April 6, 2023

Clawbacks: One Policy or Two?

One of the implementation challenges noted in the clawback comment letters that were submitted by a group of law firms to the SEC earlier this week is that if issuers already have an existing clawback policy, “they must evaluate whether and how to integrate the two policies, including whether to combine them into one policy or have separate stand-alone policies.”

This is definitely a topic that issuers have been wrestling with as they seek to formulate clawback policies based on Rule 10D-1 and the proposed listing standards. In the dozen years that it took the SEC to adopt the clawback requirement mandated by the Dodd-Frank Act, issuers generally “moved on” and adopted clawback policies based on their own considerations and market practice, and rarely do these policies look like the policies contemplated by Rule 10D-1. Policies that have been adopted by issuers over the years have a multitude of potential triggering events, from fraud and misconduct in connection with an issuer’s financial statements to causing the issuer reputational harm, and melding these triggering events into a Rule 10D-1 compliant policy is proving to be a challenge. Further, the lack of discretion accorded to the board in seeking to recover compensation under Rule 10D-1 is not consistent with the approach that many issuers take in clawback policies today, and some types of triggering events for recovery do not lend themselves well to such a strict implementation requirement. Finally, existing clawback policies may cover a broader group of individuals than the “executive officer” group contemplated by Rule 10D-1, and there will inevitably be timing considerations that must be accounted for in enforcement of the new Rule 10D-1 compliant provisions of the clawback policy.

Given these integration challenges, some issuers may be compelled to throw up their hands and just have two standalone clawback policies, the “legacy” policy and the new Rule 10D-1 compliant policy. This approach has its own complications, given that companies will have to try to explain in their disclosure why they have two clawback policies, while the Board or Compensation Committee will have to administer the two separate policies going forward. This is yet another area where we will have to see how all of this plays out.

– Dave Lynn