Propose Effective Date of October 2, 2023

[Note: This post has been updated to reflect Nasdaq’s filing of an Amendment No. 1 on June 6, 2023 (posted June 7) proposing to delay the effective date of its clawback-related listing standards until October 2, 2023, consistent with the NYSE’s Amendment No. 1.]

On June 5, 2023, the New York Stock Exchange (NYSE) filed Amendment No. 1 to its proposed clawback-related listing standards with the U.S. Securities and Exchange Commission (SEC). On June 6, 2023, The Nasdaq Stock Market LLC (Nasdaq) also filed an Amendment No. 1 to its proposed clawback-related listing standards with the SEC. As discussed in our previous blog post, each of the NYSE and Nasdaq filed initial proposed clawback-related listing standards with the SEC in February 2023, which largely tracked the requirements outlined in Rule 10D-1 under the Securities Exchange Act of 1934 (Rule 10D-1), adopted by the SEC last October. Rule 10D-1 and related disclosure requirements are discussed in our previous Client Alert.

The NYSE’s Amendment No. 1 replaces and supersedes the previous version of the NYSE’s proposed clawback-related listing standards in its entirety, providing for two key changes:

• Effective Date. Amendment No. 1 provides that the effective date of new proposed Section 303A.14 of the NYSE Listed Company Manual will be October 2, 2023. Assuming the SEC approves the NYSE’s Amendment No. 1, this effective date will mean that NYSE-listed issuers will be required to adopt compliant clawback policies no later than Friday, December 1, 2023.
  
  In providing for this delayed effectiveness, the NYSE stated that it “believes that it is consistent with Section 10D of the [Exchange] Act to delay effectiveness of Section 303A.14 until this date because it believes that doing so is consistent with the goal of implementing the proposed rule promptly while also being consistent with the expectations of listed issuers that the proposed rules would take effect a year after the adoption of SEC Rule 10D-1, based on the issuers’ understanding of a statement made by the SEC staff in the Rule 10D-1 Adopting Release.”[1]
  
  The NYSE is referencing the following statement made by the SEC staff: “While we acknowledge commenter concerns about the need for adequate time to prepare for the application of the listing standards and the development of appropriate recovery policies, including in some cases the renegotiation of certain contracts, we believe the final rules provide ample time for such preparations. In that regard, we note that issuers will have more than a year from the date the final rules are published in the Federal Register to prepare and adopt compliant recovery policies. We believe the prescriptive nature of Rule 10D-1 provides issuers with sufficient notice to begin such preparations concurrently with listing standards being finalized.”[2] (Emphasis added.) As a reminder, the final rules were published in the Federal Register on November 28, 2022, approximately one year prior to the proposed date on which NYSE-listed issuers would be required to adopt compliant clawback policies.
• Delisting Procedures. As discussed in our previous blog post and in our comment letter submitted to the SEC, the NYSE initially proposed to require immediate suspension of the trading of a listed issuer’s securities and commencement of delisting procedures (with no cure period) where an issuer had not recovered erroneously awarded compensation as required by its clawback policy reasonably promptly and/or where an issuer had not provided the required disclosures in the applicable SEC filings.[3] This approach differed from Nasdaq’s proposal, which allowed issuers to submit a plan to regain compliance with the Nasdaq listing standards and provided for cure periods prior to commencement of delisting proceedings.
  
  In Amendment No. 1, the NYSE has proposed to adopt new Section 802.01F of the NYSE Listed Company Manual, which provides for delisting procedures that are similar to the NYSE’s compliance process for late SEC filings and include cure periods, in the NYSE’s discretion.[4] In the event that an issuer is non-compliant with any provisions of Section 303A.14 (including, for example, late adoption of a clawback policy, or where the issuer has not recovered erroneously awarded compensation reasonably promptly after such obligation is incurred, or where the issuer has not provided the required disclosures in the applicable SEC filings), the issuer will be required to notify the NYSE in writing within five days of any such delinquency. When the NYSE determines that a delinquency has occurred, it will promptly send written notification to the issuer with the applicable compliance process, which may include cure periods up to 12 months following the date of the delinquency, in the NYSE’s discretion.

Other than the change to the effective date, proposed Section 303A.14 of the NYSE Listed Company Manual is the same as proposed in the NYSE’s initial filing and as noted above, closely follow the requirements outlined in Rule 10D-1. Notably, this means that, similar to Nasdaq’s proposed listing standards, proposed Section 303A.14 does not include any guidance or factors that the NYSE will consider when making a determination as to whether the issuer has recovered “reasonably promptly” the amount of erroneously awarded incentive-based compensation. However, in Amendment No. 1, the NYSE stated the following:

“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 [NYSE] 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.”[5]

Similar to the NYSE’s Amendment No. 1, Nasdaq’s Amendment No. 1 provides that the effective date of new proposed Rule 5608, Recovery of Erroneously Award Compensation, will be October 2, 2023. If Nasdaq’s Amendment No. 1 is approved by the SEC, then Nasdaq-listed issuers will also be required to adopt compliant clawback policies no later than Friday, December 1, 2023. All other aspects of Nasdaq’s initial filing remain the same, including the delisting procedures (which include cure periods).

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We welcome this additional time for listed issuers to continue to review their executive compensation programs and existing clawback policies (if any) as they work to adopt and implement clawback policies that will be compliant with new stock exchange listing standards. Assuming that these amended versions of the NYSE and Nasdaq listing standards are approved by the SEC in their current form, the effective date of the stock exchange listing standards will be October 2, 2023. This means that the incentive-based compensation that must be covered is that which is received (as defined in the stock exchange listing standards) by executive officers on or after October 2, 2023. It also means that listed issuers will be required to adopt compliant clawback policies no later than Friday, December 1, 2023.

[1] New York Stock Exchange LLC, File No. SR-NYSE-2023-12, Amendment No. 1 (June 5, 2023), at pages 5 and 6.

[2] Listing Standards for Recovery of Erroneously Awarded Compensation, 87 Fed. Reg. at 73111 (Nov. 28, 2022).

[3] In the NYSE’s initial filing, the proposed delisting procedures for late adoption of a clawback policy differed from the delisting procedures for noncompliance with other provisions of proposed Section 303A.14, and provided for cure periods up to 12 months prior to delisting, in the NYSE’s discretion. Under Amendment No. 1, there would not be a bifurcated approach to delisting procedures, and noncompliance with any of the provisions of proposed Section 303A.14 would provide for cure periods up to 12 months prior to delisting, in the NYSE’s discretion.

[4] New York Stock Exchange LLC, File No. SR-NYSE-2023-12, Amendment No. 1 (June 5, 2023), at page 10 ([p]roposed Section 802.01F is closely modeled on the compliance process for listed issuers delayed in submitting periodic reports to the SEC as set forth in Section 802.01E).

[5] New York Stock Exchange LLC, File No. SR-NYSE-2023-12, Amendment No. 1 (June 5, 2023), at page 5.