On January 27, 2023, the SEC’s Division of Corporation Finance (Corp Fin) published four new Compliance and Disclosure Interpretations (CDIs) relating to the SEC’s recently adopted clawback rules. Please refer to our previous Client Alert for more information on the clawback rules. These new CDIs address what had been an outstanding question relating to upcoming disclosure obligations, as well as a few other clarifications.
Among other things, the clawback rules will require the addition of two check boxes to the cover page of Forms 10-K, 20-F, and 40-F, which are as follows:
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
The new clawback rules are effective January 27, 2023, and accordingly there was some confusion as to whether these two new check boxes would be required in the upcoming Form 10-K filings for calendar-year companies even though companies are not yet required to have adopted a clawback policy.
In new Question 121H.01, Corp Fin has clarified that these two new check boxes should be added to the upcoming Form 10-K, Form 20-F, and Form 40-F, but it does not expect companies to provide this disclosure (i.e., check either box) until they are required to have a clawback policy under the applicable listing standard. As a reminder, the stock exchanges have until late November 2023 to implement new clawback listing standards. Companies will then have 60 days thereafter within which to adopt a clawback policy to comply with the applicable listing standards. This CDI is reproduced below.
Question 121H.01
Question: The form amendments adding check boxes to the cover page of Form 10-K, Form 20-F, and Form 40-F indicating whether the form includes the correction of an error in previously issued financial statements and a related recovery analysis are effective January 27, 2023. However, the listing standards are not required to be effective until November 28, 2023 and issuers subject to such listing standards will not be required to adopt a recovery policy for 60 days following the date on which the applicable listing standards become effective. Will issuers be required to mark the check boxes in 2023 before an issuer is required to adopt a recovery policy and comply with the applicable listing standards?
Answer: In the adopting release, the Commission indicated that it does not expect compliance with the disclosure requirements until issuers are required to have a recovery policy under the applicable exchange listing standard. While the check boxes and other disclosure requirements will be in the rules and forms in 2023, we do not expect issuers to provide such disclosure until they are required to have a recovery policy under the applicable listing standard. [January 27, 2023]
Two of the new CDIs provide clarification on “named executive officers” for purposes of Form 20-F and Form 40-F filers, and are reproduced below (and are also included in the Exchange Act Forms section of the CDIs).
Question 121H.02
Question: Which persons will be considered named executive officers for purposes of determining the parties for whom individualized disclosure pursuant to Item 6.F of Form 20-F must be provided?
Answer: Item 6.F of Form 20-F provides for individualized disclosure for an issuer’s named executive officers. Foreign private issuers that file on domestic forms and provide executive compensation disclosure under Item 402 of Regulation S-K should provide individualized disclosure for their named executive officers to the extent required by Form 20-F. For foreign private issuers that use Form 20-F, individualized disclosure is required about members of their administrative, supervisory, or management bodies for whom the issuer otherwise provides individualized compensation disclosure in the filing. [January 27, 2023]
Question 121H.03
Question: Which persons will be considered named executive officers for purposes of determining the parties for whom individualized disclosure pursuant to Item B.(19) of Form 40-F must be provided?
Answer: Item B.(19) of Form 40-F provides for individualized disclosure for an issuer’s named executive officers. Such individualized disclosure is required about executive officers for whom the issuer otherwise provides individualized compensation disclosure in the filing. [January 27, 2023]
The final CDI provides clarification on the applicability of the clawback rules to incentive-based compensation plans, and is reproduced below.
Question 121H.04
Question: Because the clawback rule applies broadly to incentive-based compensation, would the rules affect compensation that is in any sort of plan, other than tax-qualified retirement plans, including long term disability, life insurance, SERPs, or any other compensation that is based on the incentive-based compensation?
Answer: The rule is intended to apply broadly. For plans that take into account incentive-based compensation, an issuer would be expected to claw back the amount contributed to the notional account based on erroneously awarded incentive-based compensation and any earnings accrued to date on that notional amount. [January 27, 2023]
