Risk Management and Crisis Response Blog

Clawing it back: SEC adopts listing standards to prevent executives from benefiting from misstatements in financial statements

Nov 10, 2022 6 MIN READ
Lauren Tomasich

Partner, Litigation, Toronto

Tristram Mallett

Partner, Litigation, Calgary

Tamara Kljakic

Associate, Litigation, Toronto

Rob Lando

New York Managing Partner, New York

Lawrence E. Ritchie

Partner, Litigation, Toronto

businessman with financial document

On October 26, 2022, the United States Securities and Exchange Commission (the SEC) adopted new compensation recovery listing standards and disclosure rules which will apply to issuers with securities listed on a U.S. national securities exchange such as the New York Stock Exchange or NASDAQ. These rules require all issuers with a U.S. stock exchange listing, including foreign private issuers filing annual reports on Form 20-F and Canadian foreign private issuers filing annual reports on Form 40-F under the Multijurisdictional Disclosure System, to develop and implement policies providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers, and to disclose such policies (the clawback rules).

The new rules implement Section 10D of the Securities Exchange Act of 1934, a provision added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which was first passed in 2010. The SEC first issued the proposed rules to implement the new provision in 2015, and reopened the comment period on them in October 2021.

There is no general requirement in Canada that public companies impose clawback provisions. However, Canadian issuers that have any class of debt or equity securities listed on a U.S. stock exchange will be required to conform with the new clawback rules as described below.

What is a clawback requirement?

Clawback requirements are meant to hold corporate leaders financially accountable for misstatement of financial statements. If a reporting error occurs, whether as a result of fraud or a failure to comply with accounting rules, companies must have a policy in place to recover or “clawback” formerly awarded executive compensation in excess of what would have been awarded based on the restated financial statements. The primary aim of such requirements is to prevent senior executives from benefitting from incorrect accounting information and compliance lapses.

When does the clawback apply?

The new rules will be implemented through amendments to stock exchange listing standards and will apply to all public companies that have any class of securities listed on a national securities exchange in the United States (except for certain security futures products, standardized options, securities issued by unit investment trusts and securities issued by certain registered investment companies). There are no exceptions for Canadian or other foreign private issuers, emerging growth companies or smaller reporting companies. Any current or former “executive officer”, as defined in the new SEC rule, will be subject to the clawback requirements, including the company’s president, principal financial and accounting officers, any vice-president in charge of a principal business unit, division or function and any other officer or other person who performs policymaking decisions.

If a U.S. stock exchange-listed company is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under securities laws, whether reporting under U.S. GAAP or IFRS (international financial reporting standards), the company will be required to recover, pursuant to its policy, incentive-based compensation received by current and former executive officers during the three completed fiscal years immediately preceding the date on which the company is required to prepare the accounting restatement. The recoverable amount is the amount that the executive would not have received if the financial statements had initially been presented correctly, and is to be calculated on a pre-tax basis.

The compensation recovery policy will be triggered in the event of both

  • “Big R” restatements, which correct errors that are material to previously issued financial statements
  • “Little r” restatements, which correct errors that are not material to previously issued financial statements, but that would result in a material misstatement if the error were recognized or left uncorrected in the current period

What must a listed issuer do?

Exchanges will have 90 days from the publication of the adopting release in the Federal Register to file proposed listing standards for issuers, which must become effective no later than one year following the publication date of the SEC final rules.

Once the applicable stock exchange listing standards become effective, listed companies will have 60 days to adopt their clawback policies and comply with the disclosure requirements in the first SEC filing following adoption of the clawback policy. The disclosure requirements include, but are not limited to, the full text of the company’s clawback policy (which must be filed as an exhibit), disclosure of the aggregate dollar amount of excess incentive-based compensation attributable to the restatement, how the company determined recovery of such compensation and explanations if some or all of the excess-based compensation would be impracticable to recover.

An issuer will be subject to delisting if it does not adopt and comply with a compensation recovery policy that meets the requirements of the listing standards.

Clawback policies in Canada

While no law in Canada currently exists requiring companies to have a clawback policy, paragraph 2.1(5)(b) of Form 51-102F6 [PDF] of Canadian National Instrument 51-102, which prescribes Canadian executive compensation disclosure requirements, requires Canadian issuers to disclose the details of their clawback policy, if one exists. Issuers wishing to voluntarily adopt clawback policies or which are required to adopt one under the new SEC rules must disclose, among other things

  1. which employees will be covered by the policy
  2. the triggering event for the clawback (e.g., financial statement restatement, business losses, adjustments, etc.)
  3. the types of compensation to which the clawback would apply (e.g., annual bonuses, cash awards, stock options, performance shares and units, whether granted, earned or vested)
  4. the amount of compensation that must be recovered and the method of recoupment
  5. the relevant time period for the compensation to be clawed back

Canadian companies that are required to adopt an SEC-compliant clawback policy will have to satisfy these Canadian disclosure requirements, if applicable to them, in addition to filing a copy of the clawback policy as an exhibit to their SEC annual report on Form 10-K, Form 20-F or Form 40-F.


Canadian issuers that have securities listed on a U.S. stock exchange should familiarize themselves with the new rules and consider the impact on their executive compensation programs, compensation arrangements and any previously adopted clawback policies, and will be required to adopt one if they have not already done so.

They should also be aware that the application of a clawback policy and the calculation of what represents incentive-based compensation in the event of a restatement represents an area with the potential for disputes with the current or former officers who may be affected by it, as well as with the company’s shareholders. The SEC rules only permit limited flexibility for an issuer to determine not to pursue legal proceedings against an executive officer who is unwilling to return erroneously awarded amounts.

Despite a lack of legislative change in Canada so far, the evolution of thinking across borders may soon spill over into Canada. A proposed amendment [PDF] to the Canadian executive compensation disclosure requirements issued by the Canadian Securities Administrators (the CSA) in 2011, shortly after the Dodd-Frank Act, raised the possibility of, among other things, introducing Canadian requirements for compensation policies and practices that require repayment or forfeiture of compensation earned by taking excessive risks. The CSA made specific reference to the Dodd-Frank Act in the United States as a motivation for proposing its own amendments to Canadian executive compensation disclosure requirements. While this proposed Canadian amendment has not since been implemented, the SEC’s enactment of rules implementing the Section 10D requirements may now prompt the CSA to reconsider introducing similar or related requirements in Canada.

Connect with Osler to learn more about your organization’s obligations with respect to clawback requirements and strategies to achieve compliance.