In 2023, US securities exchanges adopted listing standards in compliance with the final rules introduced by SEC in 2022. The aim is to ensure that listed companies take back excess compensation when there are errors in their financial reporting, in matters related to accounting revisions or restatements. This requirement applies to most listed companies, with only a few exceptions.
Here’s what these final rules require:
Companies need to create and put into practice a policy for recovering incentive-based compensation that was given to both current and former executive officers based on materially misreported financials.
They also have to publicly share this recovery policy as an exhibit to their annual report, including information about any instances where compensation was recovered along with other disclosures.
The primary objective behind these rules is to ensure that executive officers don’t retain excessive compensation if the financial results used to determine their pay are later found to be incorrect due to significant violations of financial reporting standards.
The issuer’s recovery policy would only apply to incentive-based compensation received on or after the effective date of the new rules (i.e., October 02, 2023). The affected issuers must adopt a recovery policy that complies with the standards no later than December 01, 2023.
The rules outline specific steps that companies must follow to ensure compliance, including:
1. Policy Creation and Implementation: Companies must create a written recovery policy that outlines the circumstances under which incentive-based compensation will be reclaimed. This policy should detail the procedures for identifying materially misstated financial statements and the process for recovering the compensation.
2. Public Disclosure: The recovery policy must be included as an exhibit in the company’s annual report. Additionally, companies must disclose any instances of recovered compensation, including the amounts and the reasons for recovery, to provide transparency to shareholders and the public.
3. Review and Enforcement: The policy must include mechanisms for regular review and enforcement to ensure ongoing compliance. Companies should appoint a responsible party or committee to oversee the implementation and adherence to the recovery policy.
4. Employee Notification: Current and former executive officers must be informed about the recovery policy and its implications. This ensures that all relevant parties are aware of the potential for compensation recovery in the event of financial misreporting.
By establishing and enforcing these recovery policies, the rules aim to promote responsible financial reporting and executive compensation practices. This approach helps to safeguard the integrity of financial markets and protect investors from the adverse effects of materially misstated financial statements.
