In another move to implement the provisions of 2010’s Dodd-Frank Act, the SEC has adopted final rules that direct national securities exchanges to adopt listing standards that require issuers to adopt and implement recovery, or “clawback,” policies. Clawback policies must provide for the recovery of erroneously awarded incentive-based compensation received by executive officers, whether current or former (and regardless of the executive’s culpability), in the event the issuer is required to prepare an accounting restatement due to its material noncompliance with any financial reporting requirement under the securities laws during the three fiscal years immediately preceding the date the issuer is required to prepare the restatement. The amount to be recovered is the amount of incentive-based compensation received in excess of the amount that otherwise would have been received, if the restated financial measure had been used for the determination.

Issuers will also be required to:

1. File clawback policies as exhibits to their annual reports;

2. Indicate via a checkbox on the annual report whether the financial statements contained therein reflect correction of an error in any previously issued financial statements and whether any of those error corrections are restatements that required a clawback analysis; and

3. Disclose any actions they have taken pursuant to such clawback policies. Issuers that do not comply will be subject to delisting.

The final rules will become effective 60 days following publication in the Federal Register, and exchanges will be required to file proposed listing standards no later than 90 days following publication in the Federal Register. Listing standards must be effective no later than one year following such publication, and listed issuers will be required to adopt a clawback policy no later than 60 days following the date on which the applicable listing standards become effective and comply with the disclosure requirements in proxy statements and annual reports filed on or after the adoption of a clawback policy. Issuers with existing clawback policies will need to keep an eye on the rules adopted by the exchanges and make any necessary changes to ensure their policy is compliant with the final rules.