The SEC adopted the Final Rule, Listing Standards for Recovery of Erroneously Awarded Compensation, to implement Section 954 of the Dodd-Frank Act, which added Section 10D to the Exchange Act. Section 10D requires national securities exchanges and national securities associations to adopt listing standards that require all issuers with a class of securities listed on an exchange or an association to develop and implement a policy for recovering, under certain circumstances, erroneously awarded incentive-based compensation paid to executive officers (commonly referred to as a “clawback” policy).
Exchanges and associations are required to propose listing standards no later than 90 days after the Final Rule is published in the Federal Register, with these standards’ effectiveness no later than one year after publication.
Each issuer is required to adopt a policy relating to the recovery of erroneously awarded compensation no later than 60 days following the effective date of implementing the listing standards.
The new rules apply to all issuers, with very limited exceptions. Issuers that do not adopt and comply with the compensation recovery policies or those that do not disclose the policy will be subject to delisting.
‘Clawback’ policy
The Final Rule amends certain rules and forms to require the issuer to (1) disclose and file its recovery policy as an exhibit to its annual report, (2) indicate by check boxes on its annual report whether the financial statements included in the annual report reflect a correction of an error to previously issued financial statements and whether the corrections are restatements that triggered a recovery analysis, and (3) disclose any actions taken from the recovery analysis.
Restatement determination
Under the new rules, an issuer is required to perform a recovery analysis when it has an accounting restatement that (1) corrects an error in previously issued financial statements that is material to the previously issued financial statements (a “Big R” restatement), or (2) would result in a material misstatement if the error was either corrected in the current period or left uncorrected in the current period (a “little r” restatement).
The Final Rule recognizes that U.S. GAAP permits certain retrospective changes to previously issued financial statements that do not represent error corrections and, therefore, would not trigger a recovery analysis. Examples include:
- Change in accounting principle
- Change in reportable segment information due to a change in the structure of an issuer’s internal organization
- Reclassification due to a discontinued operation
- Change in reporting entity
- Adjustment to provisional amounts in connection with a prior business combination
- Stock splits, reverse stock splits, stock dividends, or other changes in capital structure
Date of restatement
The Final Rule requires an issuer to recover the erroneously awarded compensation from the three-year period preceding the date when the issuer is required to prepare an accounting restatement. The Final Rule defines this date as the earlier of when the board of directors, a committee of the board of directors, or officers have concluded, or should have concluded, that an accounting restatement is required,1 or when a court, regulator, or other legally authorized entity directs the issuer to prepare an accounting restatement.
Executive officers
Section 10D defines an “executive officer” as the issuer’s president; principal financial officer; principal accounting officer (or controller); vice presidents; or any other officer or person who performs a policy-making function, including executive officers of the issuer’s parent(s) or subsidiaries.
S-K Item 402(w) disclosure
The Final Rule also adds new Item 402(w) to Regulation S-K to require an issuer to disclose actions taken to recover erroneously awarded compensation. When an accounting restatement occurs that requires recovery of erroneously awarded compensation, the issuer is required to disclose the following information:
- Date the accounting restatement was prepared;
- Aggregate dollar amount of erroneously awarded compensation and calculation of that amount; if the amount is not yet determined, an issuer must disclose this fact and include the known amount and other required disclosures in the next filing that is subject to S-K Item 402;
- Aggregate dollar amount of erroneously awarded compensation that remains outstanding at the end of the last completed fiscal year; and
- Estimates used in determining the erroneously awarded compensation and an explanation of the methodology used for the estimates if the financial reporting measure is related to a stock price or total shareholder return metric.
If recovery is impracticable, the issuer is required to disclose the amount of recovery forgone and to provide a description of the reasons why recovery is not being pursued. Additional disclosures are required when the recovery amount has been outstanding for 180 days or longer.
When an accounting restatement is prepared that does not require recovery of erroneously awarded compensation, the issuer is required to disclose the reasons for this conclusion.
Grant Thornton insight
Materiality in error correction determinations continues to be a focus of the SEC staff, with heightened attention on the qualitative assessment. In a March 2022 statement, SEC Acting Chief Accountant Paul Munter said that determining whether an error is material is an “objective assessment” focusing on whether there is a substantial likelihood that the error would be important to a reasonable investor.
Further, the Final Rule commentary reminds registrants, audit committee members, and auditors to apply a well-reasoned, holistic, and objective approach when assessing an error. When assessing the materiality of an error, any misstatement that positively impacted compensation should be considered as a qualitative factor.
1 For a “Big R” restatement, this date typically aligns with the restatement disclosure date in a non-reliance Form 8-K filed under Item 4.02.
Contacts:



Kendra Decker
Partner-in-Charge, SEC Regulatory Matters
Kendra Decker is a partner with Grant Thornton’s National Professional Standards Group. She has more than 15 years of accounting and auditing experience in SEC regulatory, financial reporting and compliance matters.
Washington DC, Washington DC
Industries
- Technology and telecommunications
- Banking
Service Experience
- Audit



Rohit Elhance
Partner, SEC Regulatory Matters, National Professional Standards Group
Rohit Elhance is a partner in SEC Regulatory Matters group, with more than 17 years of international experience serving large multinational and entrepreneurial companies in the areas of audit, risk advisory and transaction services.
Washington DC, Washington DC
Industries
- Real estate and construction
- Manufacturing
- Technology and telecommunications
- Energy
Service Experience
- Advisory
- Audit
- Mergers and acquisitions



Cindy Williams
Managing Director, SEC Regulatory Matters
Cindy is a managing director in the firm’s SEC Regulatory Matters group, with more than 15 years of auditing, accounting, and SEC reporting experience. She began her career in 2006 in the audit practice where she served public and private companies, primarily in the manufacturing and healthcare industries.
Arlington, Virginia
Industries
- Manufacturing
- Real estate and construction
- Asset management
Service Experience
- Audit
- Digital assets
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