February 24, 2023

Nasdaq Posts Clawback Rule Filing

Yesterday, I blogged about the NYSE’s initial rule filing with the SEC to implement the directive in SEC Rule 10D-1 to adopt a clawback policy, comply with that policy and provide the required clawback policy disclosures. Not long after that blog was published, Nasdaq posted its initial rule filing with the SEC for the same purpose. Nasdaq proposes to adopt Listing Rule 5608 titled, recovery of erroneously awarded compensation. As with the NYSE proposal, the language of proposed Listing Rule 5608 conforms closely to the applicable language of Rule 10D-1.

With respect to the delisting process, the Nasdaq proposes to require that a company will be subject to delisting if it does not adopt a compensation recovery policy that complies with the applicable listing standard, disclose the policy in accordance with SEC or comply with the policy’s recovery provisions, as contemplated by Rule 10D-1. For the purpose of implementing that aspect of the Rule, Nasdaq notes:

Rule 10D-1 requires that a listed company recover the amount of erroneously awarded incentive-based compensation reasonably promptly, but does not specify the time by which the issuer must complete the recovery of excess incentive-based compensation; rather, Nasdaq would determine whether the steps an issuer is taking constitute compliance with its compensation recovery policy. The issuer’s obligation to recover erroneously awarded incentive-based compensation reasonably promptly will be assessed on a holistic basis with respect to each such accounting restatement prepared by the issuer. In evaluating whether an issuer is recovering erroneously awarded incentive-based compensation reasonably promptly, the Exchange will consider whether the issuer is pursuing an appropriate balance of cost and speed in determining the appropriate means to seek recovery, and whether the issuer is securing recovery through means that are appropriate based on the particular facts and circumstances of each executive officer that owes a recoverable amount.

Nasdaq also proposes to amend Listing Rule 5810(c)(2)(A)(iii) to provide that a company that failed to comply with proposed Listing Rule 5608 must submit to Nasdaq Staff a plan to regain compliance. The administrative process that will be followed is similar to other corporate governance deficiencies, allowing Nasdaq Staff to provide the issuer up to 180 days to cure the deficiency. The Nasdaq Staff would then be required to issue a delisting letter, which could be appealed to the Hearings Panel, which in turn could allow the issuer up to an additional 180 days to cure the deficiency.

The SEC will next publish the rule filing on its website. Comments will be due 21 days from publication of the Notice in the Federal Register.

– Dave Lynn