reporting measure performance goal is attained, even if the executive
officer has established only a contingent right to payment at that
time. If the issuer's board of directors concludes in 2018 that the
issuer will restate previously issued financial statements for 2015
through 2017 (the three-year performance period),\145\ the recovery
policy should apply to reduce the number of RSUs ultimately payable in
stock, even though the executive has not yet satisfied the two-year
service-based vesting condition to payment. In this example, if the
executive officer were deemed not to receive the RSUs before obtaining
a non-forfeitable interest in them, such a restatement of the financial
statements that would reduce the number of RSUs ultimately payable in
stock would not be subject to recovery because the incentive-based
compensation would not have been received during the three-year look-
back period. We do not believe such an outcome would appropriately
implement the policy underlying Section 10D, because it would mean that
the mere passage of time pursuant to a service-based vesting condition
or a subsequent performance condition unrelated to a financial
reporting measure \146\ would preclude the issuer from recovering
incentive-based compensation.
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    \144\ See Senate Report at 135.
    \145\ In this example, the three-year performance period
coincides with the three-year look-back period covered by the
recovery policy. See Section II.C.2.b. above regarding the three-
year look-back period.
    \146\ For example, if the subsequent condition in the example
above was not service-based vesting but instead called for the
issuer to open 100 stores during 2018 and 2019, or required the
executive to comply with a non-compete or non-solicitation covenant
during those years.
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    Ministerial acts or other conditions necessary to effect issuance
or payment, such as calculating the amount earned or obtaining the
board of directors' approval of payment, would not affect the
determination of the date received. For example, for an equity award
deemed received upon grant, receipt would occur in the fiscal year that
the relevant financial reporting measure performance goal was
satisfied, rather than a subsequent date on which the award was
issued.\147\ Similarly, a non-equity incentive plan award would be
deemed received in the fiscal year that the executive earns the award
based on satisfaction of the relevant financial reporting measure
performance goal, rather than a subsequent date on which the award was
paid.\148\
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    \147\ The fiscal year in which an incentive-based equity award
is deemed received upon grant in some cases may be a fiscal year
preceding the fiscal year in which the ASC Topic 718 grant date
occurs and for which it is reported in the Summary Compensation
Table and Grants of Plan-Based Awards Table because our requirements
for reporting equity awards in the Summary Compensation Table do not
utilize a ``performance year'' standard. See Proxy Disclosure
Enhancements, Release No. 33-9089 (Dec. 16, 2009) [74 FR 68334] at
Section II.A.2.c.
    \148\ This would be the same fiscal year for which the non-
equity incentive plan award earnings are reported in the Summary
Compensation Table, based on Instruction 1 to Item 402(c)(2)(vii),
which provides: ``If the relevant performance measure is satisfied
during the fiscal year (including for a single year in a plan with a
multi-year performance measure), the earnings are reportable for
that fiscal year, even if not payable until a later date, and are
not reportable again in the fiscal year when amounts are paid to the
named executive officer.''
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    Under proposed Rule 10D-1, incentive-based compensation would be
subject to the issuer's recovery policy to the extent that it is
received while the issuer has a class of securities listed on an
exchange or an association.\149\ An award of incentive-based
compensation granted to an executive officer before the issuer lists a
class of securities would be subject to the recovery policy, so long as
the incentive-based compensation was received by the executive officer
while the issuer had a class of listed securities. Incentive-based
compensation received by an executive officer before the issuer's
securities become listed would not be subject to the recovery policy
under our proposed

rule. As proposed, an exchange would not be permitted to list an issuer
that it has delisted or that has been delisted from another exchange
for failing to comply with its recovery policy until the issuer comes
into compliance with that policy.\150\
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    \149\ Proposed Rule 10D-1(b)(1)(i)(A).
    \150\ Proposed Rule 10D-1(b)(1)(vi).
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Request for Comment
    39. Should incentive-based compensation be deemed ``received'' for
purposes of triggering the recovery policy under Section 10D in the
fiscal year during which attainment of the financial reporting measure
specified in the incentive-based compensation award, by its terms,
causes the incentive-based compensation to be granted, to be earned or
to vest, as proposed? If not, when should incentive-based compensation
be deemed ``received'' for purposes of triggering the recovery policy?
    40. Should an executive officer be required to obtain a non-
forfeitable entitlement to the incentive-based compensation to
``receive'' the compensation? Would such a requirement effectuate the
purpose of Section 10D? Should the rule specifically address the
treatment of awards subject to multiple vesting conditions, only some
of which may be linked to financial reporting measures? If so, what
would be the appropriate treatment of such rewards?
    41. If following receipt, as proposed to be defined, an executive
officer contributes incentive-based compensation to a nonqualified
deferred compensation plan, how should deferral affect recovery? \151\
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    \151\ See Section II.C.3.a, below, addressing the computation of
excess incentive-based compensation for this form of compensation.
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    42. Should incentive-based compensation be subject to the issuer's
recovery policy only to the extent that it is received while the issuer
has a class of securities listed, as proposed? If not, please explain
in what circumstances a different standard should apply and why. For
example, if a company lists in 2017, and restates the three prior
fiscal years in 2018, should its policy require recovery of incentive-
based compensation received in 2015 or 2016?
3. Recovery Process
a. Determination of Excess Compensation
    Section 10D(2)(b) requires exchanges and associations to adopt
listing standards that require issuers to adopt and comply with
recovery policies that apply to the amount of incentive-based
compensation received ``in excess of what would have been paid to the
executive officer under the accounting restatement.''
    Commenters recommended that the Commission clarify how excess
compensation subject to recovery should be determined.\152\ One
commenter suggested that the Commission establish a clear set of
guidelines as to how issuers should calculate the recoverable amount
under a variety of common arrangements, or alternatively, a clear set
of principles to be used to make such calculations.\153\ In some cases,
commenters recommended specific ways to measure excess compensation for
particular forms of incentive-based compensation. For example, for cash
awards based upon the achievement of erroneous financial metrics, one
commenter recommended that the excess incentive-based compensation
should be the difference between the cash award that was granted and
the cash award that should have been granted using the restated
financial metric.\154\
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    \152\ See, e.g., letters from Center on Executive Compensation,
Compensia, Inc., Meridian Compensation Partners, LLC, Pay Governance
LLC and Towers Watson.
    \153\ See letter from Compensia, Inc.
    \154\ See letter from Center on Executive Compensation.
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    Several commenters sought clarity regarding performance-based
equity awards, with some recommending various methods to calculate the
recoverable amount for different forms of these awards, taking into
account such factors as whether an award is granted or vested based on
attaining a financial statement metric, whether or not an option has
been exercised, and whether the shares have been sold.\155\
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    \155\ See, e.g., letters from Compensia, Inc., and Meridian
Compensation Partners, LLC.
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    Regarding bonuses paid from ``pool plans,'' two commenters
questioned whether determination of the recoverable amount might depend
on whether the board or compensation committee had exercised any
discretion, either in determining whether to allocate the entire pool
to bonus awards or in determining individual bonus amounts.\156\ For
example, commenters noted that if a restatement reduces the size of the
bonus pool, but not below the aggregate amount that the board exercised
discretion to pay out as bonuses, there would not appear to be any
excess compensation to recover. Alternatively, if a restatement reduces
the size of the bonus pool below the aggregate amount paid out, the
commenters sought clarification whether each bonus paid would need to
be ratably reduced, or if discretion could be exercised in allocating
recovery of the excess amount among individual bonuses as long as the
aggregate excess amount is recovered. Another commenter questioned, in
general, whether the amount of compensation earned should be measured
by reference to the target achieved, or the compensation actually
provided after the compensation committee exercised discretion to
either increase or decrease the amount.\157\ A different commenter
suggested that where incentive-based compensation is not determined
based solely on formulaic measures, but also on qualitative measures,
the same percentage recoverable from the formulaic portion based on the
restatement also should be recovered from the portion based on
qualitative measures.\158\ Other commenters noted that executive
officers would already have paid personal income taxes on incentive-
based compensation they had received.\159\
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    \156\ See letters from Center on Executive Compensation and
Protective Life Corporation.
    \157\ See letter from Davis Polk & Wardwell LLP.
    \158\ See AFL-CIO Joint Letter.
    \159\ See letters from Clark Consulting, Davis Polk & Wardwell
LLP and Frederic W. Cook & Co, Inc.
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    We propose to define the recoverable amount as ``the amount of
incentive-based compensation received by the executive officer or
former executive officer that exceeds the amount of incentive-based
compensation that otherwise would have been received had it been
determined based on the accounting restatement.'' \160\ Applying this
definition, after an accounting restatement, the issuer would first
recalculate the applicable financial reporting measure and the amount
of incentive-based compensation based thereon. The issuer would then
determine whether, based on that financial reporting measure as
calculated relying on the original financial statements and taking into
account any discretion that the compensation committee had applied to
reduce the amount originally received, the executive officer received a
greater amount of incentive-based compensation than would have been
received applying the recalculated financial reporting measure.\161\
Where

incentive-based compensation is based only in part on the achievement
of a financial reporting measure performance goal, the issuer first
would determine the portion of the original incentive-based
compensation based on or derived from the financial reporting measure
that was restated. The issuer would then need to recalculate the
affected portion based on the financial reporting measure as restated,
and recover the difference between the greater amount based on the
original financial statements and the lesser amount that would have
been received based on the restatement.\162\
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    \160\ Proposed Rule 10D-1(b)(1)(iii).
    \161\ For example, assume a situation in which, based on the
financial reporting measure as originally reported, the amount of
the award was $3,000. However, the issuer exercised negative
discretion to pay out only $2,000. Following the restatement, the
amount of the award based on the corrected financial reporting
measure is $1,800. Taking into account the issuer's exercise of
negative discretion, the recoverable amount would be $200 (i.e.,
$2,000--$1,800).
    \162\ For example, assume a situation in which, based on the
financial reporting measure as originally reported, the amount of
the award was $3,000. The issuer exercised positive discretion to
increase the amount by $1,000, paying out a total of $4,000.
Following the restatement, the amount of the award based on the
corrected financial reporting measure is $1,800. Taking into account
the issuer's exercise of positive discretion, the recoverable amount
would be $1,200, provided that based on the revised measurement, the
exercise of positive discretion to increase the amount by $1,000 was
still permitted under the terms of the plan.
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    For incentive-based compensation that is based on stock price or
total shareholder return, where the amount of erroneously awarded
compensation is not subject to mathematical recalculation directly from
the information in an accounting restatement, the recoverable amount
may be determined based on a reasonable estimate of the effect of the
accounting restatement on the applicable measure.\163\ To reasonably
estimate the effect on the stock price, there are a number of possible
methods with different levels of complexity of the estimations and
related costs.\164\ For these measures, the issuer would be required to
maintain documentation of the determination of that reasonable estimate
and provide such documentation to the relevant exchange or
association.\165\
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    \163\ Proposed Rule 10D-1(b)(1)(iii)(A).
    \164\ See Section III.B.2, below, discussing different
methodologies for determining a reasonable estimate of the effect of
the accounting restatement on the stock price or total shareholder
return.
    \165\ Proposed Rule 10D-1(b)(1)(iii)(B).
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    The recoverable amount would be calculated on a pre-tax basis \166\
to ensure that the company recovers the full amount of incentive-based
compensation that was erroneously awarded, consistent with the policy
underlying Section 10D. Recovery on a pre-tax basis also would permit
the company to avoid the burden and administrative costs associated
with calculating recoverable amounts based on the particular tax
circumstances of individual executive officers, which may vary
significantly based on factors independent of the incentive-based
compensation.
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    \166\ Proposed Rule 10D-1(b)(1)(iii) provides that the
erroneously awarded compensation shall be computed without regard to
any taxes paid by the executive officer. The pre-tax amount refers
to the full amount of incentive-based compensation received by the
executive officer, rather than the amount remaining after he or she
satisfies his or her personal income tax obligation on it.
---------------------------------------------------------------------------

    While we intend for the definition to apply in a principles-based
manner, we recognize that applying the principles may not always be
simple. Cash awards that are received upon satisfaction of a financial
reporting measure should be relatively straightforward. The recoverable
amount would be the difference between the amount of the cash award
(whether payable as a lump sum or over time) that was received and the
amount that should have been received applying the restated financial
reporting measure.\167\
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    \167\ Similarly, for nonqualified deferred compensation, the
executive officer's account balance or distributions would be
reduced by the excess incentive-based compensation contributed to
the nonqualified deferred compensation plan and the interest or
other earnings accrued thereon under the nonqualified deferred
compensation plan. In addition, for retirement benefits under
pension plans, the excess incentive-based compensation would be
deducted from the benefit formula, and any related distributions
would be recoverable.
---------------------------------------------------------------------------

    For cash awards paid from bonus pools, the size of the aggregate
bonus pool from which individual bonuses are paid would be reduced
based on applying the restated financial reporting measure. If the
reduced bonus pool is less than the aggregate amount of individual
bonuses received from it, the excess amount of an individual bonus
would be the pro rata portion of the deficiency. If the aggregate
reduced bonus pool would have been sufficient to cover the individual
bonuses received from it, then no recovery would be required.
    Equity awards involve different considerations. For equity awards,
if the shares, options or SARs are still held at the time of recovery,
the recoverable amount would be the number received in excess of the
number that should have been received applying the restated financial
reporting measure. If the options or SARs have been exercised, but the
underlying shares have not been sold, the recoverable amount would be
the number of shares underlying the excess options or SARs applying the
restated financial measure. If the shares have been sold, the
recoverable amount would be the sale proceeds received by the executive
officer with respect to the excess number of shares.\168\ In any case
in which the shares have been obtained upon exercise and payment of an
exercise price, the recoverable amount would be reduced to reflect the
applicable exercise price paid.\169\
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    \168\ Where excess shares have been gifted, such as gifts to
charities, the recoverable amount would be the gifted shares' fair
market value at the date of the gift.
    \169\ Shares sold can be traced consistent with Treas. Reg.
1.1012-1(c) and Rule 144(d) [17 CFR 230.144(d)].
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    We recognize that there may be circumstances in which both proposed
Rule 10D-1 and SOX Section 304 could provide for recovery of the same
incentive-based compensation. The proposed rule is not intended to
alter or otherwise affect the interpretation of Section 304 or the
determination by the Commission or the courts of when reimbursement is
required under Section 304. If, however, an executive officer
reimburses an issuer pursuant to Section 304, such amounts should be
credited to the extent that an issuer's Rule 10D-1 recovery policy
requires repayment of the same compensation by that executive officer.
Further, recovery under Rule 10D-1 would not preclude recovery under
Section 304 to the extent any applicable amounts have not been
reimbursed to the issuer.
Request for Comment
    43. Do the proposed rule and rule amendments articulate an
appropriate standard for calculating the amount of excess incentive-
based compensation that listed issuers must recover? Why or why not?
    44. For incentive-based compensation based on stock price or total
shareholder return, would permitting the recoverable amount to be
determined based on a reasonable estimate of the effect of the
accounting restatement, as proposed, facilitate administration of the
rule by issuers and exchanges? Why or why not? Should we provide
additional guidance regarding how such estimates should be calculated?
If so, what particular factors should that guidance address?
    45. As proposed, should the issuer be required to maintain
documentation of the determination of that reasonable estimate and
provide such documentation to the relevant exchange? Why or why not? Is
the documentation required sufficient for compliance monitoring? If
not, what else should be required? Should the rule specify a period of
time that an issuer would need to maintain such documentation or what
types of documentation should be maintained? If so, what period of time
or

documentation is appropriate? Should we require that such determination
be disclosed, either to the exchange or in Commission filings? What
would be the effects of such disclosure?
    46. Should the rule and rule amendments alternatively, or in
addition, include specific instructions for how to compute the excess
amount of specific forms of incentive-based compensation? If so, which
ones and why?
    47. Is further guidance needed on the application of the proposed
standard? If yes, what additional guidance is necessary? Is further
guidance required regarding any particular form of compensation? For
example:
    a. Should we provide guidance on how to determine the recoverable
amount of supplemental retirement plan benefits that are calculated
based on erroneously awarded incentive-based compensation? If so, what
should that guidance be?
    b. For equity awards granted based on satisfaction of a financial
reporting measure, the guidance above directs listed issuers to recover
the excess number of shares or, if no longer held, the proceeds from
the sale of the excess shares so that executive officers cannot benefit
from future appreciation in shares that were not earned. Instead of
recovering the excess number of shares, should listed issuers have the
choice to recover the cash value of the excess shares? If so, should
the shares be valued at the vesting date, the date the recoverable
amount is determined, or some other date?
    c. Where the number of excess shares is less than the entire award
and some of the shares received were sold and some are still held,
should recovery be made first against the remaining shares that are
held? Alternatively, should recovery apply first to shares that were
sold, so as not to erode company stock holding policies? Should this
decision be left to the listed issuer's discretion?
    d. Where excess shares have been gifted, such as gifts to
charities, should the recoverable amount be the shares' fair market
value at the date of the gift? If not, at what other date should the
excess shares be valued?
    e. Is the guidance above appropriate for determining the
recoverable amount where the listed issuer has exercised discretion to
reduce or increase the original amount of incentive-based compensation
received?
    48. Where the issuer chose to increase the original amount of
incentive-based compensation, should an amount proportionate to the
effect of the restatement on the financial statement measure also be
recovered from the discretionary enhancement?
    49. One commenter recommended that the Commission require recovery
of a proportionate amount of incentive compensation awarded under
qualitative standards.\170\ Should we require recovery of amounts
awarded under qualitative standards that may involve judgement by the
board? If so, how would the excess compensation be calculated in those
instances?
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    \170\ See AFL-CIO Joint Letter.
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    50. Is further guidance needed regarding circumstances in which
both proposed Rule 10D-1 and SOX Section 304 would apply?
b. Board Discretion Regarding Whether To Seek Recovery
    Section 10D requires exchanges and associations to adopt listing
standards that require issuers to adopt and comply with recovery
policies. Specifically, the statute provides that ``the issuer will
recover'' incentive-based compensation, and does not address whether
there are circumstances in which an issuer's board of directors may
exercise discretion not to recover.
    Commenters suggested that the Commission's implementing rules
should address the issue of board discretion whether to pursue recovery
and, if such discretion is permitted, address its scope. Many of these
commenters asserted that the Commission should allow for board
discretion to determine whether to pursue recovery.\171\ Commenters
raised concerns about situations where the potential costs of recovery
may exceed the excess incentive-based compensation to be recovered
\172\ and recommended that boards be permitted to evaluate the benefits
of recovery against the costs involved.\173\ Commenters noted the
following factors that may affect this decision: the likelihood of
recovery; \174\ de minimis recovery; \175\ the need to pursue
litigation to recover; \176\ and the possibility that recovery might
violate existing statutory or contractual provisions.\177\ One
commenter asserted that in the absence of discretion, companies will be
incentivized to implement compensation arrangements that are not
subject to Section 10D recovery provisions.\178\ Other commenters
recommended the Commission establish a standard similar to the Troubled
Asset Relief Program (``TARP'') standard where an issuer is not
required to enforce its recovery policy if it would be unreasonable to
do so.\179\
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    \171\ See letters from Davis Polk & Wardwell LLP, Center on
Executive Compensation, Meridian Compensation Partners, LLC,
American Benefits Council, Baker, Donelson, Bearman, Caldwell &
Berkowitz, PC, Compensia, Inc., Clark Consulting, LLC, Society of
Corporate Secretaries and Governance Professionals, Frederic W. Cook
& Co., Inc., Stuart R. Lombardi and Protective Life Corporation.
    \172\ See letters from Clark Consulting, LLC and ABA Business
Law Section.
    \173\ See letters from Davis Polk & Wardwell LLP, Meridian
Compensation Partners, LLC, American Benefits Council, Compensia,
Inc., Clark Consulting, LLC, Society of Corporate Secretaries and
Governance Professionals, Stuart R. Lombardi and Protective Life
Corporation.
    \174\ See letter from Society of Corporate Secretaries and
Governance Professionals.
    \175\ See letters from Center on Executive Compensation,
Meridian Compensation Partners, LLC, American Benefits Council,
Frederic W. Cook & Co., Inc., and Protective Life Corporation.
    \176\ See letters from Society of Corporate Secretaries and
Governance Professionals and Center on Executive Compensation.
    \177\ See letters from Society of Corporate Secretaries and
Governance Professionals and Center on Executive Compensation.
    \178\ See letter from Stuart R. Lombardi. To guard against the
abuse of discretion, this commenter recommended that following a
restatement an issuer either should publicly announce its decision
whether to pursue or decline recovery, or should delegate all
clawback decision making authority to an independent party.
    \179\ See letters from Baker, Donelson, Bearman, Caldwell &
Berkowitz, PC and Compensia, Inc.
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    In considering this issue, we note that the Emergency Economic
Stabilization Act of 2008 (``EESA'') contained an executive
compensation recovery provision \180\ applicable to any financial
institution that sells troubled assets to the Secretary of the United
States Department of the Treasury under TARP. In its interim final rule
to provide guidance on the EESA's executive compensation and corporate
governance provisions applicable to entities receiving financial
assistance under TARP, the Department of the Treasury provided that
``[t]he TARP recipient must exercise its clawback rights except to the
extent it demonstrates that it is unreasonable to do so, such as, for
example, if the expense of enforcing the rights would exceed the amount
recovered.'' \181\
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    \180\ Section 111(b)(3)(B) of EESA, Public Law 110-343, 12
U.S.C. 5221, as amended by Title VII of Division B of the American
Recovery and Reinvestment Act of 2009 (``ARRA''), Public Law 111-5
[123 STAT. 115] (Feb. 17, 2009).
    \181\ TARP Standards for Compensation and Corporate Governance,
31 CFR 30.8.
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    We are mindful that allowing discretion whether to recover excess
incentive-based compensation could undermine the purpose of Section 10D
by permitting an issuer's board of directors to determine that an
executive officer may retain incentive-based compensation to which he
or she is not entitled. At the same time, we acknowledge that there are
circumstances in which pursuing

recovery of excess incentive-based compensation may not be in the
interest of shareholders and that a standard similar to the TARP
standard would permit boards of directors to evaluate whether to pursue
recovery of excess incentive-based compensation in particular
circumstances.
    To address these circumstances, proposed Rule 10D-1 would provide
that an issuer must recover erroneously awarded compensation in
compliance with its recovery policy except to the extent that pursuit
of recovery would be impracticable because it would impose undue costs
on the issuer or its shareholders or would violate home country law and
certain conditions are met. We believe the unqualified ``no-fault''
recovery mandate of Section 10D intends that the issuer should pursue
recovery in most instances. For example, we do not believe the extent
to which an individual executive officer may be responsible for the
financial statement errors requiring the restatement could be
considered in seeking the recovery. Further, we do not view
inconsistency between the proposed rule and rule amendments and
existing compensation contracts, in itself, as a basis for finding
recovery to be impracticable, because issuers can amend those contracts
to accommodate recovery.\182\
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    \182\ We note that some have suggested that issuers may be able
to amend their by-laws to implement their recovery policies. See,
e.g., Robert E. Scully Jr, Executive Compensation, the Business
Judgment Rule, and the Dodd-Frank Act: Back to the Future for
Private Litigation?, The Federal Lawyer, January 2011, pp 39-41.
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    In our view, the only criteria that should be considered are
whether the direct costs of enforcing recovery would exceed the
recoverable amounts or whether recovery would violate home country law.
Before concluding that it would be impracticable to recover any amount
of excess incentive-based compensation based on enforcement costs,\183\
the issuer would first need to make a reasonable attempt to recover
that incentive-based compensation.\184\ The issuer would be required to
document its attempts to recover, and provide that documentation to the
exchange.\185\ As described in Section II.D, below, the issuer also
would be required to disclose why it determined not to pursue recovery.
We believe that in this circumstance requiring an attempt to recover is
both consistent with the no-fault character of Section 10D, and
necessary for the issuer to justify concluding that recovery of the
amount at issue would be impracticable. Similarly, before concluding
that it would be impracticable to recover because doing so would
violate home country law, the issuer first would need to obtain an
opinion of home country counsel, not unacceptable to the applicable
national securities exchange or association, that recovery would result
in such a violation.\186\ In addition, to minimize any incentive
countries may have to change their laws in response to this provision,
the relevant home country law must have been adopted in such home
country prior to the date of publication in the Federal Register of
proposed Rule 10D-1.
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    \183\ Only direct costs involving financial expenditures, such
as reasonable legal expenses, would be considered for this purpose.
Indirect costs relating to concerns such as reputation or the effect
on hiring new executive officers would not be taken into account.
    \184\ Proposed Rule 10D-1(b)(1)(iv).
    \185\ Id.
    \186\ Id. The listed issuer would need to provide such opinion
to the exchange or association.
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    In either case, to prevent potential conflicts of interest, any
determination that recovery would be impracticable would need to be
made by the issuer's committee of independent directors that is
responsible for executive compensation decisions.\187\ In the absence
of a compensation committee, the determination would need to be made by
a majority of the independent directors serving on the board. Such a
determination, as with all determinations under proposed Rule 10D-1,
would be subject to review by the listing exchange.\188\
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    \187\ Exchange Act Rule 10C-1 mandated that the exchanges adopt
listing standards to require that directors responsible for
oversight of executive compensation (whether or not serving as part
of a formal compensation committee) be independent. Examples of such
listing standards are Section 303A.05 of the NYSE Listed Company
Manual and NASDAQ Rule 5605(d), both of which require listed
companies, with limited exceptions, to have a compensation committee
composed entirely of independent directors. Listed companies were
given until the earlier of their first annual meeting of
shareholders after January 15, 2014 or October 31, 2014 to comply
with the revised NYSE and Nasdaq independence requirements for
compensation committee members.
    \188\ Proposed Rule 10D-1(b)(1)(iv).
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    We believe that the proposed issuer discretion is necessary or
appropriate in the public interest and consistent with the protection
of investors because it would save issuers the expense of pursing
recovery in circumstances where the costs of recovery could exceed or
be disproportionate to the recoverable amounts, and for foreign private
issuers, would avoid such issuers having to choose between potential
de-listing or violating home country laws, either of which could be
detrimental to shareholders. Further, as discussed below,\189\ we
propose to require a listed issuer to disclose the reasons why it
decided not to pursue recovery in particular instances. We believe that
requiring this disclosure will mitigate potential abuse of this
discretion.
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    \189\ See Section II.D.1, below.
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Request for Comment
    51. Is the proposed issuer discretion not to pursue recovery of
incentive-based compensation consistent with the purpose of Section
10D? Is the scope of this discretion appropriate? Why or why not?
    52. Should the standard for exercising discretion not to recover be
limited to the extent to which that recovery is impracticable? Should
direct costs of recovery be a basis for exercising discretion not to
recover? If so, what specific costs of recovery should be considered?
For example, should only direct expenditures to third-parties be
considered, as proposed? Should we further define what constitutes
``direct costs''? Should an issuer be permitted to consider indirect
costs, such as opportunity costs or reputational costs? Should the
issuer disclose the cost estimates in its Exchange Act annual reports?
If the cost estimates are not disclosed in the issuer's annual reports,
should those costs be independently verified?
    53. Should the issuer first be required to make a reasonable
attempt to recover that compensation, as proposed? If so, should we
specify what steps to recover excess incentive-based compensation
should be required or what constitutes a ``reasonable attempt'' to
recover such compensation? Should this requirement depend on what
financial reporting metric triggers recovery? Should the issuer be
required to document its attempts to recover, and provide that
documentation to the exchange?
    54. Should a listed issuer be permitted to forego recovering
incentive-based compensation if doing so would violate home country
law? In this circumstance, should the issuer first be required to
obtain a legal opinion from home country counsel, as proposed? If not,
why not? Are there any other conditions that should be met beyond a
legal opinion from home country counsel before an issuer should be
permitted to forego recovering incentive-based compensation in these
circumstances? Should the proposed accommodation apply only to the
extent that recovery would conflict with home country laws in effect
before the date of publication of proposed Rule 10D-1 in the Federal
Register, as proposed? If not, please explain why not. In addition, as
proposed, the listed issuer would need to provide such opinion to the

exchange upon request. Should a copy of this opinion be filed with the
Commission as an exhibit? Why or why not?
    55. Should the determination that recovery would be impracticable
need to be made by the issuer's committee of independent directors
responsible for executive compensation decisions, or in the absence of
such a committee, by a majority of the independent directors serving on
the board? If not, why not, and who should be authorized to make the
determination?
    56. Are there other circumstances in which a listed issuer should
be permitted to not pursue recovery from its former executive officers?
If so, please explain the circumstances and what, if any, conditions
should apply.
    57. Could application of the Section 10D recovery policy to current
or former employees cause an issuer to violate any existing statutory
or contractual provisions? If so, please specify the applicable
provisions, how they might make affect recovery, and how an issuer
could address them to implement recovery.
    58. Would issuers be able to implement their recovery policies with
respect to existing compensation agreements and arrangements through
amendments to their by-laws?
c. Board Discretion Regarding Manner of Recovery
    Section 10D does not address whether an issuer's board of directors
may exercise discretion in the manner in which it recovers excess
compensation to comply with the listing standards. Commenters suggested
that the Commission's rule and rule amendments should address whether
boards may exercise discretion in effecting recovery in two primary
areas--the amount to be recovered when discretion was exercised in the
original grant, and the means of recovery.
i. Amount To Be Recovered
    Commenters requested that boards be able to exercise discretion
with regard to the amount to be recovered when discretion was used in
determining the original award amount.\190\ For example, some issuers
use ``pool plans,'' in which the size of the available bonus pool is
determined based wholly or in part on satisfying a financial reporting
measure performance goal, but specific amounts granted from the pool to
individual executives are based on discretion. One commenter
recommended that the issuer's board of directors have the discretion to
decide how much to recover from each executive officer, as long as the
issuer recovers the aggregate erroneously awarded amount.\191\ A
different commenter stated that the issuer's board should be given the
same level of discretion to determine the amount to be recovered from
individual executive officers as was used in making the initial
compensation decision.\192\ This commenter also suggested that the
Commission consider situations in which the issuer's board would be
permitted to settle for less than the full amount when seeking recovery
under its recovery policy.\193\
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    \190\ See letters from Davis Polk & Wardwell LLP, Center on
Executive Compensation and Society of Corporate Secretaries and
Governance Professionals. See Section II.C.3.a, above, regarding the
amount to be recovered when discretion was used to either increase
or decrease the original award amount.
    \191\ See letter from Protective Life Corporation.
    \192\ See letter from Center on Executive Compensation.
    \193\ See letter from Center on Executive Compensation.
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    As proposed, Rule 10D-1 would not limit the amount of compensation
the board could seek to recover on any other legal basis. However,
under the proposed rule, issuers' boards of directors would not be
permitted to pursue differential recovery among executive officers,
including in ``pool plans,'' where the board may have exercised
discretion as to individual grants in allocating the bonus pool. In
this instance, we believe that recovery should be pro rata based on the
size of the original award rather than discretionary. We believe that
permitting discretion in these instances would be inconsistent with
Section 10D's no-fault standard and its goal of preventing executive
officers from retaining compensation to which they are not entitled
under the restated financial reporting measure. Additionally,
permitting discretion in these instances could result in issuers
selectively applying recovery policies to former executive officers,
which we believe also would be inconsistent with Section 10D's purpose.
    Moreover, consistent with Section 10D's emphasis on preventing
executive officers from retaining compensation that they received and
to which they were not entitled under the issuer's restated results,
and as described above, we are not proposing that issuers be permitted
to settle for less than the full recovery amount unless impracticable
from a cost standpoint. In that circumstance, the same conditions would
apply as for a determination to forgo recovery.\194\
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    \194\ See Section II.C.3.b, above.
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ii. Means of Recovery
    In addition, several commenters recommended that boards of
directors be able to exercise discretion on how to accomplish recovery
under the recovery policy required by the proposed listing
standards.\195\ One commenter suggested that boards may decide to
recover the excess compensation over time or from future pay,\196\
while another commenter recommended that issuers recover erroneously
paid compensation first from current compensation owing, and then from
executive officers' after-tax funds.\197\ One commenter recommended
that recovery of an incentive-based compensation award that has been
earned but not paid should be accomplished through forfeiture of the
award, while recovery in all other cases should be accomplished solely
by the executive officer's repayment.\198\ Several commenters suggested
cancellation of unvested equity and non-equity awards or offsetting
against amounts otherwise payable by the issuer to the executive
officer, such as deferred compensation, as possible recovery
methods.\199\
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    \195\ See letters from Davis Polk & Wardwell LLP, Center on
Executive Compensation, Pay Governance LLC, Society of Corporate
Secretaries and Governance Professionals, Stuart R. Lombardi and
Protective Life Corporation.
    \196\ See letter from Davis Polk & Wardwell LLP.
    \197\ See letter from Frederic W. Cook & Co., Inc.
    \198\ See letter from Meridian Compensation Partners, LLC.
    \199\ See letters from Center on Executive Compensation, Society
of Corporate Secretaries and Governance Professionals and Protective
Life Corporation.
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    We recognize that the appropriate means of recovery may vary by
issuer and by type of compensation arrangement. Consequently, we
believe issuers should be able to exercise discretion in how to
accomplish recovery. Nevertheless, in exercising this discretion, we
believe that issuers should act in a manner that effectuates the
purpose of the statute--to prevent executive officers from retaining
compensation that they received and to which they were not entitled
under the issuer's restated results. Regardless of the means of
recovery utilized, we believe that issuers should recover excess
incentive-based compensation reasonably promptly, as undue delay would
constitute non-compliance with an issuer's policy as required.
Request for Comment
    59. How and under what circumstances, if any, should the board of
directors be able to exercise discretion regarding the amount to be
recovered? What steps should the board

of directors be required to take, if any, before exercising any
permitted discretion about the amount to be recovered from individual
executive officers?
    60. Are there any material tax considerations relevant to whether
an issuer should be able to exercise discretion as to the amount of
recovery? If so, please explain.
    61. Would the exercise of discretion by an issuer's board of
directors on the amount to be recovered where discretion was used in
determining the original award amount (e.g., in a pool plan) be
consistent with the purpose of Section 10D? If so, how?
    a. If an issuer uses a pool plan in which achievement of a
financial reporting measure determines the aggregate amount of the
bonus pool and the bonus pool is insufficient after giving effect to
the restatement, how should the issuer determine the amount to be
recovered? Should this decision be left to the board of directors or
compensation committee? Should recovery be on a pro rata basis?
    62. Should an issuer's board of directors be able to exercise
discretion regarding the means of recovery, as proposed? If so, how and
under what circumstances should the board be able to exercise
discretion regarding the means of recovery? Are there any steps the
board should be required to take before it exercises any permitted
discretion regarding the means of recovery?
    63. Should any of the principles discussed in this section be
codified?
    64. Should deferred payment arrangements be permitted when an
executive officer otherwise is unable to repay excess incentive-based
compensation? If so, should the time period over which repayment may be
deferred be limited?
    65. If recovery does not occur reasonably promptly, this would
constitute non-compliance with an issuer's policy. Should there be an
explicit window of time within which an issuer must have recovered
excess incentive-based compensation from an executive beyond which the
failure to recover would not be considered ``reasonably prompt''? Why
or why not? If so, what should that time period be?
    66. Should an issuer be permitted to recover excess incentive-based
compensation by netting incentive-based compensation overpayments with
incentive-based compensation underpayments that result from restating
financial statements for multiple periods during the three-year
recovery period? For example, suppose an issuer's restatement for a
material error in revenue recognition results in a shift in revenue
from the most recent year to an earlier year in the three-year period,
such that an incentive payment in the earlier year would have been
greater under the restatement. Should the issuer be permitted to
recover the excess incentive-based compensation in the later year by
crediting the earlier ``underpayment''? Why or why not? Should the
conclusion be different from the situation where the executive officer
received incentive-based compensation due to the achievement of a
cumulative performance goal for the three-year period based on the
financial reporting measure? Why or why not?
    67. One commenter suggested that we specifically authorize or
approve of the use of a nonqualified deferred compensation plan (e.g.,
a ``holdback plan'' or ``bonus bank'') to aid in the recovery of
erroneously awarded incentive-based compensation.\200\ Would these or
other mechanisms aid in the recovery of such compensation? Why or why
not?
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    \200\ See letter from Clark Consulting.
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4. Compliance With Recovery Policy
    Under the proposed rule and rule amendments, an issuer would be
subject to delisting if it does not adopt and comply with its
compensation recovery policy.\201\ The proposed rule and rule
amendments do not specify the time by which the issuer must complete
the recovery of excess incentive-based compensation. Rather, under
proposed Rule 10D-1, an exchange would determine whether the steps an
issuer is taking constitute compliance with its recovery policy. In
making this assessment, an exchange would need to determine, among
other things, whether the issuer was making a good faith effort to
promptly pursue recovery.
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    \201\ Under the proposed rule and rule amendments, it would also
be subject to delisting if it does not disclose its compensation
recovery policy in accordance with Commission rules.
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Request for Comment
    68. Should Rule 10D-1 specify the time by which the issuer must
complete the recovery of excess incentive-based compensation required
by the listing standards?
    69. Should Rule 10D-1 provide an objective standard to determine
whether an issuer is complying with its recovery policy? For example,
if the issuer has not recovered a certain percentage of excess
incentive-based compensation within a certain time period after a
restatement that triggers application of the policy, should it be
deemed non-compliant? If so, what percentages or time periods should be
used, and why?
    70. Alternatively, should Rule 10D-1 provide a standard that
includes different subjective criteria, or both subjective and
objective criteria, to determine whether an issuer is complying with
its recovery policy? If so, what standard should be used and why?
    71. Are there procedures that should be considered to assess
compliance with an issuer's policies and procedures concerning recovery
of excess incentive-based compensation? If so, what are they? Should an
issuer be required to disclose those policies and procedures? Should
there be an independent third-party assessment of an issuer's
compliance with those policies and procedures?
    72. Could proposed Rule 10D-1 be revised to better ensure
compliance with the obligation to recover? If so, how?

D. Disclosure of Issuer Policy on Incentive-Based Compensation

    Section 10D(b)(1) requires exchanges and associations to adopt
listing standards that call ``for disclosure of the policy of the
issuer on incentive-based compensation that is based on financial
information required to be reported under the securities laws.''
Sections 10D(a) and (b) require that the Commission adopt rules
requiring the exchanges to prohibit the listing of any security of an
issuer that does not develop and implement a policy providing for such
disclosure.
    Commenters noted that Section 10D(b)(1) could be read either to
require disclosure about the issuer's policy on incentive-based
compensation generally, or, instead, to require disclosure only about
the issuer's recovery policy with regard to such compensation. One
commenter \202\ requested that the Commission address how the
disclosure required by Section 10D(b)(1) would relate to the recovery
policy disclosure already provided in an issuer's CD&A.\203\ Another
commenter recommended implementing Section 10D(b)(1)'s disclosure
requirement by mandating that CD&A include the type of disclosure
currently addressed but not mandated under Item 402(b)(2)(viii) of
Regulation S-K, to the extent that such policies relate to financial

information required to be reported under the securities laws.\204\
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    \202\ See letter from Baker, Donelson, Bearman, Caldwell &
Berkowitz, PC.
    \203\ Item 402(b)(2)(viii) provides as an example of information
that may be material information to be disclosed under CD&A
``[r]egistrant policies and decisions regarding the adjustment or
recovery of awards or payments if the relevant registrant
performance measures upon which they are based are restated or
otherwise adjusted in a manner that would reduce the size of an
award or payment.''
    \204\ See letter from ABA Business Law Section.
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    A different commenter recommended that the Commission not interpret
Section 10D(b)(1) as creating a new disclosure requirement for
incentive-based compensation or, if the Commission does adopt a
separate disclosure requirement, that it allow the requirement to be
satisfied by identifying any types of incentive-based compensation that
are based on financial information that is required to be reported
under the securities laws.\205\ This commenter further recommended that
the Commission allow an issuer to present any required disclosure on
its general corporate Web site in view of the information about
incentive-based compensation that is currently required in proxy
materials under Item 402 of Regulation S-K.
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    \205\ See letter from Compensia, Inc.
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    Other commenters sought disclosure of issuers' clawback decisions.
One commenter recommended public disclosure of an issuer's decision
whether or not to pursue recovery as a means to prevent abuse of any
permitted discretion.\206\ A different commenter stated that in
addition to disclosing the existence of a clawback policy, listed
issuers should be required to disclose whether or not recovery has been
initiated and completed, along with details of the sums recovered and
identity of executives from whom compensation was recovered, as a
prophylactic against firms that restate but do not meet their
obligation to recover funds.\207\
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    \206\ See letter of Stuart R. Lombardi.
    \207\ See AFL-CIO Joint Letter, suggesting that this disclosure
be in the Form 8-K.
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    In part, because Section 10D(b)(1) comes under the Section 10D(b)
heading ``Recovery of Funds,'' we construe its disclosure requirement
to mean disclosure of the listed issuer's policy related to recovery of
erroneously awarded compensation. This approach would permit an
assessment of a listed issuer's compliance with the mandatory recovery
policy, while avoiding a potential duplication of the existing
disclosure requirements applicable to incentive-based compensation. The
proposed disclosure requirements are intended to inform shareholders
and the listing exchange as to both the substance of a listed issuer's
recovery policy and how the listed issuer implements that policy in
practice.
    While the specific language of Sections 10D(a) and (b) may be
ambiguous, we believe that it is intended to require listed issuers to
adopt, comply with, and provide disclosure about their compensation
recovery policies. Accordingly, proposed Rule 10D-1 would call for the
listing standards to include among the new requirements that listed
issuers disclose their recovery policies.\208\ Implementing the
disclosure requirement as an element of the listing standards would
permit exchanges to commence de-listing proceedings for issuers that
fail to make the required disclosure, as well as those that fail to
adopt recovery policies or fail to comply with their terms.
---------------------------------------------------------------------------

    \208\ Proposed Rule 10D-1(b)(1).
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    Further, to provide consistent disclosure across exchanges,
proposed Rule 10D-1 would provide that the required disclosure about
the issuer's recovery policy must be filed in accordance with the
disclosure requirements of the federal securities laws. These
requirements would be implemented by the proposed amendments to
Regulation S-K and relevant forms described below. Structuring the
provision in this manner would assure that, in addition to making the
disclosure a condition to listing, it would be subject to Commission
oversight to the same extent as other disclosure required in Commission
filings.
    Finally, to facilitate verification of compliance by the exchanges,
the listing standards of each exchange would require that listed
issuers record their compensation recovery policies in writing, and
these recovery policies would be filed with the Commission, as
described immediately below.
1. Listed U.S. Issuers
    The first of the proposed disclosure requirements would amend Item
601(b) of Regulation S-K to require that a listed issuer file its
recovery policy as an exhibit to its annual report on Form 10-K.\209\
For this purpose, an issuer would be ``a listed issuer'' if it had a
class of securities listed on an exchange registered pursuant to
Section 6 of the Exchange Act or an association registered pursuant to
Section 15A of the Exchange Act at any time during its last completed
fiscal year. Because the disclosure is keyed to the statutorily
mandated listing requirement, we would apply this disclosure
requirement to all listed issuers and do not propose to apply it to
issuers who do not have a listed class of securities.
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    \209\ Proposed Item 601(b)(96) of Regulation S-K. The Form 20-F
Instructions as to Exhibits would be amended correspondingly to add
new Instruction 17. Similarly, Form 40-F would be amended to add new
paragraph (17(a)) to General Instruction B. Form N-CSR would be
amended to renumber Item 12 (Exhibits) as Item 13 and add new
paragraph (a)(3) to that item for those registered management
investment companies that would be subject to the requirements of
proposed Rule 10D-1.
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    Although not specifically required by the Act, to further implement
Section 10D(b)(1), we are also using our discretionary authority to
propose to amend Item 402 of Regulation S-K to require listed issuers
to disclose how they have applied their recovery policies. Proposed
Item 402(w) of Regulation S-K would apply if at any time during its
last completed fiscal year either a restatement that required recovery
of excess incentive-based compensation pursuant to the listed issuer's
compensation recovery policy was completed or there was an outstanding
balance of excess incentive-based compensation from the application of
that policy to a prior restatement. In this circumstance, the listed
issuer would be required to provide the following information in its
Item 402 disclosure:
     For each restatement, the date on which the listed issuer
was required to prepare an accounting restatement, the aggregate dollar
amount of excess incentive-based compensation attributable to such
accounting restatement and the aggregate dollar amount of excess
incentive-based compensation that remains outstanding at the end of its
last completed fiscal year; \210\
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    \210\ Proposed Instruction 4 to Item 402(w) would provide that
if the aggregate dollar amount of excess incentive-based
compensation has not yet been determined, the listed issuer would
disclose this fact and explain the reasons.
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     The estimates used to determine the excess incentive-based
compensation attributable to such accounting restatement, if the
financial reporting measure related to a stock price or total
shareholder return metric;
     The name of each person subject to recovery of excess
incentive-based compensation attributable to an accounting restatement,
if any, from whom the listed issuer decided during the last completed
fiscal year not to pursue recovery, the amount forgone for each such
person, and a brief description of the reason the listed issuer decided
in each case not to pursue recovery; and
     The name of, and amount due from, each person from whom,
at the end of its last completed fiscal year, excess incentive-based
compensation had been outstanding for 180 days or longer since the date
the issuer determined the amount the person owed.
    As proposed, the disclosure would show a listed issuer's activity
to recover excess incentive-based compensation

during its last completed fiscal year. We believe this disclosure would
inform shareholders' voting and investment decisions and help exchanges
ensure compliance with their listing standards. All listed issuers
would be subject to Item 402(w) disclosure.\211\ The proposed
disclosure would be included along with the listed issuer's other Item
402 disclosure in annual reports on Form 10-K and any proxy and consent
solicitation materials that require executive compensation disclosure
pursuant to Item 402 of Regulation S-K.\212\ As proposed, a listed
issuer that complies with its Item 402(w) disclosure requirements would
not need to disclose any incentive-based compensation recovery pursuant
to Item 404(a).\213\ With respect to registered management investment
companies subject to proposed Rule 10D-1, information mirroring the
proposed Item 402(w) disclosure would be included in annual reports on
Form N-CSR and in proxy statements and information statements relating
to the election of directors.\214\
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    \211\ See proposed Instruction 1 to Item 402(w), defining the
term ``listed registrant; and proposed Instruction 2 to Item 402(w)
defining the term ``compensation recovery policy.''
    \212\ Proposed Instruction 5 to Item 402(w).
    \213\ Proposed Instruction 5.a.iii to Item 404(a) of Regulation
S-K. Item 404(a) requires a description of any transaction, since
the beginning of the issuer's last fiscal year, or any currently
proposed transaction, in which the issuer was or is to be a
participant and the amount involved exceeds $120,000, and in which
any related person had or will have a direct or indirect material
interest. For registered management investment companies, see
proposed Instruction 1 to Item 22(b)(20) of Schedule 14A
(information provided pursuant to Item 22(b)(20) is deemed to
satisfy the requirements of paragraphs (b)(8) and (b)(11) of Item 22
with respect to the recovery of erroneously awarded compensation
pursuant to Rule 10D-1(b)(1)).
    \214\ Proposed Item 12 of Form N-CSR; proposed Item 22(b)(20) of
Schedule 14A. We are also proposing to amend General Instruction D
to Form N-CSR to permit registered management investment companies
subject to proposed Rule 10D-1 to answer the information required by
proposed Item 12 by incorporating by reference from the company's
definitive proxy statement or definitive information statement.
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    Since our proposal would apply to any current or former executive
officer to recovery, rather than only the ``named executive officers''
whose compensation is subject to discussion in CD&A, we propose this
disclosure requirement as a separate item rather than as an amendment
to CD&A. If the listed issuer is required to provide CD&A under Item
402 of Regulation S-K, however, the listed issuer could choose to
include the disclosure required by proposed Item 402(w) in its CD&A
discussion of its recovery policies and decisions pursuant to Item
402(b)(2)(viii) of Regulation S-K. Such a practice could benefit
investors by disclosing all compensation recovery information in a
single location in the filing.
    We also considered implementing Section 10D(b)(1)'s disclosure
requirement by mandating that CD&A include the type of disclosure
currently addressed but not mandated under Item 402(b)(2)(viii) of
Regulation S-K, to the extent that such policies relate to financial
information required to be reported under the securities laws. This
approach, however, would always locate the disclosure in CD&A, a
section that requires discussion of the compensation awarded to, earned
by, or paid to the smaller group of ``named executive officers.''
Further, smaller reporting companies, emerging growth companies and
foreign private issuers are not required to provide CD&A in their
filings and proposed Item 402(w) disclosure would be required in some
filings that do not require CD&A disclosure.\215\ In addition, the
disclosure called for by CD&A is not limited to recovery triggered by
the restatement of a financial reporting measure, but instead
encompasses other adjustments that would reduce the size of an award or
payment, including with respect to an award based on a strategic or
operational measure.\216\
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    \215\ Smaller reporting companies and emerging growth companies
are not required to provide CD&A in accordance with the scaled
disclosure requirements contained in Item 402 of Regulation S-K. See
Item 402(l) of Regulation S-K and Section 102(c) of the JOBS Act.
Foreign private issuers and filers under the multijurisdictional
disclosure system (``MJDS'') who file annual reports on Form 20-F or
Form 40-F, respectively, are not subject to Item 402 of Regulation
S-K and are not required to provide CD&A. See Form 20-F and Form 40-
F. Similarly, foreign private issuers electing to use U.S. issuer
registration and reporting forms are not required to provide CD&A
because they will be deemed to comply with Item 402 by providing the
information required by Items 6.B and 6.E of Form 20-F, with more
detailed information provided if otherwise made publicly available
or required to be disclosed by the issuer's home jurisdiction or a
market in which its securities are listed or traded. See Item
402(a)(1) of Regulation S-K.
    In addition, Form N-CSR and Schedule 14A do not require
registered investment companies to provide CD&A disclosure.
Currently, registered investment companies are not subject to Item
402 disclosure. We are proposing that registered management
investment companies subject to proposed Rule 10D-1 would provide
information mirroring the proposed Item 402(w) disclosure in annual
reports on Form N-CSR pursuant to proposed Item 12 of that form, and
in proxy statements and information statements pursuant to proposed
Item 22(b)(20) of Schedule 14A.
    \216\ Item 402(b)(2)(viii) of Regulation S-K: ``Registrant
policies and decisions regarding the adjustment or recovery of
awards or payments if the relevant registrant performance measures
upon which they are based are restated or otherwise adjusted in a
manner that would reduce the size of an award or payment.''
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    We are also proposing amendments to the Summary Compensation Table
disclosure requirements. A new instruction to the Summary Compensation
Table would require that any amounts recovered pursuant to a listed
issuer's erroneously awarded compensation recovery policy reduce the
amount reported in the applicable column for the fiscal year in which
the amount recovered initially was reported, and be identified by
footnote.\217\ For example, if a listed issuer reported that in 2016
its Principal Executive Officer earned $1 million in non-equity
incentive plan award compensation, and in 2017 a restatement of 2016
financial statements resulted in recovery of $300,000 of that
incentive-based compensation, the 2017 Summary Compensation Table would
revise the 2016 reported amount to $700,000, with footnote disclosure
of the $300,000 recovered. The Summary Compensation Table ``total''
column would also be revised the same way. The new instruction would
apply in any filing requiring Summary Compensation Table disclosure
covering the affected fiscal year, including in Securities Act
registration statements.
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    \217\ Proposed Instruction 5 to Item 402(c), and proposed
Instruction 5 to Item 402(n).
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    We are proposing that the disclosure required by proposed Item
402(w) be provided in interactive data format using XBRL using block-
text tagging.\218\ The interactive data would have to be provided as an
exhibit to the definitive proxy or information statement filed with the
Commission and as an exhibit to the annual report on Form 10-K.\219\
Issuers would be required to prepare their interactive data using the
list of tags the Commission specifies and submit them with any
supporting files the EDGAR Filer Manual prescribes.\220\ This
requirement generally would apply to all listed issuers.\221\ We
believe requiring the data to be tagged would lower the cost to
investors of collecting this information, and would permit data to be
analyzed more quickly by shareholders, exchanges and other end-users
than if the data was provided in a non-machine readable format.
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    \218\ Data becomes interactive when it is labeled or ``tagged''
using a computer markup language such as XBRL that software can
process for analysis.
    \219\ Proposed Item 25 of Schedule 14A and proposed Item
601(b)(97) of Regulation S-K.
    \220\ The EDGAR Filer Manual is available at: http://www.sec.gov/info/edgar/edmanuals.htm.
    \221\ See n. 229, below.
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2. Listed Foreign Issuers
    Foreign private issuers, including Canadian issuers using the MJDS,
would be required to provide the same information called for by Item
402(w) in, and to file their erroneously awarded

compensation policies as an exhibit to, the annual reports they file
with the Commission pursuant to Section 13(a) of the Exchange Act.\222\
We propose to require foreign private issuers, including MJDS filers,
to disclose the information in annual reports they file on Form 20-F,
Form 10-K \223\ and Form 40-F, as applicable. Because securities
registered by these listed issuers are exempt from Section 14(a) of the
Exchange Act,\224\ they would not be required to disclose the
information in any proxy or consent solicitation materials with respect
to their securities.
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    \222\ A foreign private issuer required to file annual reports
with the Commission pursuant to Section 13(a) or Section 15(d) of
the Exchange Act may file on Form 20-F or, if it elects to use the
registration and reporting forms that U.S. issuers use, on Form 10-
K. MJDS filers are those eligible Canadian reporting issuers that
file registration statements and reports with the Commission in
accordance with the requirements of the MJDS. MJDS filers file
annual reports with the Commission pursuant to Section 13(a) or
Section 15(d) of the Exchange Act on Form 40-F.
    \223\ If a foreign private issuer elects to use the registration
and reporting forms that U.S. issuers use and files its annual
report on Form 10-K, it is deemed to comply with Item 402 of
Regulation S-K, an express form requirement of Form 10-K, by
complying with Item 402(a)(1) of Regulation S-K. Therefore, we are
also proposing to amend Item 402(a)(1) of Regulation S-K to include
proposed Item 6.F of Form 20-F, which calls for the same disclosure
as proposed Item 402(w).
    \224\ See Exchange Act Rule 3a12-3 (stating that securities
registered by a foreign private issuer, as defined in Rule 3b-4,
shall be exempt from sections 14(a), 14(b), 14(c), 14(f) and 16 of
the Exchange Act).
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    Form 20-F is used as either the registration statement or annual
report for foreign private issuers under the Exchange Act.\225\ The
proposals would amend Item 402(a)(1) to add proposed Item 6.F of Form
20-F to the list of mandatorily required executive compensation
disclosures for foreign private issuers.\226\ As proposed, Item 6.F
would mirror the disclosure requirements of Item 402(w). In addition, a
listed foreign private issuer that provides the disclosure required by
Item 6.F of Form 20-F would not need to provide Item 7.B \227\
disclosure of any individual excess incentive-based compensation
recovery transaction otherwise subject to Item 7.B.\228\ We are
proposing a similar amendment to Form 40-F to add Paragraph (17) of
General Instruction B to mirror the disclosure requirements of Item
402(w). As discussed above, listed issuers would generally be required
to tag this disclosure in an interactive data format.\229\
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    \225\ Form 20-F also sets forth disclosure requirements for
registration statements filed by foreign private issuers under the
Securities Act. Effective in 2000, the Commission incorporated in
Form 20-F the International Equity Disclosure Standards, which were
published by the International Organization of Securities
Commissions (IOSCO). Release No. 33-7745 (Sept. 28, 1999) [64 FR
53900]. The disclosure requirements for related party transactions
are set forth in Item 7.B of Form 20-F.
    \226\ The amendment would require a foreign private issuer that
elects to provide domestic Item 402 disclosure to provide Item
402(w) disclosure in its annual report.
    \227\ Item 7.B requires a description of related party
transactions for foreign private issuers.
    \228\ Proposed Instruction 4 to Item 7.B of Form 20-F.
    \229\ In general, foreign private issuers are required to submit
Interactive Data Files, as defined in Rule 11 of Regulation S-T, to
the Commission with their financial statements; however, those
foreign private issuers that prepare their financial statements in
accordance with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board are not
required to submit Interactive Data Files until the Commission
specifies on its Web site a taxonomy for use by such foreign private
issuers in preparing their Interactive Data Files. See Interactive
Data to Improve Financial Reporting, Release No. 33-9002 (Jan. 30,
2009) at n. 94 http://www.sec.gov/rules/final/2009/33-9002.pdf. See
also Letter to the Center for Audit Quality (Apr. 8, 2011) at http://www.sec.gov/divisions/corpfin/cf-noaction/2011/caq040811.htm. We
anticipate that foreign private issuers that do not yet submit a
data file with their financial statements would have a similar
accommodation for submitting proposed Item 6.F disclosure in a
tagged format.
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Request for Comment
    73. Is the proposed approach of having the listing standard require
an issuer to disclose its compensation recovery policy an appropriate
means to implement Sections 10D(a) and 10D(b)(1)?
    74. Would it be preferable to implement the disclosure requirement
only through issuer disclosure requirements? Alternatively, would it be
preferable to make the disclosure requirement solely a listing standard
requirement? If so, please explain why.
    75. Should a listed issuer be required, as proposed, to file as an
exhibit to its Exchange Act annual report its policy regarding the
recovery of incentive-based compensation that is based on or derived
from financial information required to be reported under the securities
laws? Are there better ways to disclose the policy? Should the policy
be included in the text of the Exchange Act annual report?
    76. Would proposed Item 402(w) and the proposed amendment to Item
404 elicit the appropriate level of detail about how issuers have
applied their recovery policies? Should listed issuers be required to
disclose the names of executive officers from whom recovery has been
forgone, the amounts forgone and the reason the listed issuer decided
not to pursue recovery? Should listed issuers be required to disclose
the names of executive officers from whom, as of the end of the last
completed fiscal year, excess incentive-based compensation had been
outstanding for 180 days or longer since the date the issuer determined
the amount the person owed? If not, are there different disclosures
that should be required?
    77. Should an issuer also be required to disclose the basis of the
determination of the amount of excess incentive-based compensation and
any critical estimates used in determining the amounts? Should a listed
issuer also be required to disclose the process or procedures by which
it will seek to recover excess incentive-based compensation for amounts
in which it is seeking recovery? Why or why not? If not, what should be
disclosed and why?
    78. As proposed, Item 402(w) disclosure would be required if at any
time during the last completed fiscal year either a restatement was
completed that required recovery pursuant to the listed issuer's
compensation recovery policy, or there was an outstanding balance of
excess incentive-based compensation based on application of that policy
to a prior restatement. Should the disclosure proposed in Item 402(w)
be required in both these circumstances? If not, please explain why.
Will it be clear if a restatement was completed during a fiscal year,
such that disclosure would be required? If not, what guidance should we
provide? Alternatively, should listed issuers be required to disclose
every restatement in Item 402(w)--even if recovery of excess incentive-
based compensation is not required?
    79. Should Item 402(w) disclosure be required even after an issuer
has been delisted if it has not recovered all compensation under the
policy?
    80. Would the proposed Item 402(w) disclosure properly track any
amount of incentive-based compensation subject to recovery through the
duration of the recovery obligation until that amount either is
recovered or the listed issuer concludes that recovery would be
impracticable? If not, how should we revise the disclosure requirement
to better track such amounts?
    81. Is there any additional information that would be important to
investors that should be disclosed?
    82. Should the disclosure proposed by Item 402(w) of Regulation S-K
be required only in annual reports and proxy and consent solicitations,
as proposed? If not, please explain why. Should the disclosure of a
listed issuer's application of its recovery policy be implemented by
amending the executive compensation disclosure requirements of Item
402, as proposed? Alternatively, should it be implemented

by amending the Item 407 corporate governance disclosure requirements,
or by adopting a new Item of Regulation S-K? If so, please explain why.
    83. Should a listed issuer only be required to provide the
disclosure proposed by Item 402(w) in a report to its listing exchange
or association, rather than in its annual reports and proxy and consent
solicitations? If detailed notification is provided to its exchange or
association, what type of disclosure, if any, should be made in a
listed issuer's Commission filings? Alternatively, should a listed
issuer be required to provide the proposed Item 402(w) disclosure and,
in addition, be required to make a separate notification to its
exchange or association?
    84. How would the proposed Item 402(w) disclosure be used by
institutional and retail investors, investment advisers, and proxy
advisory firms in making voting decisions and recommendations on
matters such as director elections and executive compensation?
    85. Should we require that the disclosure required by proposed Item
402(w) be tagged in XBRL format, as proposed? Should we require a
different format, such as, for example, eXtensible Markup Language
(XML)? Would tagging these disclosures enhance the ability of
shareholders and exchanges to assess issuers' compliance with their
recovery policies? Alternatively, instead of requiring that either of
these disclosures be tagged, should tagging this disclosure be
optional?
    86. Is the burden to implement the proposed tagging requirements
comparatively greater for smaller reporting companies and emerging
growth companies than for other issuers, such that we should exempt
them or provide them a phase-in period for this requirement? If so,
please explain the differential burden and how long a phase-in period
it would justify.
    87. We anticipate that foreign private issuers would not be
required to submit an electronic data file with proposed Item 6.F
disclosure until they submit financial statement information in an
electronic data file. Is there a reason to require this information to
be tagged before financial statement information is available in an
electronic data file? What would the relative costs and benefits be of
filing this information for the first time together or filing them
separately?
    88. Is the proposed instruction to Item 404(a), which would exclude
a transaction involving recovery of excess incentive-based compensation
that is disclosed pursuant to Item 402(w) from disclosure as a related
party transaction, appropriate? Why or why not?
    89. In the Summary Compensation Table, should any amount recovered
pursuant to a listed issuer's recovery policy reduce the amount
reported in the applicable column for the fiscal year in which the
amount recovered initially was reported, as proposed? For example, with
respect to equity awards, should the then-probable grant date fair
value reported be reduced by the portion of that grant date fair value
attributable to the number of shares or options recovered? Should this
disclosure be required in any filing containing Summary Compensation
Table disclosure? Should we require similar reductions in amounts
reported in compensation tables required for registered management
investment companies? Why or why not? Are there any special
considerations relating to registered management investment companies
that make disclosing this information more or less useful than similar
disclosure by operating companies? If so, please describe.
    90. Our rules permit emerging growth companies and smaller
reporting companies to provide scaled disclosure of certain
requirements. Should the proposed disclosure rules for incentive-based
compensation recovery policies be scaled for these companies? If so,
please explain why and in what manner.
    91. Is the disclosure proposed to be included in annual reports on
Form N-CSR and proxy statements and information statements that mirrors
the proposed disclosure in Item 402(w) appropriate for registered
management investment companies subject to the rule? Should it be
modified and, if so, how? Is it appropriate to include disclosure in
both Form N-CSR reports and proxy statements and information
statements? Should we, as proposed, amend General Instruction D to
permit registered management investment companies to answer proposed
Item 12 of Form N-CSR by incorporating by reference information from
definitive proxy statements and definitive information statements? Why
or why not? Should the proposed disclosure appear elsewhere in addition
to, or in lieu of, reports on Form N-CSR and proxy and information
statements, and, if so, where (e.g., the Statement of Additional
Information)? Should we require that registered management investment
companies tag these disclosures in XBRL format, as proposed? Why or why
not? Are there any special considerations relating to registered
management investment companies that make tagging this information more
or less useful than similar tagging by operating companies? If so,
please describe.
    92. Should listed foreign private issuers, including MJDS filers,
be exempt from the requirement to provide disclosure about compensation
recovery policies? If so, please explain why.

E. Indemnification and Insurance

    State indemnification statutes, indemnification provisions in an
issuer's charter, bylaws, or general corporate policy and coverage
under directors' and officers' liability insurance provisions may
protect executive officers from personal liability for costs incurred
in a successful defense against a claim or lawsuit resulting from the
executive officer's service to the issuer.\230\ Commenters requested
clarification about whether issuers may indemnify executive officers
whose compensation is recovered due to no fault of their own.\231\ If
the Commission does not prohibit such arrangements, these commenters
asserted that issuers should be required to disclose the existence of
these agreements in their proxy statements and other filings.
---------------------------------------------------------------------------

    \230\ In the context of Securities Act registration statements,
a registrant is required to ``state the general effect of any
statute, charter provisions, by-laws, contract or other arrangements
under which any controlling persons, director or officer of the
registrant is insured or indemnified in any manner against liability
which he may incur in his capacity as such.'' Item 702 of Regulation
S-K.
    \231\ See letters from Towers Watson and Baker, Donelson,
Bearman, Caldwell & Berkowitz, PC.
---------------------------------------------------------------------------

    We believe that indemnification arrangements may not be used to
avoid or nullify the recovery required by Section 10(D). Section 10D's
listing standard requirement that ``the issuer will recover'' is
inconsistent with indemnification because a listed issuer does not
effectively ``recover'' the excess compensation from the executive
officer if it has an agreement, arrangement or understanding that it
will mitigate some or all of the consequences of the recovery.\232\
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    \232\ See Cohen v. Viray, 622 F.3d 188, 195 (2d Cir. 2010)
(holding that an indemnification agreement cannot be used to release
chief executive officer and chief financial officer from liability
to repay compensation under Section 304 of SOX, in part because
``indemnification cannot be permitted where it would effectively
nullify a statute''); see, also Senate Report at 136 (``[I]t is
unfair to shareholders for corporations to allow executives to
retain compensation that they were awarded erroneously.''). To the
extent that an issuer indemnifies an executive officer, arranges for
or provides insurance protecting against the risk that incentive-
based compensation will be recovered pursuant to the issuer's
recovery policy, whether directly by purchasing this coverage or
indirectly by increasing the executive compensation to facilitate
the executive's purchase of this coverage, the executive officer
retains the excess compensation to which he or she was not entitled.

---------------------------------------------------------------------------

    Congress designed the recovery policy required by Section 10D to
apply on a no-fault basis, requiring listed issuers to develop and
implement a policy to recover ``any compensation in excess of what
would have been paid to the executive officer had correct accounting
procedures been followed.'' \233\ Indemnification arrangements that
permit executive officers to retain compensation that they were not
entitled to receive based on restated financial statements
fundamentally undermine the purpose of Section 10D.\234\
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    \233\ See Senate Report at 136.
    \234\ Cf. First Golden Bancorporation v. Weiszmann, 942 F.2d
726, 729 (10th Cir. 1991) (finding any attempt by a corporate
insider to seek indemnity against liability for short-swing profits
under Section 16(b) of the Exchange Act void as against public
policy where Congress had a clear intent to provide a ``catch-all,
prophylactic remedy, not requiring proof of actual misconduct.'').
---------------------------------------------------------------------------

    We further believe that Section 29(a) of the Exchange Act would
render any indemnification agreement unenforceable to the extent that
the agreement purported to relieve the issuer of its obligation under
Section 10(D), the proposed rule and rule amendments, and a resulting
listing standard to recover erroneously-paid incentive compensation.
Section 29(a) provides that ``[a]ny condition, stipulation, or
provision binding any person to waive compliance with any provision of
this title or of any rule or regulation thereunder, or of any rule of a
self-regulatory organization, shall be void.'' \235\ As courts have
noted, ``by its terms, Section 29(a) `prohibits waiver of the
substantive obligations imposed by the Exchange Act.' . . . . The
underlying concern of this section is `whether the [challenged]
agreement weakens [the] ability to recover under the Exchange Act.' ''
\236\ Thus, we believe that Section 29(a) would not permit an
indemnification agreement to undermine an issuer's right and obligation
to recover excess incentive-based compensation.\237\
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    \235\ 15 U.S.C. 77cc. National securities exchanges and national
securities associations are self-regulatory organizations. 15 U.S.C.
78c(a)(26).
    \236\ AES Corp. v. The Dow Chemical Company, 325 F.3d 174, 179
(3d Cir. 2003) (quoting Shearson/American Express, Inc. v. McMahon,
482 U.S. 220, 228, 230 (1987)).
    \237\ See Cohen v. Viray, 622 F.3d at 195 (citing Section 29(a)
in rejecting indemnification against SOX Sec.  304 liability);
Allied Artists Pictures Corp. v. Giroux, 312 F. Supp. 450 (S.D.N.Y.
1970) (Section 29(a) rendered general release given by corporation
to former chairman ``unenforceable as a matter of law'' in action by
corporation to recover short-swing profits action under Section
16(b) of the Exchange Act).
---------------------------------------------------------------------------

    For these reasons, Rule 10D-1, as proposed, would prohibit a listed
issuer from indemnifying any executive officer or former executive
officer against the loss of erroneously awarded compensation.\238\
Further, while an executive officer may be able to purchase a third-
party insurance policy to fund potential recovery obligations, the
indemnification prohibition would prohibit an issuer from paying or
reimbursing the executive for premiums for such an insurance policy.
For the reasons stated above, we believe that indemnification and
insurance premium payment or reimbursement arrangements would frustrate
Section 10D's ultimate purpose of preventing an executive officer from
retaining compensation ``that the executive would not have received if
the accounting was done properly and was not entitled to.'' \239\
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    \238\ Proposed Rule 10D-1(b)(1)(v).
    \239\ See Senate Report at 135.
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Request for Comment
    93. Should we require the exchanges to adopt listing standards that
would prohibit issuers from indemnifying executive officers and/or
funding the purchase of insurance to protect against the risk that an
executive officer will be subject to the issuer's recovery policy, as
proposed?
    94. Should such listing standards also prohibit issuers from
indemnifying executive officers' litigation expenses in recovery
actions?
    95. As noted above, the anti-indemnification provisions of Rule
10D-1 would prohibit agreements, arrangements or understandings that
directly or indirectly mitigate some or all of the consequences of
recovery. Will the exchanges and issuers be able to distinguish between
payments that are made to mitigate the effect of a recovery and those
that are paid as compensation in the ordinary course of business?
    96. Should we define ``indemnification'' for purposes of the
recovery under Section 10D? If so, how should it be defined? Should it
require that there be an agreement on the part of the indemnitor in
advance of the event for which the indemnitee is being indemnified?

F. Transition and Timing

    We received a number of comments regarding timing and transition
issues. Commenters generally advocated for prospective application of
the recovery policy required by the listing standard. Commenters who
addressed the application of Section 10D to former executive officers
expressed concern about retroactive application to persons who were
executive officers before Section 10D was enacted.\240\ Some commenters
recommended specific dates after which incentive-based compensation
should be subject to recovery, such as the enactment date of the
Act,\241\ the effective date of the final implementing rules,\242\ the
effective date of the listing standards approved by the
Commission,\243\ or the date the issuer implements the listing
standard.\244\
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    \240\ See letters from Baker, Donelson, Bearman, Caldwell &
Berkowitz, PC; Davis Polk & Wardwell; and Towers Watson.
    \241\ See letter from Compensia, Inc.
    \242\ See letter from Davis Polk & Wardwell LLP.
    \243\ See letter from Center on Executive Compensation.
    \244\ See letter from ABA Business Law Section.
---------------------------------------------------------------------------

    Commenters also expressed concerns regarding how the recovery
policy would affect existing compensation contracts and
agreements.\245\ Commenters asserted that issuers may be unable to
apply recovery policies retroactively to arrangements in which
compensation already has been granted or earned, or to compensation
provided pursuant to pre-existing employment agreements.\246\ One
commenter recommended that the Commission establish a grandfathering
rule that would exempt incentive-based compensation awards granted
before the effective date of the Commission's final rules implementing
Section 10D.\247\ Another commenter asked whether the recovery policy
would apply to compensation paid from the date the policy is effective,
regardless of contract terms, and when issuers would be required to
make their recovery policies first enforceable.\248\
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    \245\ See letters from Baker, Donelson, Bearman, Caldwell &
Berkowitz, PC, American Benefits Council and Towers Watson.
    \246\ See letters from ABA Business Law Section; American
Benefits Council; and Davis Polk & Wardwell.
    \247\ See letter from American Benefits Council.
    \248\ See letter from Towers Watson.
---------------------------------------------------------------------------

    Additionally, some commenters suggested that the Commission provide
for delayed compliance after the effective date of proposed Rule 10D-1
or approval of the listing standards, during which time issuers could
develop and implement a recovery policy and make necessary plan
amendments. These commenters recommended a 12-month period following
Commission approval of the listing standards,\249\ or a one-year period
after the issuance of final rules,\250\ for issuers to develop and
implement their recovery policies and make any necessary plan
amendments.
---------------------------------------------------------------------------

    \249\ See letter from Center on Executive Compensation.
    \250\ See letter from American Benefits Council.
---------------------------------------------------------------------------

    We propose that each exchange file its proposed listing rules no
later than 90

days following publication of the final adopted version of Rule 10D-1
in the Federal Register, and that its rules be effective no later than
one year following that publication date,\251\ and that each listed
issuer shall adopt the recovery policy required by this section no
later than 60 days following the date on which the exchanges' rules
become effective.\252\ We also propose that each listed issuer be
required to recover all erroneously awarded incentive-based
compensation received by executive officers and former executive
officers as a result of attainment of a financial reporting measure
based on or derived from financial information for any fiscal period
ending on or after the effective date of Rule 10D-1 and that is
granted, earned or vested on or after the effective date of Rule 10D-1
pursuant to the issuer's recovery policy.\253\ Finally, we propose that
a listed issuer be required to file the required disclosures in the
applicable Commission filings required on or after the date on which
the exchanges rules become effective.\254\
---------------------------------------------------------------------------

    \251\ Proposed Rule 10D-1(a)(2)(i).
    \252\ Proposed Rule 10D-1(a)(2)(ii).
    \253\ Id.
    \254\ Id.
---------------------------------------------------------------------------

    In light of the statutory purpose of Section 10D, we think it is
appropriate to require exchanges to adopt listing standards that
require issuers to comply with recovery policies that apply to
incentive-based compensation that is based on or derived from financial
information for periods that end on or after the effective date of Rule
10D-1. Issuer compliance would be required whether such incentive-based
compensation is received pursuant to a pre-existing contract or
arrangement, or one that is entered into after the effective date of
the exchange's listing standard.
Request for Comment
    97. Is the proposed schedule for exchanges to file their proposed
listing rules and have them effective following the effective date of
proposed Rule 10D-1 workable and appropriate? Similarly, is the
proposal to require each listed issuer to adopt the required recovery
policy within 60 days following the effective date of the exchanges'
listing rules workable and appropriate? If not, what other schedule
should apply?
    98. Should the Commission provide that the recovery policy will
apply to require recovery of all erroneously awarded incentive-based
compensation received by a current or former executive officer on or
after the effective date of Rule 10D-1 that results from attaining a
financial reporting measure based on or derived from financial
information for periods that end on or after the effective date of Rule
10D-1, as proposed? Alternatively, should the recovery policy apply to
incentive-based compensation received by an executive officer on or
after the effective date of the exchange's listing standard that
results from attaining a financial reporting measure based on or
derived from financial information for periods that end on or after the
effective date of Rule 10D-1? If neither of these alternatives, what
date(s) would be more appropriate and why? Should the Commission
consider the date of compensation agreements and the ability of issuers
to modify those agreements as part of the transition? If so, how?
    99. Is there anything the Commission should do to address the
potential effect proposed Rule 10D-1 will have on existing compensation
plans and employment agreements that do not contemplate recovery under
a policy required by the rule and rule amendments implementing Section
10D? To what extent will issuers need to amend their existing
compensation plans and employment agreements to provide for the
application of the recovery policy? Should the recovery policy only
apply to new compensation plans and employment agreements entered into
after the effective date of the exchange's listing standard? Why or why
not?
    100. As proposed, an exchange may not list an issuer that it has
delisted or that has been delisted from another exchange for failing to
comply with its recovery policy until it comes into compliance with
that policy.\255\ In this circumstance, should the exchange rules
prohibit the issuer from obtaining a new listing at the same or a
different exchange? Why or why not? If so, for how long?
---------------------------------------------------------------------------

    \255\ Proposed Rule 10D-1(b)(1)(vi), described in Section
II.C.2.c, above.
---------------------------------------------------------------------------

    101. Are there sufficient enforcement mechanisms to ensure
compliance with the listing standard? Why or why not?

General Request for Comment

    We request and encourage any interested person to submit comments
on any aspect of our proposals, other matters that might affect the
amendments, and any suggestions for additional changes. With respect to
any comments, we note that they are of greatest assistance to our
rulemaking initiative if accompanied by supporting data and analysis of
the issues addressed in those comments and by alternatives to our
proposals, where appropriate.

III. Economic Analysis

    As discussed above, Section 954 of the Dodd-Frank Act amends the
Exchange Act to include new Section 10D, which requires the Commission
to direct the exchanges and associations to prohibit the listing of
issuers that do not develop and implement policies to recover certain
incentive-based compensation. The policies must provide that, in the
event that the issuer is required to prepare an accounting restatement
due to material noncompliance with any financial reporting requirement
under the securities laws, the issuer will recover any compensation in
excess of what would have been paid under the accounting restatement
from any of its current or former executive officers who received
incentive-based compensation during the three-year period preceding the
date of the required restatement. Section 10D also calls for the
listing standards to require each issuer to develop and implement a
policy providing for disclosure of the issuer's policy on incentive-
based compensation that is based on financial information required to
be reported under the securities laws. We are proposing a new rule and
rule amendments to satisfy the statutory mandates of Section 10D.
    We have performed an analysis of the main economic effects that may
flow from the rule and rule amendments being proposed today. We
consider the economic impact--including the costs and benefits and the
impact on efficiency, competition, and capital formation--of the
proposed rule requirements on issuers and other affected parties,
relative to the baseline discussed below.\256\ We also consider the
potential costs and benefits of reasonable alternative means of
implementing Section 10D. Where practicable, we have attempted to
quantify the effects of the proposed rule and rule amendments; however,
in certain cases, we are unable to do so

because we lack the data necessary to provide a reasonable estimate.
---------------------------------------------------------------------------

    \256\ Section 3(f) of the Exchange Act and Section 2(c) of the
Investment Company Act require us, when engaging in rulemaking that
requires us to consider or determine whether an action is necessary
or appropriate in the public interest, to consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f); 15 U.S.C. 80a-2(c). Further, Section 23(a)(2) of the
Exchange Act requires us, when proposing rules under the Exchange
Act, to consider the impact that any new rule would have on
competition and to not adopt any rule that would impose a burden on
competition that is not necessary or appropriate in furtherance of
the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    We request comment on all aspects of the economic effects,
including the costs and benefits of the proposals and possible
alternatives. We also request comment on any effect the proposed
requirements may have on efficiency, competition and capital formation.
We appreciate comments that include both qualitative information and
data quantifying the costs and the benefits identified in the analysis
or alternative implementations of the proposed rule and rule
amendments.

A. Baseline

    The proposed rule and rule amendments require national securities
exchanges and national securities associations to establish listing
standards that would require each issuer to implement and disclose a
policy providing for the recovery of erroneously paid incentive-based
compensation. Consistent with Section 10D, the proposed rule and rule
amendments require that the recovery of incentive-based compensation be
triggered in the event the issuer is required to prepare an accounting
restatement due to material noncompliance with any financial reporting
requirement under the securities laws. In order to reduce the
likelihood of a material accounting error, executive officers may have
an enhanced incentive to ensure that greater care is exerted in
preparing accurate financial reports, or a reduced incentive to engage
in inappropriate accounting practices for the purpose of increasing
incentive-based compensation awarded to them.\257\ While these
incentives could result in high-quality financial reporting that would
benefit investors, they may also alter operating decisions of executive
officers or divert resources away from activities that may involve more
complex accounting judgments.
---------------------------------------------------------------------------

    \257\ We note that not all executive officers affected by the
proposed rule and rule amendments may have the ability to directly
affect the financial reporting of the issuer.
---------------------------------------------------------------------------

    The proposed requirement that an issuer implement a recovery policy
would introduce uncertainty about the amount of incentive-based
compensation the executive officer will be able to retain. As a result,
executive officers may demand that incentive-based compensation
comprise a smaller portion of their pay packages, or that they receive
a greater total amount of compensation, to account for the possibility
that the awarded incentive-based compensation may be reduced due to
future recovery. With these possible changes to the pay packages of
executive officers, overall executive compensation may become less
sensitive to the performance of the issuer, and the interests of the
executive officers could diverge from those of the shareholders.
Further, to the extent that executive officers respond negatively to
the expected effects of the compensation recovery policies developed
and implemented by issuers, the proposed rule and rule amendments may
cause affected issuers to be less able to attract and retain executive
talent, when competing for that talent against unlisted companies. We
note that there may be other factors affecting the ability of an issuer
to attract and retain executive talent. Further, the incremental effect
of the proposed rule and rule amendments is mitigated to the extent
that the labor markets for executives at listed issuers and at unlisted
issuers do not overlap.
    To assess the economic impact of the proposed rule and rule
amendments, we are using as our baseline the current state of the
market without a requirement for listed issuers to implement and
disclose a compensation recovery policy consistent with Section 10D.
    The proposed rule and rule amendments would dictate listing
standards that require the recovery of excess incentive-based
compensation that is based on financial reporting measures, including
stock price and total shareholder return (``TSR''). Performance-based
compensation can be either short-term or long-term, and each type can
potentially be tied to different measures of performance. One study
\258\ found that, in the short-term incentive plans of chief executive
officers (CEOs) at S&P 1500 companies in 2012, the three most common
financial reporting measures used as performance metrics were earnings
(36 percent), revenue (27 percent), and operating income (26 percent).
In contrast, in long-term incentive plans, the three most common
financial reporting measures used to compensate CEOs were TSR (48
percent), earnings (31 percent), and revenue (17 percent).\259\ While
earnings also was frequently used as a performance measure in long-term
incentive plans, TSR was the most frequent metric used for such plans.
The use of TSR was far less prevalent in short-term incentive plans,
where only 10 percent of plans used it.\260\ Based on Commission staff
analysis of 145 randomly sampled issuers drawn from the full population
of firms (both domestic and foreign) that filed an annual proxy
statement in calendar year 2013, we estimate that approximately 21
percent of issuers used stock price and/or TSR as an element of their
performance-based compensation.\261\
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    \258\ See Equilar Measuring Short-Term and Long-Term Performance
in 2012 (May 28, 2013), available at http://www.equilar.com/publications/26-measuring-short-term-and-long-term-performance-in-2012.html.
    \259\ See Equilar Measuring Short-Term and Long-Term Performance
in 2012 (May 28, 2013).
    \260\ Performance-based compensation may be tied to multiple
measures of performance. The average number of performance measures
to evaluate performance in the short-term and long-term is 1.8 and
1.7, respectively. See Equilar Measuring Short-Term and Long-Term
Performance in 2012 (May 28, 2013).
    \261\ We estimated the percentage of issuers that use stock
price and/or TSR as performance metrics based on Commission staff
analysis of information disclosed in annual proxy statements (DEF
14A). The sample comprises 145 proxy filers, which represents about
3 percent of the total number of DEF 14A filers in calendar year
2013. Staff manually examined the CD&A in each of the 145 proxy
statements to find that 21 percent of the 145 randomly sampled
issuers disclosed the use of stock price and/or TSR as compensation
performance metrics in 2013. Another 30 percent of the 145 randomly
sampled issuers do not disclose whether they use compensation
performance metrics; however, if these companies use stock price
and/or TSR as a compensation performance metric, it is likely not a
material element of their compensation because Item 402 of
Regulation S-K calls for disclosure in the CD&A if a performance
target is a material element of compensation policies and practices.
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    Under the proposed rule and rule amendments, the trigger for the
recovery of excess incentive-based compensation would be when the
issuer is required to prepare an accounting restatement as the result
of a material error that affects a financial reporting measure based on
which executive officers received incentive-based compensation. Hence,
not all accounting restatements would trigger a recovery of
compensation that was earned as a result of meeting performance
measures. Using incentive-based compensation tied to revenue as an
example, in order for that compensation to be required to be recovered,
there would have to be a material accounting error that affects
revenue. Based on one recent study, only 15 percent of all Item 4.02-
reported accounting restatements made between 2005 and 2012 were due to
errors involving revenue.\262\ If the issuers that

had a material accounting error in revenue had been subject to the
proposed rule requirements, those issuers that awarded incentive-based
compensation tied to the restated revenue or other measures that are
affected by the restatement of revenue would be required to recover the
incentive-based compensation paid to executive officers.\263\
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    \262\ See Scholz, S. 2013. ``Financial Restatement: Trends in
the United States: 2003-2012.'' Center for Audit Quality, available
at: http://thecaq.org/reports-and-publications/financial-restatement-trends-in-the-united-states-2003-2012/financial-restatement-trends-in-the-united-states-2003-2012. In referring to
findings of the study, we use the phrase Item 4.02-reported
accounting restatement when the issuer filed an Item 4.02 to Form 8-
K in connection with such restatement. The study characterizes these
as ``4.02 restatements'' and observes that the filing of Item 4.02
to Form 8-K is required when an accounting error renders previously-
filed financial statement unreliable. The study also comments that
these are generally more serious than other restatements, which it
refers to as ``non-4.02 restatements.''
    \263\ Incentive-based compensation tied to financial reporting
measures that are affected by more reported items on the financial
statements is more likely to be recovered. For example, incentive-
based compensation tied to earnings or operating income is more
likely to be recovered because material accounting errors that
involve either revenue or expenses could impact these measures and
thereby trigger a required recovery. Between 2005 and 2012, 52
percent of significant restatements involved operating expenses. See
Scholz, S. 2013. ``Financial Restatement: Trends in the United
States: 2003-2012.'' Center for Audit Quality.
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    Further, the incidence of events where incentive-based compensation
would be required to be recovered is affected by the number of
restatements based on material errors that occur. A recent study
reports that between 2005 and 2012 there was an average of 531 Item
4.02-reported accounting restatements per year, but the incidence of
accounting restatements steadily declined over this period.\264\ In
calendar year 2012, there were 255 Item 4.02-reported accounting
restatements, which represent approximately three percent of the
population of issuers that potentially could have had an Item 4.02-
reported accounting restatement.\265\ This suggests that an event that
would require an issuer to recover compensation (i.e., payment of
incentive-based compensation tied to a financial reporting measure and
occurrence of a material accounting error) would be relatively
infrequent.\266\
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    \264\ See Scholz, S. 2013. ``Financial Restatement: Trends in
the United States: 2003-2012.'' Center for Audit Quality.
    \265\ In calendar year 2012, approximately 8,000 registrants
filed annual reports on Form 10-K and would be required to file Item
4.02 to Form 8-K. We note that the proposed rule and rule amendments
would affect a subset of registrants subject to reporting on Form 8-
K (i.e., the listed issuers).
    \266\ These estimates are based on historical rates and types of
restatements, which may not be indicative of future rates and types
of restatements.
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    The proposed rule and rule amendments would require exchanges to
apply the compensation recovery requirement to all listed issuers,
including emerging growth companies (EGCs), smaller reporting companies
(SRCs), foreign private issuers (FPIs), and controlled companies. We
estimate that proposed Rule 10D-1 would be applicable to 4,845
registrants.\267\ We estimate that, of those 4,845 registrants, there
are 706 SRCs, 376 EGCs, 511 FPIs (filing annual reports on Form 20-F),
and 128 MJDS issuers (filing annual reports on Form 40-F). There are a
limited number of registered management investment companies that also
would be affected by the proposed rule and rule amendments. We estimate
that there are approximately seven registered management investment
companies that are listed issuers and are internally managed, that may
have executive officers who receive incentive-based compensation.
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    \267\ We estimate the number of issuers subject to the proposed
rule based upon Commission staff analysis of issuers that filed
annual reports on Form 10-K, Form 20-F, or Form 40-F pursuant to
Section 12(b) of the Exchange Act in the period from 7/1/2013 to 6/
30/2014, regardless of the fiscal year of the filing. The staff used
text analysis of an issuer's Form 10-K to determine if the issuer is
an SRC. The staff performed a similar analysis of an issuer's Form
10-K and registration statement to determine if the issuer is an
EGC. Examining filings in this manner involves a certain degree of
error, and it is possible for issuers to be misclassified. Hence all
numbers in this analysis should be taken as estimates.
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    As outlined in the table below, we estimate that approximately 23
percent of all filers currently disclose some form of an executive
compensation recovery policy.\268\ We further estimate that
approximately four percent of SRCs, two percent of EGCs, three percent
of FPIs, and one percent of MJDS issuers disclose some form of a
recovery policy.
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    \268\ We estimate the number of issuers that have disclosed some
form of recovery policy based on Commission staff analysis of
information disclosed in Form 10-K, Form 20-F, Form 40-F, and an
issuer's annual proxy statement (DEF 14A). Staff used text analysis
and keyword searches similar to those of Babenko, Bennett, Bizjak,
and Coles in their working paper Clawback Provisions (2012)
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2023292. Examining filings in this manner
involves a certain degree of error, and it is possible for issuers
to be misclassified. Hence all numbers in this analysis should be
taken as estimates.

----------------------------------------------------------------------------------------------------------------
                                                                Number of                          Percent of
                                                               filers that        Number of        filers that
                                                               disclose a      filers affected     disclose a
                                                             recovery policy       (total)       recovery policy
----------------------------------------------------------------------------------------------------------------
All affected filers (total)...............................             1,116             4,845              23.0
SRCs......................................................                29               706               4.1
EGCs......................................................                 9               376               2.4
FPIs......................................................                17               511               3.3
MJDS......................................................                 1               128               0.8
All other filers..........................................             1,060             3,124              33.9
----------------------------------------------------------------------------------------------------------------

    We note that larger issuers are more likely to have already
implemented and disclosed a recovery policy. Using the staff estimates
discussed above, as of June 30, 2014, approximately 64 percent (305
issuers) of the issuers that comprise the S&P 500 and approximately 50
percent (713 issuers) of the issuers that comprise the S&P 1500 report
having a recovery policy of some form.\269\
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    \269\ A report by Equilar finds that the prevalence of recovery
policies in Fortune 100 companies has increased from less than 18
percent in 2006 to 84 percent in 2011 and more than 89 percent in
2013. See Equilar Clawback Policy Report (2013), available at http://info.equilar.com/rs/equilar/images/equilar-2013-clawbacks-policy-report.pdf. This increasing trend in the implementation of recovery
policies is supported by Babenko, Bennett, Bizjak, and Coles in
their working paper Clawback Provisions (2012).
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    In addition to the issuers referenced above, some issuers may have
experience with recovering executive compensation given existing
provisions of law concerning the recovery of such compensation under
certain circumstances. Section 304 of SOX contains a recovery provision
that is triggered when a restatement is the result of issuer
misconduct. This provision applies only to CEOs and chief financial
officers (``CFOs'') and the amount of required recovery is limited to
compensation received in the 12-month period following the first public
issuance or filing with the Commission of the improper financial
statements.\270\ In addition, the Interim Final Rules under Section 111
of EESA, as amended by ARRA, required institutions receiving assistance
under TARP to mandate that Senior Executive Officers and the next
twenty most highly compensated employees repay compensation if awards
based on statements of earnings, revenues, gains,

or other criteria were later found to be materially inaccurate.\271\ As
discussed above, relative to either SOX or EESA, the compensation
recovery requirement of the proposed rule and rule amendments has a
different scope because it would affect any current or former executive
officer of all listed issuers and would be triggered when the issuer is
required to prepare an accounting restatement due to material
noncompliance of the issuer with any financial reporting requirement
under securities laws, regardless of issuer or executive misconduct or
the role of the executive in preparing the financial statements.
Finally, we note that currently issuers other than SRCs, EGCs, and FPIs
are required to disclose in the CD&A, if material, their policies and
decisions regarding adjustment or recovery of named executive officers'
compensation if the relevant performance measures are restated or
adjusted in a manner that would reduce the size of an award or
payment.\272\
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    \270\ See 15 U.S.C. 7243.
    \271\ Under EESA a ``Senior Executive Officer'' is defined as an
individual who is one of the top five highly paid executives whose
compensation is required to be disclosed pursuant to the Securities
Exchange Act of 1934. See Department of Treasury, TARP Standards for
Compensation and Corporate Governance; Interim Final Rule (June 15,
2009), available at http://www.gpo.gov/fdsys/pkg/FR-2009-06-15/pdf/E9-13868.pdf.
    \272\ See Item 402(b)(2)(viii).
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    Many of the issuers that disclose having recovery policies do not
require misconduct on the part of the executive to trigger
recovery.\273\ In a review by Commission staff \274\ of a random sample
of 104 issuers with disclosed recovery policies, 51 issuers (49
percent) did not require misconduct on the part of the executive, 34
issuers (33 percent) required misconduct on the part of the executive,
and 19 issuers (18 percent) did not specify. By contrast, the proposed
rule and amendments would require all listed issuers to have a recovery
policy that applies to any material accounting error, without regard to
misconduct.
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    \273\ In a sample of 2,326 companies in the Corporate Library
database, DeHaan et al. (2013) find that 39 percent had compensation
recovery policies that did not require executive misconduct in order
to be triggered. DeHaan, Hodge, and Shevlin Does Voluntary Adoption
of a Clawback Provision Improve Financial Reporting Quality?