In 2015 the SEC proposed rules to implement Section 954 of the Dodd-Frank which added Section 10D to the Securities Exchange Act of 1934. Section 10D requires the SEC to adopt rules directing the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with Section 10D’s requirements for disclosure of the issuer’s policy on incentive-based compensation and recovery of incentive-based compensation that is received in excess of what would have been received under an accounting restatement. Many refer to Section 10D as the clawback rules.
The proposed clawback rules were never finalized. However, the SEC has reopened the comment period on the proposed clawback rules.
The SEC asks a number of interesting questions in the notice announcing the reopening of the comment period.
For instance, the SEC asks if the scope of the proposed clawback rules should include:
- restatements that correct errors that are material to previously issued financial statements and
- restatements that correct errors that are not material to previously issued financial statements, but would result in a material misstatement if
- the errors were left uncorrected in the current report or
- the error correction was recognized in the current period
The SEC also notes that if it interprets the statutory term “an accounting restatement due to material noncompliance” to include restatements required to correct errors that were not material to previously issued financial statements, but would result in a material misstatement if (a) the errors were left uncorrected in the current report or (b) the error correction was recognized in the current period, then those restatements would require a recovery analysis.
According to the SEC registrants do not always label historical financial statements as “restated” for the foregoing types of restatements. Also, the SEC believes an Item 4.02 Form 8-K filing is not typically filed for that type of error, because the error is not material to the previously issued financial statements. As such, to provide greater transparency around such restatements, the SEC is considering whether to add check boxes to the cover page of the Form 10-K that indicate separately (a) whether the previously issued financial statements included in the filing include an error correction, and (b) whether any such corrections are restatements that triggered a clawback analysis during the fiscal year.