This rulemaking is straightforward and long awaited. It was over a decade ago when Congress mandated that the Commission promulgate rules related to the recovery, by issuers from its executives, of erroneously awarded incentive based compensation.[1]

The rulemaking would require an issuer to have in place a policy for mandatory recovery of compensation based on materially misreported financials. The principle is simple: if an executive was paid too much based upon incorrect accounting, then the executive should not get to keep that money. In such an event, the portion of compensation attributable to that incorrect accounting would be recovered, or “clawed back,” by the issuer.

Other components of the rule would require disclosure to investors of the recovery policy itself, additional disclosures when it has been determined pay should be recovered, and also, in the event there is a restatement of financials but no recovery necessitated, an explanation of why that is the case.[2] Further, the rule would require a check box on the cover of annual reports to provide investors with clear and accessible notice of when there is a correction of an error to previously issued financial statements and whether any such corrections are restatements that trigger a recovery analysis.[3]

Additionally the rulemaking would require recovery policies to be triggered by material errors defined to include both “Big R” and “little r” restatements.[4] As the adopting release notes, “little r” restatements accounted for 76% of all restatements in 2020;[5] and scoping such restatements into the rule is consistent with the relevant legal precedent,[6] statutory language and mandate,[7] accounting literature,[8] provisions of U.S GAAP and IFRS,[9] and staff guidance regarding accounting errors and materiality determinations.[10]

Both the scope and the design of the rule were carefully calibrated to incentivize higher quality financial reporting and to hold executives and issuers alike accountable by returning erroneously awarded incentive based compensation.[11]

Thank you to members of the public who submitted comment letters in connection with this rulemaking. Thank you also to the staff of the Division of Corporation Finance, the Office of the Chief Accountant, the Division of Economic and Risk Analysis, the Office of the General Counsel, and also the staff within Chair Gensler’s office for your hard work.