consumption that would otherwise be possible. These considerations 
suggest that a holdback plan could be efficient at some issuers but 
inefficient at others. We note that the rule does not mandate a 
holdback plan, but also does not prevent issuers from adopting a 
holdback plan if they so choose.
---------------------------------------------------------------------------

    \533\ See comment letter from Compensia; NACD; and Bhagat and 
Elson. See also Stuart Gillan and Nga Nguyen, Clawbacks, Holdbacks, 
and CEO Contracting, 30 J. Appl. Corp. Fin., 53 (2018).
    \534\ See comment letter from Bhagat and Elson.
    \535\ See comment letter from ABA 1.
---------------------------------------------------------------------------

    One commenter suggested that the Commission consider also requiring 
recovery of proportional incentive compensation, whether or not it is 
numerically connected to the restated financial results. This 
suggestion would require issuers, in the event of a restatement, to 
recover a proportionate amount of the compensation tied to qualitative 
variables or board judgment.\536\ Relative to the final amendments, 
this alternative implementation would reduce the incentive to alter the 
composition of an executive officer'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, as suggested by the commenter, we agree that 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 could also 
increase the amount of expected compensation the executive officer 
would require in order to voluntarily bear the increased uncertainty.
---------------------------------------------------------------------------

    \536\ See comment letter from Public Citizen 1.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

A. Summary of the Collection of Information

    Certain provisions of our rules, schedules, and forms that will be 
affected by the final rules contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act. The 
Commission published a notice requesting comment on changes to these 
collections of information in the Proposing Release and submitted these 
requirements to the Office of Management and Budget (``OMB'') for 
review in accordance with the PRA.\537\ While a number of commenters 
provided comments on the potential costs of the proposed rules, as well 
as factors that could affect the scope of entities covered by the 
proposal, commenters did not specifically address our PRA 
analysis.\538\
---------------------------------------------------------------------------

    \537\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \538\ See supra Section II. One commenter contended that the 
Reopening Release should have included an updated PRA analysis. See 
comment letter from Toomey/Shelby, supra note 14.
---------------------------------------------------------------------------

    The hours and costs associated with preparing, filing, and 
distributing the schedules and forms constitute reporting and cost 
burdens imposed by each collection of information. 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. Compliance with the information collections is 
mandatory. Responses to the information collections are not 
confidential and there is no mandatory retention period for the 
information disclosed. The titles for the affected collections of 
information are:
    ``Form 10-K'' (OMB Control No. 3235-0063);
    ``Form 20-F'' (OMB Control No. 3235-0288);
    ``Form 40-F'' (OMB Control No. 3235-0381); and
    ``Form N-CSR'', Certified Shareholder Report of Registered 
Management Investment Companies'' (OMB Control No. 3235-0570).\539\
---------------------------------------------------------------------------

    \539\ The amendments also affect the following collections of 
information: ``Regulation 14A and Schedule 14A'' (OMB Control No. 
3235-0059); ``Regulation 14C and Schedule 14C'' (OMB Control No. 
3235-0057); and ``Rule 20a-1 under the Investment Company Act of 
1940, Solicitations of Proxies, Consents, and Authorizations'' (OMB 
Control No. 3235-0158). Regulations 14A and 14C and the related 
schedules require the new disclosure to be included in proxy and 
consent solicitations. Rule 20a-1 requires funds to comply with 
Regulation 14A, Schedule 14A, and all other rules and regulations 
adopted pursuant to Section 14(a) of the Exchange Act that would be 
applicable to a proxy solicitation if it were made in respect of a 
security registered pursuant to Section 12 of the Exchange Act. As 
noted below, for purposes of the PRA and in order to avoid the PRA 
inventory reflecting duplicative burdens, we assume the disclosure 
will be incorporated by reference into Form 10-K and Form N-CSR from 
proxy and information statements and do not include a separate 
burden for these collections of information. See notes 543 and 544.

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[[Page 73130]]

    The Commission adopted Form 10-K, Form 20-F and Form 40-F under the 
Exchange Act. Form N-CSR was adopted under the Exchange Act and 
Investment Company Act. The forms set forth the disclosure requirements 
to help shareholders make informed voting and investment decisions.

B. Summary of the Final Amendments and Effect of the Final Amendments 
on Existing Collections of Information

    To implement the provisions of Section 954 of the Dodd-Frank Act, 
which added Section 10D to the Exchange Act we are adopting Rule 10D-1 
under the Exchange Act as well as amendments to Items 402, 404, and 601 
of Regulation S-K; Rule 405 of Regulation S-T; Schedule 14A; Form 20-F; 
Form 40-F; Form 10-K; and Form N-CSR. Rule 10D-1 directs national 
securities exchanges and associations to establish listing standards 
that require listed issuers to adopt and comply with written policies 
for recovery of erroneously awarded 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. As described in more detail above, we are also 
adopting new disclosure requirements in Schedule 14A, Form 10-K, Form 
20-F, Form 40-F, and Form N-CSR to require issuers listed on an 
exchange to file their written compensation recovery policy as an 
exhibit to their annual reports. Form 10-K, Form 20-F, Form 40-F 
additionally require issuers listed on an exchange to indicate by a 
check box on the cover page of their annual reports whether the 
financial statements of the registrant included in the filing reflect 
correction of an error to previously issued financial statements and 
whether any of those error corrections are restatements that required a 
recovery analysis; and disclose actions an issuer has taken pursuant to 
such recovery policy. These disclosures will also be required to be 
provided in tagged data language using Inline XBRL.\540\
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    \540\ While paperwork burdens associated with investment company 
interactive data requirements are generally accounted for in the 
Information Collection titled ``Registered Investment Company 
Interactive Data,'' any burdens associated with interactive data for 
investment companies associated with the final rules are estimated 
to be negligible. For administrative simplicity, these burdens 
therefore are incorporated into the burdens associated with the Form 
N-CSR Information Collection, discussed below.
---------------------------------------------------------------------------

    The additional information a listed U.S. issuer is required to 
compile and disclose regarding its policy on incentive-based 
compensation pursuant to Item 402(w) supplements information that U.S. 
issuers often provide elsewhere in their executive compensation 
disclosure.\541\ Similarly, for a listed FPI filing an annual report on 
Form 20-F or, if a FPI elects to use domestic registration and 
reporting forms, on Form 10-K, the amendments supplement existing 
disclosures.\542\ We anticipate that new disclosure and submission 
requirements will increase the amount of information that listed U.S. 
issuers and listed FPIs must compile and disclose and therefore 
increase the burdens and costs for the affected registrants.
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    \541\ These issuers are required to provide information relating 
to the compensation of their named executive officers that may 
include 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. See 17 CFR 
229.402(b)(2)(viii). SRCs and EGCs generally are subject to scaled 
executive compensation disclosure requirements in Item 402 of 
Regulation S-K. See 17 CFR 229.402(l) and Section 102(c) of the JOBS 
Act. However, the requirements of new Item 402(w) are not scaled and 
thus SRCs and EGCs will be required to provide all of the 
disclosures called for by this item. Accordingly, we have not 
calculated separate or different paperwork burdens with respect to 
Item 402(w) for these classes of issuers. With respect to registered 
management investment companies, under the final rules, information 
mirroring Item 402(w) disclosure must be included in annual reports 
on Form N-CSR and in proxy statements and information statements 
relating to the election of directors.
    \542\ See Item 6.B and Item 7.B. of Form 20-F.
---------------------------------------------------------------------------

    For listed U.S. issuers, other than registered management 
investment companies, the amendments require additional Item 402 
disclosure in certain required reports and will increase the burden 
hour and cost estimates associated with Form 10-K.\543\ For listed 
registered management investment companies, the amendments to Form N-
CSR and Schedule 14A require additional disclosure and will increase 
the associated burden hour and cost estimates, if the registered 
investment company pays incentive-based compensation, for Form N-
CSR.\544\ For listed FPIs filing an annual report on Form 20-F, Form 
40-F or, if a FPI elects to use U.S. registration and reporting forms, 
on Form 10-K, the amendments require additional disclosure in annual 
reports and will increase the burden hour and costs estimates for each 
of these forms.
---------------------------------------------------------------------------

    \543\ For purposes of our PRA estimates, consistent with past 
amendments to Item 402, we assume that all of the burden relating to 
the new narrative disclosure requirements in Schedule 14A and 
Schedule 14C 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. We are therefore not allocating a 
separate burden estimates for Regulation 14A/Schedule 14A and 
Regulation 14C/Schedule 14C. 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 
(Aug. 29, 2006) [71 FR 53158].
    \544\ 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 will be 
associated with Form N-CSR, and therefore, we are not allocating a 
separate burden estimate for Schedule 14A or Rule 20a-1 under the 
Investment Company Act with respect to disclosure by such funds.
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C. Burden and Cost Estimates Related to the Final Amendments

    The following table summarizes the estimated paperwork burdens 
associated with the amendments to the affected forms filed by listed 
issuers.

[[Page 73131]]



       PRA Table 1--Estimated Paperwork Burden of Final Amendments
------------------------------------------------------------------------
                                                       Brief explanation
                                   Estimated burden      of estimated
                                       increase         burden increase
------------------------------------------------------------------------
 Amendments to Reg. S-K Items 402, 404, and 601, Reg. S-T Item 405, Form
        20-F, Form 40-F, Schedule 14A, Form 10-K, and Rule 10D-1
------------------------------------------------------------------------
(1) Require the filing of an      (1) An increase of  These increases
 issuer's recovery policy as an    0.4 burden hours    are the estimated
 exhibit to its Exchange Act       for Form 10-K,      effect on the
 annual report.                    Form 20-F, and      affected forms by
                                   Form 40-F.          the amendments to
                                  (2) An increase of   implement Section
                                   25 burden hours     10D, including
                                   for each of the     the filing of the
                                   affected forms:     recovery policy,
                                   Form 10-K, Form     recovery policy
                                   20-F, and Form 40-  and policy
                                   F.                  implementation
                                                       disclosures, and
                                                       the use of
                                                       structured data
                                                       for this
                                                       information.
(2) Require:
    [cir] Disclosure regarding
     the issuer's conclusion
     that recovery was not
     required under the recovery
     policy or disclosure
     regarding how the issuer
     applied its recovery policy
     after the issuer was
     required to prepare an
     accounting restatement that
     required recovery under the
     policy, or there was an
     outstanding balance to be
     recovered;
    [cir] Disclosure of the
     effects of the recovery on
     the Summary Compensation
     Table;
    [cir] New check boxes to
     indicate on the cover page
     of issuers' annual reports
     whether the financial
     statements included in the
     filing reflect correction
     of an error to previously
     issued financial statements
     and whether such
     corrections are
     restatements that required
     a recovery analysis; and
    [cir] The above information
     to be tagged using Inline
     XBRL.
------------------------------------------------------------------------
                Amendments to Form N-CSR, and Rule 10D-1
------------------------------------------------------------------------
(1) Require the filing of a       (1) An increase of  These increases
 fund's recovery policy as an      0.4 burden hours    are the estimated
 exhibit to its Form N-CSR         for the affected    effect on the
 annual report.                    form: Form N-CSR.   affected form by
                                  (2) An increase of   the amendments to
                                   25 burden hours     implement Section
                                   for the affected    10D, including
                                   form: Form N-CSR.   the filing of the
                                                       recovery policy,
                                                       recovery policy
                                                       and policy
                                                       implementation
                                                       disclosures, and
                                                       the use of
                                                       structured data
                                                       for this
                                                       information.
(2) Require:
    [cir] Disclosure regarding
     the fund's conclusion that
     recovery was not required
     under the recovery policy
     or disclosure regarding how
     the fund applied its
     recovery policy after the
     fund was required to
     prepare an accounting
     restatement that required
     recovery under the policy,
     or there was an outstanding
     balance to be recovered;
     and
    [cir] The above information
     to be tagged using Inline
     XBRL.
------------------------------------------------------------------------

    In the Proposing Release, we derived our burden hour and cost 
estimates by reviewing our burden estimates for similar disclosure and 
considering our experience with other tagged data initiatives. In 
particular, we noted that the preparation of the information required 
by Item 402(w) and the corresponding narrative disclosure provisions 
would be comparable to an issuer's preparation of the disclosure 
required by the Commission's 2009 amendments to enhance certain aspects 
of proxy disclosure, which were also largely designed to enhance 
existing disclosure requirements.\545\ In addition, 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 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.
---------------------------------------------------------------------------

    \545\ See Proxy Disclosure Enhancements Release No. 33-9089 
(Dec. 16, 2009) [74 FR 68334 (Dec. 23, 2009)] (``Proxy Disclosure 
Enhancements''), which 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.

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[[Page 73132]]

    In the Proposing Release, the Commission estimated that the average 
incremental burden for an issuer to prepare the new narrative 
disclosure would be 21 hours. The proposed estimate included the time 
and cost of preparing disclosure, as well as tagging the data in XBRL 
format. We continue to believe that these are the primary cost elements 
for issuers preparing the disclosure and that the elements account for 
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, disclosing information 
regarding the application and implementation of this recovery policy if 
required by a restatement.
    While the cost elements remain the same, we recognize that there 
may be some additional burden in tagging the information using Inline 
XBRL, using the check boxes, and providing the expanded disclosure 
regarding the application of the recovery policy, including disclosure 
analyzing how the amount of erroneously awarded compensation was 
calculated and explaining why an issuer concluded that a recovery of 
compensation was not required. As a result, we are increasing our 
estimate of the average incremental burden for an issuer to prepare the 
disclosure from 21 hours to 25 hours. We note that this estimate should 
represent an upward bound, as the incremental additional disclosure 
associated with ``little r'' restatements should be lower than for 
``Big R'' restatements because we anticipate that it will be less 
likely that a ``little r'' restatement will result in erroneously 
awarded compensation, and where no recovery is required the rules 
require less disclosure. As we noted in Section IV, we estimate that 
``little r'' restatements may account for roughly three times as many 
restatements as ``Big R'' restatements.\546\
---------------------------------------------------------------------------

    \546\ See note 396 and accompanying text.
---------------------------------------------------------------------------

    In addition, consistent with the Proposing Release, we separately 
estimate the burden of filing a listed issuer's or listed registered 
investment company's recovery policy as an exhibit to its annual 
report. In a modification from the proposal, we are reducing the 
estimate of the burden from approximately one hour to 0.4 hours. We 
estimate that the initial burden of filing the recovery policy as an 
exhibit will be one hour, but the ongoing burden for filing in 
subsequent years will be minimal, which we estimate as a burden of 0.1 
hours. In order to form our estimate, we averaged the initial one hour 
burden with the 0.1 hour burden in subsequent years to determine the 
average burden over three years of 0.4 hours.
    Because these estimates are 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 the overall effect of the 
restatement on the issuer's incentive-based compensation. Issuers 
subject to Item 402(w) will provide the required disclosures by either 
including the information directly in their Exchange Act annual reports 
or incorporating the information by reference from a proxy statement on 
Schedule 14A or information statement on Schedule 14C.
    The amendments described in Section II will increase the paperwork 
burden for filings on the affected forms that include recovery policy 
exhibit filings and recovery policy disclosure. However, not all 
filings on the affected forms include these disclosures, either because 
they are not listed issuers or they are not required to provide the 
disclosure because they have not had to seek recovery pursuant to their 
recovery policy. Therefore, to estimate the increase in overall 
paperwork burden from the amendments, we first estimate the number of 
listed issuers and then estimate the number of issuers that may be 
required to include the recovery disclosure. Based on the staff's 
findings, the table below sets forth our estimates of the number of 
filings on these forms \547\ and the number of such filings that will 
be required to include the recovery disclosure.\548\
---------------------------------------------------------------------------

    \547\ Of the 2,710 listed issuers that file Form N-CSR, 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, and thus may be 
required to file a recovery policy exhibit. 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 new Item 18 of Form N-CSR. One commenter 
suggested that a greater number of investment companies could be 
affected by the proposal, but as this commenter did not include data 
addressing the compensation arrangements that would fall within the 
scope of the proposed requirements, and because we have no other 
reason to believe that our estimates should be adjusted, we are not 
adjusting our methods of estimating the number of investment 
companies that the final rules would affect. See comment letter from 
ICI.
    \548\ See Section IV. In Section IV.A, we note that the report, 
A Twenty-One Year Review, indicated that 4.9% of issuers disclosed a 
restatement in 2020. In developing our estimates, we used the 
current annual responses in the OMB inventory for the forms as a 
starting point when determining the number of affected issuers. 
Issuers are generally only required to file one annual report on 
Form 10-K, Form 20-F, Form 40-F, or Form N-CSR per year. We expect, 
as noted above, that for purposes of the PRA, to the extent issuers 
provide the required information in other filings, the information 
will be incorporated by reference. See notes 543 and 544. Further, 
while issuers are generally required to file one annual report, the 
rules do not apply to all issuers, rather they only apply to listed 
issuers. As PRA Table 2 reflects, we estimate, based on Audit 
Analytics restatement data for 2021, that approximately five% of 
listed issuers restated their financial statements in 2020 and 2021. 
While recognizing that not all issuers that file restatements will 
be required to provide recovery disclosure, for purposes of the PRA, 
we use the five% figure as an upward bound, and estimate that all 
such issuers will provide the required disclosure.

                                PRA Table 2--Estimated Number of Affected Filings
----------------------------------------------------------------------------------------------------------------
                                                                                  Number of
                                                                                  estimated        Number of
                                                               Current annual     recovery     estimated filings
                             Form                               responses in       policy         that include
                                                                OMB Inventory      exhibit          recovery
                                                                                   filings         disclosure
----------------------------------------------------------------------------------------------------------------
10-K.........................................................           8,292           4,513                226
20-F.........................................................             729             722                 36
40-F.........................................................             132             132                  7
N-CSR........................................................           6,898               7                  1
----------------------------------------------------------------------------------------------------------------

    We calculated the burden estimates by adding the estimated 
additional burden to the existing estimated responses and multiplying 
the estimated number of responses by the estimated average amount of 
time it would take an issuer to prepare and review disclosure required 
under the final amendments. For purposes of the PRA, the burden is

[[Page 73133]]

to be allocated between internal burden hours and outside professional 
cost. PRA Table 3 sets forth the percentage estimates we typically use 
for the burden allocation for each collection of information and the 
estimated burden allocation for the proposed new collection of 
information. We also estimate that the average cost of retaining 
outside professionals is $600 per hour.\549\
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    \549\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $600 per hour. At the proposing 
stage, we used an estimated cost of $400 per hour. We are increasing 
this cost estimate to $600 per hour to adjust the estimate for 
inflation from August 2006 to the present. The inflation-adjusted 
amount is $583.88, which we have rounded up to $600.

PRA Table 3--Estimated Burden Allocation for the Affected Collections of
                               Information
------------------------------------------------------------------------
                                                              Outside
        Collection of information            Internal      professionals
                                             (percent)       (percent)
------------------------------------------------------------------------
Forms 10-K, N-CSR.......................              75              25
Form 20-F, 40-F.........................              25              75
------------------------------------------------------------------------

    PRA Table 4 illustrates the incremental change to the total annual 
compliance burden of affected forms, in hours and in costs, as a result 
of the amendments' estimated effect on the paperwork burden per 
response.\550\ We note that the table includes one line for the exhibit 
filing requirements and a separate line for the recovery disclosure 
requirement, to account for the differences in the number of estimated 
responses.
---------------------------------------------------------------------------

    \550\ These estimates represent the average burden for all 
issuers, both large and small. In deriving our estimates, we 
recognize that the burdens will likely vary among individual issuers 
based on a number of factors, including the size and complexity of 
their organizations. The OMB PRA filing inventories represent a 
three-year average. Some issuers may 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. Averages 
also may not align with the actual number of filings in any given 
year.

             PRA Table 4--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Final Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Number of
                                                             estimated      Burden hour      Change in       Change in       Change in       Change in
                Collection of information                    affected      increase per    burden hours    company hours   professional    professional
                                                             responses       response                                          hours           costs
                                                                 (A) \a\             (B)           (C) =           (D) =           (E) =           (F) =
                                                                                               (A) x (B)      (C) x 0.75      (C) x 0.25      (E) x $600
                                                                                                                 or 0.25         or 0.75
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K Exhibit............................................           4,513             0.4           1,805           1,354             451        $270,600
10-K....................................................             226              25           5,650           4,238           1,412         847,200
20-F Exhibit............................................             722             0.4             289              72             217         130,200
20-F....................................................              36              25             900             225             675         405,000
40-F Exhibit............................................             132             0.4            52.8              13              40          24,000
40-F....................................................               7              25             175              44             131          78,600
N-CSR Exhibit...........................................               7             0.4               3               2               1             600
N-CSR...................................................               1              25              25              19               6           3,600
--------------------------------------------------------------------------------------------------------------------------------------------------------

    PRA Table 5 illustrates the incremental change to the total annual 
compliance burden of affected forms, in costs, as a result of the 
adjustment to the average cost of retaining outside professionals from 
$400 to $600 per hour.\551\
---------------------------------------------------------------------------

    \551\ See note 549. The table adjusts the average cost of 
retaining outside professionals from $400 to $600 per hour for the 
affected Exchange Act forms. The aggregate burden of Form N-CSR was 
last estimated, including to adjust for inflation, in 2021.

PRA Table 5--Calculation of the Incremental Change in Costs of Current Responses Resulting From the Average Cost
                                                   Adjustment
----------------------------------------------------------------------------------------------------------------
                                                                             Current cost        Adjusted cost
              Collection of information               Number of affected  burden at $400 per  burden at $600 per
                                                           responses             hour                hour
----------------------------------------------------------------------------------------------------------------
10-K................................................               8,292      $1,840,481,319      $2,760,721,978
20-F................................................                 729         576,824,025         865,236,038
40-F................................................                 132          17,084,560          25,626,840
----------------------------------------------------------------------------------------------------------------

    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. The 
following table summarizes the requested paperwork burden, including 
the estimated total reporting burdens and costs, under the amendments. 
For purposes of the PRA, the requested change in burden hours in column 
H of PRA Table 6 is rounded to the nearest whole number.

[[Page 73134]]



                                                               PRA Table 6--Requested Paperwork Burden Under the Final Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Current burden                            Program change                                Revised burden
                                                          --------------------------------------------------------------------------------------------------------------------------------------
                           Form                              Current     Current                        Number of   Change in     Change in
                                                             annual       burden      Adjusted cost     affected     company    professional      Annual       Burden hours       Cost burden
                                                            responses     hours           burden        responses     hours         costs       responses
                                                                  (A)          (B)                (C)         (D)         (E)             (F)          (G)    (H) = (B) + (E)    (I) = (C) + (F)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Form 10-K................................................       8,292   14,025,462     $2,760,721,978       4,513       5,592      $1,117,800        8,292         14,031,054     $2,761,839,778
Form 20-F................................................         729      479,261        865,236,038         722         297         535,200          729            479,558        865,771,238
Form 40-F................................................         132       14,237         25,626,840         132          57         102,600          132             14,294         25,729,440
Form N-CSR...............................................       6,898      181,167          5,199,584       2,710          21           4,200        6,898            181,188          5,203,784
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

VI. Final Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act requires the Commission, in 
promulgating rules under Section 553 of the Administrative Procedure 
Act,\552\ to consider the impact of those rules on small entities. We 
have prepared this Final Regulatory Flexibility Analysis (``FRFA'') in 
accordance with Section 604 of the RFA.\553\ An Initial Regulatory 
Flexibility Analysis (``IRFA'') was prepared in accordance with the RFA 
and was included in the Proposing Release.
---------------------------------------------------------------------------

    \552\ 5 U.S.C. 553.
    \553\ 5 U.S.C. 604.
---------------------------------------------------------------------------

A. Need for, and Objectives of, the Final Amendments

    We are adopting amendments to implement the provisions of Section 
954 of the Dodd-Frank Act, which added Section 10D to the Exchange Act. 
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 final rules direct the exchanges to 
establish listing standards that require each issuer to adopt and 
comply with a policy providing for the recovery of erroneously awarded 
incentive-based compensation based on financial information required to 
be reported under the securities laws that is received by current or 
former executive officers. The final rules also require listed issuers 
to file their policies as an exhibit to their annual reports and to 
include other disclosures in the event a recovery analysis is triggered 
under the policy
    As discussed in Section I, we read Section 954 to be motivated by a 
simple proposition: executives of listed issuers should not be entitled 
to retain incentive-based compensation that was erroneously awarded on 
the basis of misreported financial information. The statute thus 
mandates that listed issuers have policies in place to recover such 
compensation for the benefit of the issuer's owners--its shareholders. 
The language and legislative history of Section 954 makes clear that 
the provision is premised on the notion that an executive officer 
should not retain incentive-based compensation that, had the issuer's 
accounting been correct in the first instance, would not have been 
received by the executive, regardless of any fault of the executive 
officer for the accounting errors. Accordingly, under the final rules, 
listed issuers will be required to adopt a policy to recover 
erroneously awarded incentive-based compensation from current or former 
executive officers regardless of whether those officers caused the 
material noncompliance or have direct responsibility for financial 
reporting matters. The disclosure requirements in the rules 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. The need for, and objectives 
of, the amendments are discussed in more detail in Sections I and II. 
We discuss the economic impact, including the estimated compliance 
costs and burdens, of the amendments in Sections IV and V.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on all aspects of 
the IRFA, including how the proposed rules could further lower the 
burden on small entities, the number of small entities that would be 
affected by the proposed rules, the existence or nature of the 
potential impact of the proposals on small entities discussed in the 
analysis, and how to quantify the impact of the proposed rules. We did 
not receive any comments specifically addressing the IRFA.\554\ 
However, we received a number of comments on the proposed rules 
generally,\555\ and have considered these comments in developing the 
FRFA. As noted in Section II.A.2., a number of commenters recommended 
that the Commission exempt or defer compliance for SRCs and EGCs citing 
the costs and burdens associated with imposing compensation recovery 
policies containing the detail and scope contemplated by the 
proposal.\556\ Other commenters expressed support for requiring 
recovery by SRCs and EGCs as proposed.\557\
---------------------------------------------------------------------------

    \554\ As discussed in supra note 14, one comment letter noted 
that the Commission did not update the RFA analysis in the Reopening 
Release, and urged the Commission to re-propose with an updated RFA 
analysis. See comment letter from Toomey/Shelby.
    \555\ See Sections II and IV.
    \556\ See, e.g., comment letters from ABA 1; CCMC 2; Compensia; 
Hunton; Mercer; and NACD. Some commenters additionally recommended 
exempting SRCs and EGCs from the XBRL tagging requirements in view 
of the burden of preparing disclosure in XBRL format. See Section 
II.D.2. and comment letters from ABA 1; and Hay Group.
    \557\ See, e.g., comment letters from Better Markets 1; CalPERS 
1; CFA Institute 1; Public Citizen 1; and SBA.
---------------------------------------------------------------------------

C. Small Entities Subject to the Final Amendments

    The final amendments will affect, among other entities, small 
entities that list securities on U.S.-registered securities exchanges. 
The RFA defines ``small entity'' to mean ``small business,'' ``small 
organization,'' or ``small governmental jurisdiction.'' \558\ For 
purposes of the RFA, under our rules, an issuer, other than an 
investment company, is 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.\559\ The final

[[Page 73135]]

amendments will 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 126 listed issuers, other than 
registered investment companies, that may be considered small 
entities.\560\ Under 17 CFR 270.0-10, an investment company, including 
a business development company, is considered to be a small entity 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. We estimate that there are 
approximately three listed investment companies, including business 
development companies, that may be considered small entities that may 
be affected by the final amendments.
---------------------------------------------------------------------------

    \558\ 5 U.S.C. 601(6).
    \559\ See 17 CFR 230.157 under the Securities Act and 17 CFR 
240.0-10(a) under the Exchange Act. When referring to an exchange, 
the term ``small business'' or ``small organization'' means any 
exchange that: (1) has been exempted from the reporting requirements 
of 17 CFR 242.601; and is not affiliated with any person (other than 
a natural person) that is not a small business or small 
organization. See 17 CFR 240.0-10(e). No exchanges meet these 
criteria.
    \560\ These estimates are based on staff analysis of issuers 
potentially subject to the final amendments, excluding co-
registrants, with EDGAR filings on Form 10-K, or amendments thereto, 
filed during the calendar year of Jan. 1, 2020 to Dec. 31, 2020, or 
filed by Sept. 1, 2021, that, if timely filed by the applicable 
deadline, would have been filed between Jan. 1 and Dec. 31, 2020. 
Analysis is based on data from XBRL filings, Compustat, Ives Group 
Audit Analytics, and manual review of filings submitted to the 
Commission. We further note that in the Proposing Release we 
estimated that there were 61 listed issuers. While the number of 
issuers in our current estimate reflects an increase from 61 to 126 
listed issuers, we further estimate that 89 of the 126 listed 
issuers are SPACs. In the past two years, the U.S. securities 
markets have experienced an unprecedented surge in the number of 
initial public offerings by SPACs, with SPACs initially raising more 
than $83 billion in 2020 and more than $160 billion in 2021, 
compared to $13.6 billion in in 2019 and $10.8 billion in 2018. Some 
of these small entities that are SPACs are unlikely to remain small 
entities once the SPAC has completed its intended business 
combination and becomes an operating rather than a shell company.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    As noted above, the purpose of the final rules is to implement 
Section 10D of the Exchange Act by directing the exchanges to prohibit 
the listing of any security of an issuer that does not comply with 
listing standards regarding the development and implementation of a 
policy requiring recovery of erroneously awarded incentive-based 
compensation, and to require issuers to file all disclosure with 
respect to that policy in accordance with Commission rules. Rule 10D-1 
requires exchanges to adopt listing standards that 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. As described in more detail above, the final 
rules also require issuers listed on an exchange to: file their written 
erroneously awarded compensation recovery policy as an exhibit to their 
annual reports; indicate by check boxes on the cover page of their 
annual reports whether the financial statements of the registrant 
included in the filing reflect correction of an error to previously 
issued financial statements and whether any of those error corrections 
are restatements that required a recovery analysis; and disclose 
actions an issuer has taken pursuant to such recovery policy. These 
disclosures will also be required to be provided in tagged data 
language using Inline XBRL.
    Small entities that are listed issuers will be subject to the same 
recovery and disclosure requirements as other listed issuers. These 
requirements are discussed in detail in Section II.
    Developing and implementing the recovery policy mandated by the 
final amendments will impose compliance costs on small entities. The 
amendments may also involve the use of professional skills, such as 
legal, accounting, or technical skills. For example, listed issuers may 
engage the professional services of attorneys, accountants, and/or 
executive compensation consultants to develop their recovery policies 
and may use the services of those professionals to implement those 
policies in the event of an accounting restatement. Such services may 
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 in connection with the 
collection, recording, and reporting of disclosures required under the 
rules. In addition, these entities will incur costs to tag the required 
disclosures in Inline XBRL and may engage the services of outside 
professionals to assist with this process. We discuss the economic 
effects, including the estimated costs and burdens, of the final 
amendments on all registrants, including small entities, in Sections IV 
and V.
    As noted in Section IV, there is evidence that companies that are 
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 
listed issuers that are small entities.\561\ This may imply that, 
relative to other issuers, the final rules may cause executive officers 
at small entities to devote proportionately more internal resources to 
financial reporting and incur a greater proportional compliance burden 
than larger issuers. In addition, to the extent that a recovery policy 
reduces the incentive of an executive officer of a small entity to 
invest in certain value-enhancing projects that may increase the 
likelihood of a material accounting error, this may have a larger 
impact on the market value of equity of smaller entities whose 
valuation may be driven more by future prospects than by the value of 
current assets.\562\
---------------------------------------------------------------------------

    \561\ See note 504 and accompanying text.
    \562\ See note 506 and accompanying text.
---------------------------------------------------------------------------

    However, we believe that the impact of the amendments on small 
entities overall will be mitigated because the rules 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 affected small entities. Further, as 
noted in Section IV, the effects of implementing a recovery policy 
could be lower on small entities relative to other issuers to the 
extent that small entities use a lower proportion of incentive-based 
compensation than other issuers. Analysis by Commission staff finds 
evidence that SRCs (and small entities that are SRCs), on average, use 
a lower proportion of incentive-based compensation than non-SRCs, 
suggesting a lower potential impact of the final rules on SRCs and 
small entities.\563\
---------------------------------------------------------------------------

    \563\ See supra note 503 and accompanying text.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The RFA directs us to consider alternatives that would accomplish 
our stated objectives, while minimizing any significant adverse impact 
on small entities. Accordingly, 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;
     Using performance rather than design standards; and

[[Page 73136]]

     Establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities.
    The amendments do not provide simplified compliance and reporting 
requirements, an exemption, or otherwise establish alternative 
compliance, reporting requirements, or timetables for small entities. 
As noted in Section I, Section 10D's purpose is straightforward: to 
recover incentive-based compensation that was erroneously awarded to 
executives at listed companies on the basis of misreported financial 
information. We see no reason why the shareholders of listed issuers 
that are small entities should not be entitled to recover compensation 
that was erroneously awarded to executives on the basis of such 
misreported information. Like other listed issuers, these entities will 
have flexibility to forgo recovery in circumstances where the direct 
expense paid to a third party to assist in enforcing recovery would 
exceed the recoverable amounts and will not be required to have a 
recovery policy in place until more than a year after the final 
amendments are published in the Federal Register. Moreover, while the 
final rules may impose a greater proportional compliance burden on 
small entities, as discussed in Section IV, the benefits of the final 
rules may be particularly salient for small entities as evidence 
suggests that they may have an increased likelihood of reporting an 
accounting error and may be more likely to report a material weakness 
in internal control over financial reporting.
    The recovery requirement may also provide executive officers with 
an increased incentive to improve the overall quality and reliability 
of the issuer's financial reporting. As noted in Section IV, small 
entities may have an increased likelihood of reporting an accounting 
error and may be more likely to report a material weakness in internal 
control over financial reporting, due to their smaller size relative to 
larger entities.\564\ For all of these reasons, we do not believe it 
would be appropriate to establish alternative compliance requirements 
or exempt small entities from the scope of the mandatory recovery 
provisions.
---------------------------------------------------------------------------

    \564\ See note 520.
---------------------------------------------------------------------------

    The final amendments further require the filing of a listed 
issuer's policy on recovery of incentive-based compensation, and clear 
disclosure to provide shareholders with useful information regarding 
the application of that policy. By requiring such disclosure, the final 
amendments will help promote consistent compliance with recovery 
obligations and related disclosure across all listed issuers. Because 
the filing of the recovery policy is not costly for issuers and 
provides a way for investors to understand the means by which an issuer 
is complying with the requirements, we do not believe the marginal cost 
savings to small entities warrants an exemption from this requirement. 
Further, we note that the additional disclosures with respect to the 
application of the policy would only be required in the event of a 
restatement due to material noncompliance with financial reporting 
requirements, and we believe it is necessary in these circumstances for 
investors to understand the implications of the restatement and the 
issuer's application of its policy, regardless of the size of the 
entity.
    Finally, some aspects of the final rules use performance standards. 
Specifically, Rule 10D-1 uses a principles-based definition of 
``incentive-based compensation,'' provides boards of directors with 
discretion in determining the means of recovery, and uses a principles-
based approach to determining the amount of incentive-based 
compensation subject to recovery. These aspects of the final rules may 
make it easier for small entities to apply the mandatory recovery 
policy in the context of their own facts and circumstances. However, 
many other aspects of the final rules, in particular the disclosure 
requirements, use design standards in order to promote consistent 
information and recovery practices across listed issuers, in keeping 
with what we understand to be Congress's objective in enacting Section 
10D.

Statutory Authority

    The amendments contained in this release are being adopted under 
the authority set forth in Sections 6, 7, 10, and 19(a) of the 
Securities Act; Sections 3(b), 10D, 12, 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, 232, 240, 249, 270, and 274

    Reporting and recordkeeping requirements, Securities, Investment 
companies.

Text of Rule Amendments

    In accordance with the foregoing, the Commission amends 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 authority citation for part 229 continues 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; sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); 
and sec. 102(c), Pub. L. 112-106, 126 Stat. 310 (2012).

0
2. Amend Sec.  229.402 by:
0
a. Revising paragraph (a)(1);
0
b. In paragraph (c), adding Instruction 5 under the heading 
``Instructions to Item 402(c)'';
0
c. In paragraph (n), adding Instruction 5 under the heading 
``Instructions to Item 402(n)''; and
0
d. Adding paragraph (w).
    The revision and additions read as follows:


Sec.  229.402   (Item 402) Executive compensation.

    (a) General. (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 249.220f), 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 (19) of General Instruction B of Form 40-F (17 CFR 
249.240f), as applicable. A foreign private issuer that elects to 
provide domestic Item 402 disclosure must provide the disclosure 
required by Item 402(w) in its annual report or registration statement, 
as applicable.
* * * * *
    (c) * * *
    Instructions to Item 402(c). * * *
    5. 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 by any amounts 
recovered pursuant to a registrant's compensation recovery policy 
required by the listing standards adopted pursuant to 17 CFR 240.10D-1, 
and identify such amounts by footnote.
* * * * *
    (n) * * *

[[Page 73137]]

    Instructions to Item 402(n). * * *
    5. 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 by any amounts 
recovered pursuant to the compensation recovery policy required by the 
listing standards adopted pursuant to 17 CFR 240.10D-1, and identify 
such amounts by footnote.
* * * * *
    (w) Disclosure of a registrant's action to recover erroneously 
awarded compensation.
    (1) If at any time during or after the last completed fiscal year 
the registrant was required to prepare an accounting restatement that 
required recovery of erroneously awarded compensation pursuant to the 
registrant's compensation recovery policy required by the listing 
standards adopted pursuant to 17 CFR 240.10D-1, or there was an 
outstanding balance as of the end of the last completed fiscal year of 
erroneously awarded compensation to be recovered from the application 
of the policy to a prior restatement, the registrant must provide the 
following information:
    (i) For each restatement:
    (A) The date on which the registrant was required to prepare an 
accounting restatement;
    (B) The aggregate dollar amount of erroneously awarded compensation 
attributable to such accounting restatement, including an analysis of 
how the amount was calculated;
    (C) If the financial reporting measure as defined in 17 CFR 
240.10D-1(d) related to a stock price or total shareholder return 
metric, the estimates that were used in determining the erroneously 
awarded compensation attributable to such accounting restatement and an 
explanation of the methodology used for such estimates;
    (D) The aggregate dollar amount of erroneously awarded compensation 
that remains outstanding at the end of the last completed fiscal year; 
and
    (E) If the aggregate dollar amount of erroneously awarded 
compensation has not yet been determined, disclose this fact, explain 
the reason(s) and disclose the information required in paragraphs 
(w)(1)(i)(B) through (D) of this section in the next filing that is 
required to include disclosure pursuant to Item 402 of Regulation S-K;
    (ii) If recovery would be impracticable pursuant to 17 CFR 240.10D-
1(b)(1)(iv), for each current and former named executive officer and 
for all other current and former executive officers as a group, 
disclose the amount of recovery forgone and a brief description of the 
reason the listed registrant decided in each case not to pursue 
recovery; and
    (iii) For each current and former named executive officer from 
whom, as of the end of the last completed fiscal year, erroneously 
awarded compensation had been outstanding for 180 days or longer since 
the date the registrant determined the amount the individual owed, 
disclose the dollar amount of outstanding erroneously awarded 
compensation due from each such individual.
    (2) If at any time during or after its last completed fiscal year 
the registrant was required to prepare an accounting restatement, and 
the registrant concluded that recovery of erroneously awarded 
compensation was not required pursuant to the registrant's compensation 
recovery policy required by the listing standards adopted pursuant to 
17 CFR 240.10D-1, briefly explain why application of the recovery 
policy resulted in this conclusion.
    (3) The information must appear with, and in the same format as, 
the rest of the disclosure required to be provided pursuant to this 
Item 402. The information is required only in proxy or information 
statements that call for Item 402 disclosure and the registrant's 
annual report on Form 10-K, and 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.
    (4) The disclosure must be provided in an Interactive Data File in 
accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual.
* * * * *

0
3. Amend Sec.  229.404 by:
0
a. Under the heading ``Instructions to Item 404(a),'' removing ``or'' 
at the end of Instruction 5.a.i.;
0
b. Under the heading ``Instructions to Item 404(a),'' removing the 
``.'' and adding in its place ``; or'' in Instruction 5.a.ii.; and
0
c. Under the heading ``Instructions to Item 404(a),'' adding 
Instruction 5.a.iii.
    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 erroneously awarded 
compensation computed as provided in 17 CFR 240.10D-1(b)(1)(iii) and 
the applicable listing standards for the registrant's securities, that 
is disclosed pursuant to Item 402(w) (Sec.  229.402(w)).
* * * * *

0
4. Amend Sec.  229.601 by:
0
a. In paragraph (a), amend the ``Exhibit table'' by adding paragraph 
(97); and
0
b. Adding paragraph (b)(97).
    The additions to read as follows:


Sec.  229.601   (Item 601) Exhibits.

    (a) * * *

                                                                                          Exhibit Table
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                     Securities act forms                                                   Exchange act forms
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
                                                       S-1     S-3     SF-1     SF-3   S-4 \1\    S-8     S-11     F-1     F-3   F-4 \1\    10    8-K \2\    10-D     10-Q     10-K     ABS-EE
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 
                                                                                          * * * * * * *
(97) Policy Relating to Recovery of Erroneously      ......  ......  .......  .......  .......  ......  .......  ......  ......  .......  ......  .......  .......  .......       X   ..........
 Awarded Compensation..............................
 
                                                                                          * * * * * * *
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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) * * *
    (97) Policy relating to recovery of erroneously awarded 
compensation. A registrant that at any time during its last completed 
fiscal year had a class of

[[Page 73138]]

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) must file as an exhibit to its annual 
report the compensation recovery policy required by the applicable 
listing standards adopted pursuant to 17 CFR 240.10D-1.
* * * * *

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
5. The general authority citation for part 232 continues to read in 
part as follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 80b-4, 80b-6a, 80b-10, 80b-11, 7201 
et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *

0
6. Amend Sec.  232.405 by:
0
a. Removing the word ``or'' at the end of paragraph (b)(2)(iii);
0
b. Removing the period at the end of paragraph (b)(2)(iv) and adding 
``; or'' in its place;
0
c. Adding paragraph (b)(2)(v);
0
d. Removing paragraph (b)(3)(i)(C);
0
e. Removing the word ``and'' at the end of paragraph (b)(3)(ii);
0
f. Removing the period at the end of paragraph (b)(3)(iii) and adding 
``; and'' in its place;
0
g. Adding paragraph (b)(3)(iv);
0
h. Removing the period at the end of paragraph (b)(4)(i) and adding 
``and'' in its place; and
0
i. Adding paragraph (b)(4)(ii).
    The revisions and additions read as follows:


Sec.  232.405  Interactive Data File Submissions.

* * * * *
    (b) * * *
    (2) * * *
    (v) Any disclosure provided in response to Item 18 of Sec. Sec.  
249.331 and 274.128 of this chapter (Form N-CSR), as applicable.
    (3) * * *
    (iv) As applicable, the disclosure set forth in paragraph (b)(4) of 
this section.
    (4) * * *
    (ii) Any disclosure provided in response to: Sec.  229.402(w) of 
this chapter (Item 402(w) of Regulation S-K); Item 6.F of Sec.  
249.220f of this chapter (Form 20-F); paragraph (19) of General 
Instruction B of Sec.  249.240f of this chapter (Form 40-F); and Item 
18 of Sec. Sec.  249.331 and 274.128 of this chapter (Form N-CSR).
* * * * *

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

0
7. The general 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, 78dd, 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); and Pub. L. 
112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise 
noted.
* * * * *

0
8. Add an undesignated center heading and Sec.  240.10D-1 after Sec.  
240.10C-1 to read as follows:

Requirements Under Section 10D


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

    (a) 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 exchange or association 
lists securities, must:
    (1) In accordance with the provisions of this section, prohibit the 
initial or continued listing of any security of an issuer that is not 
in compliance with the requirements of any portion of this section;
    (2) No later than February 27, 2023, propose rules or rule 
amendments that comply with this section. Such rules or rule amendments 
that comply with this section must be effective no later than one year 
after November 28, 2022;
    (3) Require that each listed issuer:
    (i) 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) of this section to which the issuer is 
subject;
    (ii) Comply with that recovery policy for all incentive-based 
compensation received (as defined in paragraph (d) of this section) by 
executive officers on or after the effective date of the applicable 
listing standard;
    (iii) Provide the disclosures required by this section and in the 
applicable Commission filings required on or after the effective date 
of the listing standard referenced in paragraph (a)(2) of this section 
to which the issuer is subject.
    (b) Recovery of Erroneously Awarded Compensation. The issuer must:
    (1) Adopt and comply with a written policy providing that the 
issuer will recover reasonably promptly the amount of erroneously 
awarded incentive-based compensation 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, including any required accounting 
restatement to correct an error in previously issued financial 
statements that is material to the previously issued financial 
statements, or that would result in a material misstatement if the 
error were corrected in the current period or left uncorrected in the 
current period.
    (i) The issuer's recovery policy must apply to all incentive-based 
compensation received by a person:
    (A) After beginning service as an executive officer;
    (B) Who served as an executive officer at any time during the 
performance period for that incentive-based compensation;
    (C) While the issuer has a class of securities listed on a national 
securities exchange or a national securities association; and
    (D) During the three completed fiscal years immediately preceding 
the date that the issuer is required to prepare an accounting 
restatement as described in paragraph (b)(1) of this section. In 
addition to these last three completed fiscal years, the recovery 
policy must 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 between the 
last day of the issuer's previous fiscal year end and the first day of 
its new fiscal year that comprises a period of nine to 12 months would 
be deemed a completed fiscal year. An issuer's obligation to recover 
erroneously awarded compensation is not dependent on if or when the 
restated financial statements are filed.
    (ii) For purposes of determining the relevant recovery period, the 
date that an issuer is required to prepare an accounting restatement as 
described in paragraph (b)(1) of this section is the earlier to occur 
of:
    (A) 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 is required to 
prepare an accounting restatement as described in paragraph (b)(1) of 
this section; or

[[Page 73139]]

    (B) The date a court, regulator, or other legally authorized body 
directs the issuer to prepare an accounting restatement as described in 
paragraph (b)(1) of this section.
    (iii) The amount of incentive-based compensation that must be 
subject to the issuer's recovery policy (``erroneously awarded 
compensation'') is 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 restated 
amounts, and must 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 must 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 must 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 the 
conditions of paragraphs (b)(1)(iv)(A), (B), or (C) of this section are 
met, and 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, has made a determination that recovery would be impracticable.
    (A) The direct expense paid to a third party to assist in enforcing 
the policy would exceed the amount to be recovered. Before concluding 
that it would be impracticable to recover any amount of erroneously 
awarded compensation based on expense of enforcement, the issuer must 
make a reasonable attempt to recover such erroneously awarded 
compensation, document such reasonable attempt(s) to recover, and 
provide that documentation to the exchange or association.
    (B) Recovery would violate home country law where that law was 
adopted prior to November 28, 2022. 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, acceptable to the applicable national 
securities exchange or association, that recovery would result in such 
a violation, and must provide such opinion to the exchange or 
association.
    (C) Recovery would likely cause an otherwise tax-qualified 
retirement plan, under which benefits are broadly available to 
employees of the registrant, to fail to meet the requirements of 26 
U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.
    (v) The issuer is prohibited from indemnifying any executive 
officer or former executive officer against the loss of erroneously 
awarded compensation.
    (2) File all disclosures with respect to such recovery policy in 
accordance with the requirements of the Federal securities laws, 
including the disclosure required by the applicable Commission filings.
    (c) General Exemptions. The requirements of this section do not 
apply to the listing of:
    (1) 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));
    (2) A standardized option, as defined in 17 CFR 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);
    (3) Any security issued by a unit investment trust, as defined in 
15 U.S.C. 80a-4(2);
    (4) 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.
    (d) Definitions. Unless the context otherwise requires, the 
following definitions apply for purposes of this section:
    Executive Officer. An executive officer is the issuer's president, 
principal financial officer, principal accounting officer (or if there 
is no such accounting officer, the controller), any vice-president of 
the issuer in charge of a principal business unit, division, or 
function (such as sales, administration, or finance), any other officer 
who performs a policy-making function, or any other person who performs 
similar policy-making functions for the issuer. Executive officers of 
the issuer's parent(s) or subsidiaries are deemed executive officers of 
the issuer if they perform such policy making functions for the issuer. 
In addition, when the issuer is a limited partnership, officers or 
employees of the general partner(s) who perform policy-making functions 
for the limited partnership are deemed officers of the limited 
partnership. When the issuer is a trust, officers, or employees of the 
trustee(s) who perform policy-making functions for the trust are deemed 
officers of the trust. Policy-making function is not intended to 
include policy-making functions that are not significant. 
Identification of an executive officer for purposes of this section 
would include at a minimum executive officers identified pursuant to 17 
CFR 229.401(b).
    Financial reporting measures. Financial reporting measures are 
measures that are determined and presented in accordance with the 
accounting principles used in preparing the issuer's financial 
statements, and any measures that are derived wholly or in part from 
such measures. Stock price and total shareholder return are also 
financial reporting measures. A financial reporting measure need not be 
presented within the financial statements or included in a filing with 
the Commission.
    Incentive-based compensation. 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.
    Received. 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
9. Amend Section 240.14a-101, by adding Item 22(b)(20) 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 the Fund

[[Page 73140]]

was required to prepare an accounting restatement that required 
recovery of erroneously awarded compensation pursuant to the Fund's 
compensation recovery policy required by the listing standards adopted 
pursuant to 240.10D-1, or there was an outstanding balance as of the 
end of the last completed fiscal year of erroneously awarded 
compensation to be recovered from the application of the policy to a 
prior restatement, the Fund must provide the information required by 
Item 18 of Form N-CSR, as applicable.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
10. The authority citation for part 249 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 78a et seq., and 7201 et seq.; 12 U.S.C. 
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111-203, 124 Stat. 
1904; Sec. 102(a)(3) Pub. L. 112-106, 126 Stat. 309 (2012), Sec. 107 
Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001 Pub. L. 114-94, 
129 Stat. 1312 (2015), and secs. 2 and 3 Pub. L. 116-222, 134 Stat. 
1063 (2020), unless otherwise noted.
* * * * *
    Section 249.220f is also issued under secs. 3(a), 202, 208, 302, 
306(a), 401(a), 401(b), 406 and 407, Pub. L. 107-204, 116 Stat. 745, 
and secs. 2 and 3, Pub. L. 116-222, 134 Stat. 1063.
    Section 249.240f is also issued under secs. 3(a), 202, 208, 302, 
306(a), 401(a), 406 and 407, Pub. L. 107-204, 116 Stat. 745.
* * * * *
    Section 249.310 is also issued under secs. 3(a), 202, 208, 302, 
406 and 407, Pub. L. 107-204, 116 Stat. 745.
* * * * *

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


0
11. Amend Form 20-F (referenced in Sec.  249.220f) by:
0
a. Adding the text and check boxes to the cover page immediately before 
the text ``Indicate by check mark which basis of accounting the 
registrant has used to prepare the financial statements included in 
this filing'';
0
b. Adding Item 6.F.;
0
c. Adding Instruction 4. to the Instructions to Item 7.B.; and
0
d. Adding Instruction 97 to the Instructions as to Exhibits.
    The revisions and additions to read as follows:

Form 20-F

* * * * *
    If securities are registered pursuant to Section 12(b) of the Act, 
indicate by check mark whether the financial statements of the 
registrant included in the filing reflect the correction of an error to 
previously issued financial statements. [squ]
    Indicate by check mark whether any of those error corrections are 
restatements that required a recovery analysis of incentive-based 
compensation received by any of the registrant's executive officers 
during the relevant recovery period pursuant to Sec.  240.10D-1(b). 
[squ]
* * * * *
Item 6. Directors, Senior Management and Employees
* * * * *
    F. Disclosure of a registrant's action to recover erroneously 
awarded compensation.
    (1) If at any time during or after the last completed fiscal year 
the registrant was required to prepare an accounting restatement that 
required recovery of erroneously awarded compensation pursuant to the 
registrant's compensation recovery policy required by the listing 
standards adopted pursuant to 17 CFR 240.10D-1, or there was an 
outstanding balance as of the end of the last completed fiscal year of 
erroneously awarded compensation to be recovered from the application 
of the policy to a prior restatement, the registrant must, in its 
annual report on Form 20-F, provide the following information:
    (i) For each restatement:
    (A) The date on which the registrant was required to prepare an 
accounting restatement;
    (B) The aggregate dollar amount of erroneously awarded compensation 
attributable to such accounting restatement, including an analysis of 
how the amount was calculated;
    (C) If the financial reporting measure as defined in 17 CFR 
240.10D-1(d) related to a stock price or total shareholder return 
metric, the estimates that were used in determining the erroneously 
awarded compensation attributable to such accounting restatement and an 
explanation of the methodology used for such estimates;
    (D) The aggregate dollar amount of erroneously awarded compensation 
that remains outstanding at the end of the last completed fiscal year; 
and
    (E) If the aggregate dollar amount of erroneously awarded 
compensation has not yet been determined, disclose this fact, explain 
the reason(s) and disclose the information required in (B) through (D) 
in the next filing that is subject to this Item;
    (ii) If recovery would be impracticable pursuant to 17 CFR 240.10D-
1(b)(1)(iv), for each current and former named executive officer and 
for all other current and former executive officers as a group, 
disclose the amount of recovery forgone and a brief description of the 
reason the listed registrant decided in each case not to pursue 
recovery; and
    (iii) For each current and former named executive officer from 
whom, as of the end of the last completed fiscal year, erroneously 
awarded compensation had been outstanding for 180 days or longer since 
the date the registrant determined the amount the individual owed, 
disclose the dollar amount of outstanding erroneously awarded 
compensation due from each such individual.
    (2) If at any time during or after its last completed fiscal year 
the registrant was required to prepare an accounting restatement, and 
the registrant concluded that recovery of erroneously awarded 
compensation was not required pursuant to the registrant's compensation 
recovery policy required by the listing standards adopted pursuant to 
17 CFR 240.10D-1, briefly explain why application of the recovery 
policy resulted in this conclusion;
    (3) The information must appear with, and in the same format as, 
the rest of the disclosure required to be provided pursuant to this 
Item 6, is required only in annual reports and does not apply to 
registration statements on Form 20-F, and 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; and
    (4) The disclosure must be provided in an Interactive Data File in 
accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual.
* * * * *
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

* * * * *
    97. A registrant that at any time during its last completed fiscal 
year 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) must file as an exhibit to

[[Page 73141]]

its annual report on Form 20-F the compensation recovery policy 
required by the applicable listing standards adopted pursuant to 17 CFR 
240.10D-1.
    17 through 96 and 98 through 99 [Reserved]
* * * * *

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


0
12. Amend Form 40-F (referenced in Sec.  249.240f) by adding the text 
and check boxes to the cover page immediately before the heading 
``General Instructions'' and adding paragraph (19) to General 
Instruction B to read as follows:

Form 40-F

* * * * *
    If securities are registered pursuant to Section 12(b) of the Act, 
indicate by check mark whether the financial statements of the 
registrant included in the filing reflect the correction of an error to 
previously issued financial statements. [squ]
    Indicate by check mark whether any of those error corrections are 
restatements that required a recovery analysis of incentive-based 
compensation received by any of the registrant's executive officers 
during the relevant recovery period pursuant to Sec.  240.10D-1(b). 
[square]
* * * * *

B. Information To Be Filed on This Form

* * * * *
    (19) Recovery of erroneously awarded compensation.
    (a) A registrant that at any time during its last completed fiscal 
year 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) must file as exhibit 97 to its 
annual report on Form 40-F the compensation recovery policy required by 
the applicable listing standards adopted pursuant to 17 CFR 240.10D-1.
    (b) If at any time during or after the last completed fiscal year 
the registrant was required to prepare an accounting restatement that 
required recovery of erroneously awarded compensation pursuant to the 
registrant's compensation recovery policy required by the listing 
standards adopted pursuant to 17 CFR 240.10D-1, or there was an 
outstanding balance as of the end of the last completed fiscal year of 
erroneously awarded compensation to be recovered from the application 
of the policy to a prior restatement, the registrant must, in its 
annual report on Form 40-F, provide the following information:
    (1) For each restatement:
    (i) The date on which the registrant was required to prepare an 
accounting restatement;
    (ii) The aggregate dollar amount of erroneously awarded 
compensation attributable to such accounting restatement, including an 
analysis of how the amount was calculated;
    (iii) If the financial reporting measure as defined in 17 CFR 10D-
1(d) related to a stock price or total shareholder return metric, the 
estimates that were used in determining the erroneously awarded 
compensation attributable to such accounting restatement and an 
explanation of the methodology used for such estimates;
    (iv) The aggregate dollar amount of erroneously awarded 
compensation that remains outstanding at the end of the last completed 
fiscal year; and
    (v) If the aggregate dollar amount of erroneously awarded 
compensation has not yet been determined, disclose this fact, explain 
the reason(s) and disclose the information required in (ii) through(iv) 
in the next filing that is subject to this paragraph 19;
    (2) If recovery would be impracticable pursuant to 17 CFR 240.10D-
1(b)(1)(iv), for each current and former named executive officer and 
for all other current and former executive officers as a group, 
disclose the amount of recovery forgone and a brief description of the 
reason the listed registrant decided in each case not to pursue 
recovery; and
    (3) For each current and former named executive officer from whom, 
as of the end of the last completed fiscal year, erroneously awarded 
compensation had been outstanding for 180 days or longer since the date 
the registrant determined the amount the individual owed, disclose the 
dollar amount of outstanding erroneously awarded compensation due from 
each such individual.
    (c) If at any time during or after its last completed fiscal year 
the registrant was required to prepare an accounting restatement, and 
the registrant concluded that recovery of erroneously awarded 
compensation was not required pursuant to the registrant's compensation 
recovery policy required by the listing standards adopted pursuant to 
17 CFR 240.10D-1, briefly explain why application of the recovery 
policy resulted in this conclusion;
    (d) The information must appear with, and in the same format as 
generally required for, the rest of the disclosure required to be 
provided pursuant to General Instruction B, is required only in annual 
reports and does not apply to registration statements on Form 40-F, and 
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; and
    (e) The disclosure must be provided in an Interactive Data File in 
accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual.
* * * * *

    Note: The text of Form 10-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.


0
13. Amend Form 10-K (referenced in Sec.  249.310) by adding a field to 
the cover page to include the text and check boxes immediately before 
the text ``Indicate by check mark whether the registrant is a shell 
company (as defined in Rule 12b-2 of the Act)'' to read as follows:

Form 10-K

* * * * *
    If securities are registered pursuant to Section 12(b) of the Act, 
indicate by check mark whether the financial statements of the 
registrant included in the filing reflect the correction of an error to 
previously issued financial statements. [squ]
    Indicate by check mark whether any of those error corrections are 
restatements that required a recovery analysis of incentive-based 
compensation received by any of the registrant's executive officers 
during the relevant recovery period pursuant to Sec.  240.10D-1(b). 
[squ]
* * * * *

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
14. The authority citation for part 270 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *
    Section 270.30a-2 is also issued under 15 U.S.C. 78m, 78o(d), 
80a-8, 80a-29, 7202, and 7241; and 18 U.S.C. 1350, unless otherwise 
noted.
* * * * *

0
15. Amend Sec.  270.30a-2 by revising it to read as follows:


Sec.  270.30a-2  Certification of Form N-CSR.

    (a) Each report filed on Form N-CSR (Sec. Sec.  249.331 and 274.128 
of this chapter) by a registered management investment company must 
include certifications in the form specified in Item 19(a)(3) of

[[Page 73142]]

Form N-CSR, and such certifications must be filed as an exhibit to such 
report. Each principal executive and principal financial officer of the 
investment company, or persons performing similar functions, at the 
time of filing of the report must sign a certification.
    (b) Each report on Form N-CSR filed by a registered management 
investment company under Section 13(a) or 15(d) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and that contains 
financial statements must be accompanied by the certifications required 
by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 
U.S.C. 1350) and such certifications must be furnished as an exhibit to 
such report as specified in Item 19(b) of Form N-CSR. Each principal 
executive and principal financial officer of the investment company (or 
equivalent thereof) must sign a certification. This requirement may be 
satisfied by a single certification signed by an investment company's 
principal executive and principal financial officers.

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

0
16. The authority citation for part 274 is revised to read as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and 80a-37 unless 
otherwise noted.

    Section 274.128 is also issued under 15 U.S.C. 78j-1, 7202, 7233, 
7241, 7264, and 7265; and 18 U.S.C. 1350.

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


0
18. Amend Form N-CSR (referenced in 17 CFR 274.128) by:
0
a. Revising General Instruction D;
0
b. Redesignating Item 18 as Item 19;
0
c. Redesignating the instructions to Item 18 as instructions to Item 
19;
0
d. Adding new Item 18;
0
e. Redesignating paragraph (a)(2) of newly designated Item 19 
(Exhibits) as paragraph (a)(3);and
0
f. Adding paragraph (a)(2) to newly designated Item 19 (Exhibits).
    The revisions and additions read as follows:

Form N-CSR

* * * * *

D. Incorporation by Reference

    A registrant may incorporate by reference information required by 
Items 4, 5, 18, 19(a)(1), and 19(a)(2). No other Items of the Form 
shall be answered by incorporating any information by reference. The 
information required by Items 4, 5, and 18 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.)) involving 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 303 of Regulation S-T (17 CFR 232.303) (specific 
requirements for electronically filed documents); Rule 12b-23 under the 
Exchange Act (17 CFR 240.12b-23) (additional rules on incorporation by 
reference for reports filed pursuant to Sections 13 and 15(d) of the 
Exchange Act); and Rule 0-4 under the Investment Company Act of 1940 
(17 CFR 270.0-4) (additional rules on incorporation by reference for 
investment companies).
* * * * *

Item 18. Recovery of Erroneously Awarded Compensation

    (a) If at any time during or after the last completed fiscal year 
the registrant was required to prepare an accounting restatement that 
required recovery of erroneously awarded compensation pursuant to the 
registrant's compensation recovery policy required by the listing 
standards adopted pursuant to 17 CFR 240.10D-1, or there was an 
outstanding balance as of the end of the last completed fiscal year of 
erroneously awarded compensation to be recovered from the application 
of the policy to a prior restatement, the registrant must provide the 
following information:
    (1) For each restatement:
    (i) The date on which the registrant was required to prepare an 
accounting restatement;
    (ii) The aggregate dollar amount of erroneously awarded 
compensation attributable to such accounting restatement, including an 
analysis of how the amount was calculated;
    (iii) If the financial reporting measure defined in 17 CFR 10D-1(d) 
related to a stock price or total shareholder return metric, the 
estimates that were used in determining the erroneously awarded 
compensation attributable to such accounting restatement and an 
explanation of the methodology used for such estimates;
    (iv) The aggregate dollar amount of erroneously awarded 
compensation that remains outstanding at the end of the last completed 
fiscal year; and
    (v) If the aggregate dollar amount of erroneously awarded 
compensation has not yet been determined, disclose this fact, explain 
the reason(s) and disclose the information required in (ii) through 
(iv) in the next annual report that the registrant files on this Form 
N-CSR;
    (2) If recovery would be impracticable pursuant to 17 CFR 10D-
1(b)(1)(iv), for each named executive officer and for all other 
executive officers as a group, disclose the amount of recovery forgone 
and a brief description of the reason the registrant decided in each 
case not to pursue recovery; and
    (3) For each named executive officer from whom, as of the end of 
the last completed fiscal year, erroneously awarded compensation had 
been outstanding for 180 days or longer since the date the registrant 
determined the amount the individual owed, disclose the dollar amount 
of outstanding erroneously awarded compensation due from each such 
individual.
    (b) If at any time during or after its last completed fiscal year 
the registrant was required to prepare an accounting restatement, and 
the registrant concluded that recovery of erroneously awarded 
compensation was not required pursuant to the registrant's compensation 
recovery policy required by the listing standards adopted pursuant to 
17 CFR 240.10D-1, briefly explain why application of the recovery 
policy resulted in this conclusion.

Item 19. 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).
    Instruction to paragraph (a)(2).
    The exhibit required by this paragraph (a)(2) is only required in 
an annual report on Form N-CSR.
* * * * *

    By the Commission.

    Dated: October 26, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-23757 Filed 11-25-22; 8:45 am]
BILLING CODE 8011-01-P