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On October 27, the SEC announced final rules requiring securities exchanges to adopt listing standards that require issuers to develop and implement policies providing for the recovery of erroneously awarded incentive-based compensation received by executive officers. The final rules require a listed issuer to file the policy as an exhibit to its annual report and to include disclosures related to its recovery policy and recovery analysis where a recovery is triggered. The SEC first proposed new rules for executive compensation disclosure in 2015, but they were not finalized. The SEC reopened consideration of the rules last year, and in August, adopted a new requirement that a reporting company’s proxy statement and other disclosures include a table showing executive compensation and financial performance measures.
According a statement released by SEC Chairman Gary Gensler, the new rules will “strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors.” Commissioner Hester M. Peirce also released a statement, where she noted that implementing the statutory clawbacks mandate is “commendable,” but “doing it—expansively, inflexibly, and impractically—is not.” Peirce noted that the final rule “does not permit company boards, guided by their fiduciary duty, to determine when clawing back compensation makes sense,” and that “[s]uch an approach would have served shareholders by ensuring that companies claw back erroneously awarded compensation when doing so yields a net benefit to shareholders.” The final rules will become effective 60 days after publication in the Federal Register. Exchanges will be required to file proposed listing standards no later than 90 days following publication of the release in the Federal Register, with listing standards effective no later than one year following such publication.
On August 25, the SEC announced proposed amendments to its rules requiring registrants to disclose information reflecting the relationship between executive compensation actually paid by a registrant and the registrant’s financial performance. According to the final rule, registrants would be required to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years. In regard to the measures of performance, a registrant will be required to report its total shareholder return (TSR), the TSR of companies in the registrant's peer group, its net income, and a financial performance measure chosen by the registrant. Using the information presented in the table, registrants will be required to disclose the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group. Specifically, large companies would be required to disclose details on executive compensation for the past five fiscal years, and small companies would be required to report the past three fiscal years. Additionally, small companies would be exempt from disclosing details on pensions and peer groups. They also are exempt from new language requiring companies to list the three to seven most important measures linking executive compensation to company performance. Emerging growth companies, registered investment companies, and foreign private issuers are not required to provide the disclosure. The final rules are effective 30 days after publication in the Federal Register, and registrants must comply with the new disclosure requirements in proxy and information statements that are required for fiscal years ending on or after December 16. The same day, the SEC published a fact sheet clarifying, among other things, the final rules implementing the pay versus performance requirement as required by Congress in the Dodd-Frank Act.