June 28, 2022

Clawbacks: SEC Ponders Expanding Proposed Rule to Cover “Little r” Restatements

In its October 2021 release reopening the comment period for its proposed clawback listing standard rules, the SEC floated the idea of including “little r” restatements as triggers for a compensation recovery analysis under the rules. Earlier this month, the SEC’s Department of Economic Research and Analysis issued a memorandum addressing the impact of including little r restatements with the scope of the rules. This excerpt says that while requiring little r restatements to be included would increase the total number of restatements that might trigger clawbacks, those restatements may be less likely to trigger a recovery of previously paid comp (also see Liz’s blog on

We estimate that “little r” restatements may account for roughly three times as many restatements as “Big R” restatements in 2021, after excluding restatements by SPACs. Accordingly, if the final rules were to encompass both types of restatements, it would increase the total number of restatements that could potentially trigger a compensation recovery analysis that may result in recovery.

However, “little r” restatements may be less likely than “Big R” restatements to trigger a potential recovery of compensation. For example, “little r” restatements may be less likely to be associated with a decline in previously reported net income, 19 and on average they are associated with smaller stock price reactions. As a result, if the final rules were to encompass both “Big R” and “little r” restatements, while there would be an increase in the number of restatements that would be included, the overall number of recoveries may not increase in proportion to the increase in the number of restatements that would be included. This, in turn, would mitigate the potential impact of including “little r” restatements on the expected benefits and costs associated with the proposed rules.

The DERA memo noted that one potential downside of including little r restatements is that by expanding the rule’s scope, it may “encourage managers to make suboptimal operational decisions rather than suboptimal accounting decisions to meet financial targets.” However, the memo also points out that such a decision would “mitigate the potential for the proposed rules to create an incentive for managers to report misstatements as “little r” restatements rather than “Big R” restatements.”  Given the agency’s jaundiced view about the abundance of little r restatements, my guess is that this latter point may carry a lot of weight when it comes to the final rule.

Speaking of things that might carry some weight, the CII recently submitted a comment letter reiterating its support for including little r restatements within the scope of the clawback rules.

With final rules expected as soon as this fall, We’ll be sharing the latest updates on clawbacks at our “Proxy Disclosure & 19th Annual Executive Compensation Conference” coming up in October. Our session on “Clawbacks: Where Things Stand” – with Davis Polk’s Kyoko Takahashi Lin,’s Mike Melbinger, Gibson Dunn’s Ron Mueller, and Hogan Lovells’ Martha Steinman – will give you practical action items to take in response to SEC rulemaking and recent enforcement activity, as well as investor expectations. Here’s the full agenda for the Conferences – 18 sessions over 3 days. Sign up online, email, or call 1-800-737-1271.

John Jenkins