What is a clawback policy? SEC Rule 10D-1

A clawback policy is the written policy that a listed US company must maintain to recover incentive-based compensation it paid on financial results that later turn out to be wrong. It is not a voluntary governance gesture. Under SEC Rule 10D-1 and the exchange listing standards that implement it, keeping and applying a compliant clawback policy is a condition of staying listed. This guide explains what a clawback policy covers, what triggers recovery, and where to read one. It is not investment advice.

What does a clawback policy actually require?

Three things do the work.

• A restatement is the trigger. Recovery is required when the issuer must prepare an accounting restatement to correct a material error in previously issued financial statements, and also when the correction is one that would be material if left uncorrected in the current period. Both the larger and the smaller category of restatement count.
• Incentive-based compensation is what gets recovered. That means compensation granted, earned or vested wholly or in part on the attainment of a financial reporting measure. Stock price and total shareholder return count as financial reporting measures. A salary or a time-vesting award that does not depend on such a measure does not.
• The amount is the excess. The company recovers the difference between what the executive officer received and what they would have received had the compensation been calculated on the restated figures.

Recovery is no-fault. Nothing in the rule asks whether an executive officer did anything wrong, and the policy reaches former executive officers as well as serving ones. The issuer is also barred from indemnifying an officer against the loss of erroneously awarded compensation.

When can a company not recover?

Recovery is the default, not a judgment call, but the rule is not absolute either. Rule 10D-1(b)(1)(iv) lets an issuer stop short only where its committee of independent directors responsible for compensation, or a majority of the independent directors where there is no such committee, determines that recovery would be impracticable, and only on one of three stated grounds:

• The direct expense paid to a third party to help enforce the policy would exceed the amount recoverable. The issuer must first make and document a reasonable attempt to recover, and give that documentation to the exchange.
• Recovery would violate home country law where that law was adopted before 28 November 2022. The issuer must obtain an opinion of home country counsel acceptable to the exchange.
• Recovery would likely cause a tax-qualified retirement plan whose benefits are broadly available to employees to fail the requirements of the Internal Revenue Code provisions the rule names.

Nothing else qualifies. A board's view that recovery is harsh, or that the officer acted in good faith, is not a ground under the rule.

How far back does the lookback go?

The recovery period is the three completed fiscal years immediately preceding the date the issuer is required to prepare the restatement, together with any transition period within or immediately following those years that arises from a change in the issuer's fiscal year. That date is itself defined: it is the earlier of the day the board, a board committee or the authorised officers conclude, or reasonably should have concluded, that a restatement is required, and the day a court, regulator or other legally authorised body directs one.

When did the clawback rules take effect?

The rule traces to Section 954 of the Dodd-Frank Act, which added Section 10D to the Securities Exchange Act. The SEC adopted Rule 10D-1 in October 2022, the exchange listing standards took effect on 2 October 2023, and listed issuers had to have a compliant policy in place by 1 December 2023.

Where to read a company's clawback policy

The policy itself is filed as Exhibit 97 to the annual report on Form 10-K. The cover page of that 10-K also carries two check boxes: one recording whether the filing reflects correction of an error in previously issued financial statements, and one recording whether any such correction required a recovery analysis. Item 402(w) of Regulation S-K governs what the issuer must then say about the analysis, and that narrative usually appears in the proxy statement alongside the rest of the pay disclosure.

Everything above is public on EDGAR, which you can search for free. A clawback policy filing sits next to the other pay disclosures worth reading together: the pay versus performance table, the say-on-pay vote, and, in a deal, the golden parachute disclosure. Flock reads disclosure filings and keeps each one dated and linked to its source. What any of it means for your money is your call to make.