Key Takeaways
- Both the Nasdaq Stock Market (Nasdaq) and the New York Stock Exchange (NYSE) have submitted an amendment (Amendment No. 1) to their respective rules regarding a “compensation recovery policy” that would apply to exchange-listed companies regardless of size or home country, including accelerated filers, emerging growth companies, smaller reporting companies, foreign private issuers and controlled companies.
- Amendment No. 1 delays each exchange’s proposed listing standards to take effect on October 2, 2023, with listed companies needing to adopt compliant policies by December 1, 2023.
- Additionally, the NYSE’s Amendment No. 1 adopts a new Section 802.01F, which provides for delisting procedures while also including cure periods, subject to the NYSE’s discretion.
Rulemaking Background
The Dodd-Frank Act of 2010 added Section 10D to the Exchange Act, which requires the Securities and Exchange Commission (SEC) to direct national securities exchanges[1] to prohibit the listing of issuers that do not develop and implement a policy for the recoupment of compensation as specified in Section 10D. On October 26, 2022, the SEC announced that it adopted a final rule (the Release) implementing Section 10D, which requires listed companies to implement, disclose and enforce a compensation recovery policy to claw back or otherwise recover excess incentive-based compensation that executive officers received based on financial reporting measures that are later restated. Thereafter, Nasdaq and the NYSE submitted listing standards that required listed companies to adopt, disclose and enforce a “compensation recovery policy.” You can see our previously published client alerts regarding the Release here and here. On June 5, 2023, the NYSE filed Amendment No. 1 to its listing standards, and on June 6, 2023, Nasdaq filed Amendment No. 1 to its listing standards. On June 9, 2023, the SEC approved the amended listing standards.
Overview of Amended Rules
Both Nasdaq and the NYSE kept their listing standards largely intact, with only the following changes in their amendments:
The NYSE amended rules provide that:
- The effective date for the new listing standards will be October 2, 2023.
- Newly adopted delisting procedures will be in effect if a listed company fails to comply with the NYSE’s applicable clawback policies. If the NYSE determines that a listed company is noncompliant and the listed company does not become compliant within any compliance period provided by the NYSE, all the listed securities of that company will be suspended and the NYSE will begin delisting procedures.
Nasdaq amended rules provide that:
- The effective date for the new listing standards will be October 2, 2023.
What’s Next?
Because the SEC approved the NYSE’s and Nasdaq’s amended listing standards, with an effective date of October 2, 2023, all compensation awarded on or after such date must be subject to the listed company’s policy. By December 1, 2023, each listed company is required to adopt a compliant policy governing the recovery of erroneously awarded compensation as required by the new listing standards.
Companies should take time now to review the new listing standards and their existing clawback policies and implement any necessary amendments by December. Companies should also review employment agreements, compensation plans and related agreements, as applicable, to ensure these documents work together with the company’s policy to give effect to these requirements.
[1] A “national securities exchange” is an exchange registered as such under Section 6 of the Exchange Act 15 U.S.C. 78f. There are currently 18 exchanges registered under Section 6(a) of the Exchange Act: NASDAQ OMX BX, NASDAQ OMX PHLX, Nasdaq Stock Market, National Stock Exchange, NYSE, NYSE Arca, NYSE MKT, BATS Exchange, BATS Y-Exchange, BOX Options Exchange, C2 Options Exchange, Chicago Board Options Exchange, Chicago Stock Exchange, EDGA Exchange, EDGX Exchange, International Securities Exchange (ISE), ISE Gemini and Miami International Securities Exchange.
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