With SEC Rule 10D-1 (17 CFR §240.10D-1) now fully in effect[1], 2025 marks the first year that public company boards may be required to actively enforce their clawback policies in response to financial restatements. While most companies completed policy adoption and disclosures in 2023–2024, Rule 10D-1 now enters its enforcement phase. This makes 2025 a critical juncture for governance readiness and ensuring that compensation committees, legal, finance, and human resources teams are fully prepared to implement clawback policies in the event of a financial restatement.

This Comp & Benefits Brief serves as a reminder of the Rule 10D-1’s requirements and offers practical guidance for enforcement and integration into broader compensation governance. Capitalized terms are defined in the “Key Defined Terms” section at the end of this Brief.

Summary of Rule 10D-1

Rule 10D-1 requires Issuers to adopt and comply with a written clawback policy that provides for the reasonably prompt recovery of erroneously awarded Incentive-Based Compensation in the event of an accounting restatement. Rule 10D-1 applies when an Issuer is required to restate previously issued financial statements due to material non-compliance with financial reporting requirements under securities laws, including corrections of errors that are material to prior statements or that would result in a material misstatement if left uncorrected in the current period. Under Rule 10D-1, the relevant date is the earlier of (i) when the board (or an authorized officer or committee) concludes or reasonably should have concluded that a restatement is required, or (ii) when a court or regulator directs the Issuer to restate.

The clawback policy must apply to all Incentive-Based Compensation deemed Received by any individual who served as an Executive Officer during the applicable performance period, provided such compensation was:

• Received after the individual began serving as an Executive Officer;
• Received during the three completed fiscal years immediately preceding the date the Issuer is required to prepare a restatement (including certain transition periods); and
• Received while the Issuer had a class of securities listed on a national securities exchange.

The recovery amount is the excess of what was Received over what would have been Received based on the restated results. For awards based on stock price or total shareholder return, the Issuer must use a reasonable estimate of the impact of the restatement and maintain supporting documentation.

Issuers are required to recover such compensation unless the compensation committee (or majority of independent directors) determines recovery would be impracticable because:

• The cost of recovery exceeds the amount to be recovered and reasonable recovery attempts have been documented;
• Recovery would violate home country law in effect before November 28, 2022, with a supporting legal opinion;
• Recovery would cause a tax-qualified retirement plan to fail to meet applicable tax requirements.

Issuers may not indemnify current or former Executive Officers for any recovered amounts. Additionally, disclosure of the clawback policy and its application is required in annual reports and applicable SEC filings.

Practical Considerations for Enforcement

As restatements occur, boards and compensation committees should be prepared to move from policy adoption to policy enforcement. In doing so, several legal and operational considerations may arise:

1. Contractual Alignment. Existing employment agreements, bonus plans, and equity award documents should be reviewed to ensure consistency with the clawback policy. Where needed, amendments or acknowledgments may be appropriate to support enforceability.

2. Process and Documentation. Boards should establish clear internal procedures for identifying affected compensation, calculating recovery amounts, and documenting the analysis. Finance, legal, and compensation teams should be aligned on roles and responsibilities.

3. Tax Considerations. Clawback enforcement for Executive Officers may raise tax withholding and reporting issues. Issuers should consider whether recovered amounts require adjustments to Forms W-2 or 1099, and how income tax corrections will be processed.

4. Beyond the Rule: Broader Conduct-Based Clawbacks. While Rule 10D-1 addresses financial restatements, many companies maintain broader clawback provisions applicable in cases of misconduct, violation of restrictive covenants, reputational harm, or breach of fiduciary duty. Ensuring coordination between these policies and clarity on when each applies remains a best practice.

Recommendations for Compensation Committees

As Rule 10D-1 enters its enforcement phase, proactive governance is essential. Boards that have not only adopted compliant policies but also integrated enforcement procedures into their compensation oversight framework will be best positioned to navigate upcoming restatements and regulatory scrutiny. Early engagement with legal counsel can help ensure policies are not only compliant but positioned for effective enforcement when needed. Accordingly, compensation committees and general counsel may wish to take the following steps as part of their 2025 governance cycle:

• Confirm that the Issuer’s Rule 10D-1 policy is filed, current, and reviewed at least annually.
• Reassess form award agreements and employment agreements for consistency with clawback enforcement.
• Prepare a standing agenda item to address potential triggering events and board-level recovery discussions.
• Educate new board members on the clawback framework and its interaction with the Issuer’s broader compensation strategy.

Key Defined Terms

• “Executive Officer” primarily includes the Issuer’s president, principal financial officer, principal accounting officer, any vice president in charge of a principal business unit or function, or any person performing similar policy-making functions.
• “Financial Reporting Measure” means any measure determined in accordance with the accounting principles used in preparing the Issuer’s financial statements, as well as any measure derived wholly or in part from such measures. This includes stock price and total shareholder return, even if not presented in the financial statements.
• “Incentive-Based Compensation” means any compensation that is granted, earned, or vests wholly or in part upon the attainment of a Financial Reporting Measure.
• “Issuer” means the registrant with a class of securities listed on a national securities exchange or a national securities association. For purposes of Rule 10D-1, the “Issuer” is the entity responsible for adopting and enforcing the clawback policy and complying with related disclosure obligations.
• “Received”: Incentive-Based Compensation is deemed “Received” in the fiscal period during which the relevant Financial Reporting Measure is attained, regardless of when payment or grant actually occurs.