discriminatory in application and, thus, are not incentive-based
compensation and are not subject to various ``incentive plan''
disclosure under Item 402. See comment letter from ABA 1. See also
comment letter from Sutherland (also noting that tax-qualified
retirement plans are not considered incentive-based compensation in
the normal sense of that term). This commenter suggested that the
Commission not interpret ``incentive-based compensation'' to include
either tax-qualified or non-qualified plans, further suggesting that
all such compensation is provided for retirement, rather than as a
performance incentive. Because amounts contributed to qualified
plans may be affected by incentive-based awards, such as in the case
where the benefit formula for a plan includes amounts awarded as an
annual bonus, we disagree with this commenter's characterization of
such compensation as categorically lacking a performance incentive.
    \284\ We anticipate the effect will be modest. We believe that
incentive-based compensation will typically have only small and
indirect effects on amounts added to tax-qualified retirement plans.
26 U.S.C. 401(a)(17) precludes a tax-qualified retirement plan from
basing contributions or benefits on compensation in excess of an
annual limit ($305,000 in 2022). The compensation of many covered
executive officers will exceed this limit regardless of any
incentive-based compensation they may have been erroneously awarded.
In addition, 26 U.S.C. 415 provides a series of limits on benefits
under qualified defined benefit plans and on contributions and other
additions under qualified defined contribution plans. For example,
under these limitations, in 2022, annual additions with respect to a
participant in a defined contribution plan may not exceed $61,000
and a participant's annual benefit under a defined benefit plan may
not exceed $245,000.
---------------------------------------------------------------------------

    In order to mitigate potential conflicts of interest, any
determination that recovery would be impracticable in any of these
three circumstances must be made by the issuer's committee of
independent directors that is responsible for executive compensation
decisions. In the absence of a compensation committee, the
determination must be made by a majority of the independent directors
serving on the board. Such a determination, as with all determinations
under Rule 10D-1, is subject to review by the listing exchange.
    We acknowledge that there are circumstances in which pursuing
recovery of erroneously awarded compensation may not be in the interest
of shareholders. We have determined that limited board discretion to
determine when it would be impracticable to recover is necessary or
appropriate in the public interest and consistent with the protection
of investors. Permitting board discretion in these circumstances will
save issuers the expense of pursuing recovery in circumstances where
recovery would violate anti-alienation rules applicable to tax-
qualified retirement plans, or home country law, or where the direct
costs of recovery could exceed or be disproportionate to the
erroneously awarded compensation amounts. Balancing these concerns, the
standard we are adopting appropriately permits boards of directors to
evaluate whether to pursue recovery of erroneously awarded
compensation, but only in these limited circumstances.
c. Board Discretion Regarding the Means 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.
i. Proposed Amendments
    In the Proposing Release, in addition to addressing board
discretion regarding whether to recover excess incentive-based
compensation, the Commission addressed whether boards may exercise
discretion in effecting the means of recovery. The Proposing Release
recognized that the appropriate means of recovery may vary by issuer
and by type of compensation arrangement, and that consequently issuers
should be able to exercise discretion in how to accomplish recovery.
Regardless of the means of recovery utilized, the Proposing Release
indicated that issuers should recover excess incentive-based
compensation reasonably promptly, as undue delay would constitute
noncompliance with an issuer's recovery policy.
ii. Comments
    We received various comments on the Proposing Release relating to
whether boards may exercise discretion regarding the means of recovery.
    Commenters generally supported allowing board discretion regarding
the means of recovery.\285\ Some commenters noted the concept of
fungibility of assets, which would permit issuers to more readily
recover erroneously awarded compensation.\286\ Based on this concept of
fungibility, commenters recommended permitting issuers various means of
recovery, such as through canceling unrelated unvested compensation
awards,\287\ offsets against nonqualified deferred compensation and
unpaid incentive compensation,\288\ future compensation
obligations,\289\ or dividends on company stock owed to an executive
officer.\290\ Some commenters also recommended including in the final
rule specific instructions on how to compute the excess amount of
specific forms of incentive-based compensation and sought discretion to
recover the cash value of excess shares subject to recovery.\291\
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    \285\ See comment letters from ABA 1; Bishop; CEC 1; Compensia;
Exxon; and FSR. See also comment letters in response to the
Reopening Release from CEC 2; McGuireWoods (recommending flexibility
for boards to enter into settlement and repayment terms); and
Hunton.
    \286\ See comment letters from AFL-CIO; and Exxon.
    \287\ See comment letters from ABA 1; CEC 1; and WAW.
    \288\ See comment letters from Exxon; and WAW.
    \289\ See comment letters from Duane; and WAW.
    \290\ See comment letter from Exxon.
    \291\ See, e.g., comment letters from ABA 1 (recommending that,
for equity awards, recovery should first be sought from shares that
remain held, and that for the equity awards where the shares were
sold prior to recovery that the recovery be for the fair market
value on the date the erroneously awarded compensation amount is
determined, or if the shares were gifted, the fair market value on
the date of the gift); Duane (noting potential restrictions on an
executive's ability to liquidate securities and issuers' stock
retention requirements, and recommending recovery of stock awards
either in cash or in kind over reasonable periods of time); Exxon
(recommending cash value should be calculated at the time the shares
are ``received'' within the meaning of the rule to avoid
incentivizing executives to sell shares immediately on vesting); and
FSR (recommending basing the cash amount on the shares' value on the
date the issuer is required to prepare a restatement to address
manipulation concerns).
---------------------------------------------------------------------------

    Commenters also recommended that the final rules permit, or that
the Commission provide guidance or other confirmation relating to the
use of, nonqualified deferred compensation plans, holdback policies, or
otherwise deferring payment of incentive-based compensation to
facilitate potential future recovery.\292\ Other commenters highlighted
potential benefits to such set-offs.\293\ Some commenters additionally
recommended that netting overpayments with incentive-based compensation
underpayments resulting from restating financial statements for

different periods be permitted under the rules.\294\
---------------------------------------------------------------------------

    \292\ See, e.g., comment letters from ABA 1; AFL-CIO; Compensia;
and NACD.
    \293\ See, e.g., comment letters from Exxon (enhancing the
ability to recover promptly); CEC 1 (ease of recovery and ability to
recover the full pre-tax amount of excess compensation); and WAW
(reduced cost of recovery and risk of litigation with executives).
    \294\ See, e.g., comment letters from ABA 1; Bishop; CEC 1
(recommending disclosure to inform shareholders of recovery by
netting); Compensia; Mercer (suggesting that without netting
executives would be penalized and that making the executive whole
could distort the pay for performance relationship); NACD; SCG 1;
and SH&P. Two of these commenters suggested that this approach would
be fair and consistent with the ``no-fault'' standard of the
proposed rule. See comment letters from NACD; and SH&P.
---------------------------------------------------------------------------

    We also received varied comments regarding the timing requirements
for recovery ranging from recommendations to require ``immediate
recovery,'' \295\ input regarding the meaning of the ``reasonably
promptly'' guidance,\296\ and recommendations opposing time
limits.\297\ Some commenters recommended allowing deferred
repayments,\298\ with one noting that immediate recovery could result
in significant economic hardship to an executive officer and that a
deferred payment plan could increase the likelihood of collecting and
avoid potential litigation costs.\299\
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    \295\ See comment letter from CalPERS 1.
    \296\ See comment letter from Better Markets 1 (further
recommending requiring an explanation of the timing to discourage a
protracted recovery process).
    \297\ See, e.g., comment letters from Bishop (noting that
issuers will face circumstances beyond their control, such as
litigation by executives); CFA Institute 1 (recommending that the
listing exchange determine whether an issuer is complying with its
recovery policy); and NACD.
    \298\ See, e.g., comment letters ABA 1 (noting that there may be
circumstances where the executive is otherwise unable to repay the
excess amount); Bishop; Davis Polk 1; Ensco; and SCG 1 (recommending
that the rule permit discretion where the board determines
enforcement could affect the issuer's defense in a securities class
action). One of these commenters sought clarification that repayment
plans would not constitute prohibited personal loans under Exchange
Act Section 13(k). See comment letter from Bishop. See also comment
letters in response to the Reopening Release from ABA 2
(recommending discretion to permit a deferred payment plan);
McGuireWoods (recommending flexibility for boards to enter into
settlement and repayment terms); and Hunton.
    \299\ See comment letter from Davis Polk 1.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering the views of commenters, we continue to believe
that the adopted rules should provide boards discretion, subject to
certain reasonable restrictions, regarding the means of recovery and
are providing the following guidance to assist boards in exercising
that discretion.\300\ Rule 10D-1 does not limit the amount of
compensation the board is required to recover; however, the rule does
not permit boards to settle for less than the full recovery amount
unless they satisfy the conditions that demonstrate recovery is
impracticable.\301\
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    \300\ See Rule 10D-1(b)(1)(iii). For a discussion of how to
determine the amounts, see supra note 235.
    \301\ In that circumstance, the same conditions would apply as
for a determination to forgo recovery. See Section II.C.3.b.
---------------------------------------------------------------------------

    We recognize that the appropriate means of recovery may vary by
issuer and by type of compensation arrangement. We agree with
commenters that many different means of recovery may be appropriate in
different circumstances. Consequently, the final amendments permit
issuers to exercise discretion in how to accomplish recovery.
Nevertheless, in exercising this discretion, issuers should act in a
manner that effectuates the purpose of the statute: to prevent current
or former executive officers from retaining compensation that they
received and to which they were not entitled under the issuer's
restated financial results.
    Regardless of the means of recovery used, issuers should recover
erroneously awarded compensation reasonably promptly, because delays in
recovering excess payments allow executive officers to capture the time
value of money with respect to funds they did not earn, which should
instead belong to shareholders. Consistent with the discussion of the
timing in which the issuer must seek recovery in the Proposing Release,
the final rule clarifies that the issuer must pursue recovery
``reasonably promptly.'' \302\ The rule does not, however, adopt a
definition of ``reasonably promptly.'' We recognize that what is
reasonable may depend on the additional cost incident to recovery
efforts. We expect that issuers and their directors and officers, in
the exercise of their fiduciary duty to safeguard the assets of the
issuer (including the time value of any potentially recoverable
compensation), will pursue the most appropriate balance of cost and
speed in determining the appropriate means to seek recovery.
Furthermore, the rules do not prevent an issuer from securing recovery
through means that are appropriate based on the particular facts and
circumstances of each executive officer that owes a recoverable
amount.\303\
---------------------------------------------------------------------------

    \302\ See Rule 10D-1(b)(1).
    \303\ We note that unpaid amounts will be subject to disclosure
pursuant to 17 CFR 229.402(w)(1)(ii) and (iii).
---------------------------------------------------------------------------

    For example, an issuer may be acting reasonably promptly in
establishing a deferred payment plan that allows the executive officer
to repay owed erroneous compensation as soon as possible without
unreasonable economic hardship to the executive officer, depending on
the particular facts and circumstances.\304\ The final rules also do
not prohibit an issuer from establishing compensation practices that
account for the possibility of the need for future recovery; while we
acknowledge the many suggestions by commenters in this regard, we
decline to offer specific guidance on which methods may be appropriate,
as it will depend on the particular facts and circumstances applicable
to that issuer. Finally, we note that the final rules do not restrict
exchanges from adopting more prescriptive approaches to the timing and
method of recovery under their rules in compliance with Section 19(b)
of the Exchange Act, including after they have observed issuer
performance and use any resulting data to assess the need for further
guidelines to ensure prompt and effective recovery.
---------------------------------------------------------------------------

    \304\ In response to the commenter who asked for clarification
regarding whether a deferred repayment plan would be a prohibited
personal loan under 15 U.S.C. 78m(k), as a general matter, we would
not view such arrangements that are narrowly tailored to the
compensation being recovered and in order to facilitate full payment
as promptly as is reasonable under the circumstances as being a
prohibited personal loan.
---------------------------------------------------------------------------

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.
1. Proposed Amendments
    The Commission proposed to require that issuers disclose their
recovery policies as an element of the listing standards, so that
exchanges could commence de-listing proceedings for issuers that fail
to make the required disclosure, as well as those that fail to adopt
recovery policies or those that fail to comply with the terms of their
policy.
    In addition, the Commission proposed amendments to its rules and
relevant forms to require disclosure about, and the filing of, the
issuer's recovery policy. Specifically, the Commission proposed:
     Amending Item 601(b) of Regulation S-K to require that an
issuer file its recovery policy as an exhibit to its annual report on
Form 10-K;
     Adding Item 402(w) of Regulation S-K to require issuers to
disclose certain information about how they have

applied their recovery policies, including the date of and amount of
erroneously awarded compensation attributable to the accounting
restatement, any estimates that were used in determining the amount,
the amount that remains to be collected, and the names of, and amounts
owed by, executive officers where amounts due are owed or forgone;
     Amending the Summary Compensation Table requirements of
Item 402 of Regulation S-K to disclose the effect of any recovered
amount;
     Amending rules to require the new compensation recovery
disclosure pursuant to proposed Item 402(w) of Regulation S-K be
structured using machine-readable eXtensible Business Reporting
Language (``XBRL''); \305\ and
---------------------------------------------------------------------------

    \305\ The proposed structuring would be limited to block text
tagging of the disclosures, rather than any additional detail tags
for specific data points included within the compensation recovery
disclosures. See Proposing Release at Section II.D.1.
---------------------------------------------------------------------------

     Amending forms applicable to FPIs and listed funds to
require the same information called for by proposed Item 402(w) of
Regulation S-K.
    In the Reopening Release, the Commission requested comment on
whether additional disclosures would benefit investors, such as
disclosure of how issuers calculated the erroneously awarded
compensation, including their analysis of the amount of the executive
officer's compensation that is recoverable under the rule, and, for
incentive-based compensation based on stock price or TSR, disclosure
regarding the determination and methodology that an issuer used to
estimate the effect of stock price or TSR on erroneously awarded
compensation. The Reopening Release also sought comment on whether to
add check boxes to the Form 10-K cover page that indicate separately
(a) whether the previously issued financial statements in the filing
include an error correction, and (b) whether any such corrections are
restatements that triggered a compensation recovery analysis during the
fiscal year. The Commission additionally requested comment on whether
any specific data points that are included within the new compensation
recovery disclosure should be detail tagged using Inline XBRL.
2. Comments
    While commenters generally supported some level of disclosure about
an issuer's recovery policy, comments were mixed regarding the specific
disclosures that should be required. Some commenters generally
supported the proposed disclosure requirements, with several commenters
stating that required disclosure under the Federal securities laws
would promote consistency.\306\ One commenter specifically supported
the use of a listing standard requirement to disclose the issuer's
recovery policy,\307\ and others supported the proposed structure of
the disclosure requirements as they would facilitate exchanges' ability
to commence delisting proceedings for issuers that fail to make the
required disclosure.\308\ A few commenters recommended requiring the
issuer's recovery policy be posted on the issuer's website rather than
requiring it to be filed, as proposed.\309\
---------------------------------------------------------------------------

    \306\ See, e.g., comment letters from ABA 1; Better Markets 1;
and CFA Institute 1.
    \307\ See comment letter from Compensia.
    \308\ See comment letters from ABA 1; and Better Markets 1.
    \309\ See, e.g., comment letters from ABA 1 (recommending
following the compensation committee charter disclosure model which
relies on website disclosure and noting that many issuers disclose
their existing recovery policies on the corporate website and
investors are familiar with accessing corporate governance policies
there); and NACD.
---------------------------------------------------------------------------

    We received a range of comments on the specific proposed disclosure
requirements.\310\ Some commenters supported proposed Item 402(w),\311\
noting its relevance to say-on-pay and director election voting
decisions,\312\ and the insight the disclosure would provide into board
decision-making.\313\ Some commenters further supported requiring the
additional disclosure requirements on which we requested comment in the
Reopening Release.\314\ Another commenter suggested that the disclosure
would elicit a sufficient amount of detailed information about how a
listed issuer has enforced its compensation recovery policy.\315\ Some
commenters recommended expanding certain disclosure requirements.\316\
Another commenter recommended further clarification of the
requirements.\317\
---------------------------------------------------------------------------

    \310\ We received limited comment regarding the proposal to
adjust Summary Compensation Table disclosure, with one commenter
expressly supporting the proposal (see comment letter from ABA 1)
and another recommending that amounts recovered for periods earlier
than the three years presented should be reported in a footnote (see
comment letter from Mercer). One commenter questioned whether
reducing amounts reported in the Summary Compensation Table Stock
Awards and Option Awards columns would be inconsistent with
reporting other modifications under ASC Topic 718 and whether a
delay in grant date determination for share-based awards under ASC
Topic 718 could result from a recovery policy consistent with Rule
10-D-1. See comment letter from TCA. That commenter expressed
concern that such a delay would have a substantial and material
impact on the disclosure timing for those awards in the Summary
Compensation Table and Grants of Plan-Based Awards Table. We note
that, assuming the conditions for establishing a grant date under
ASC Topic 718 are otherwise met, having such a recovery policy
should not affect the issuer's determination.
    \311\ See, e.g., comment letters from As You Sow 1; Better
Markets 1; CII 1; CalPERS 1; and OPERS 1.
    \312\ See, e.g., comment letters from CalPERS 1; and CII 1
(noting its usefulness to institutional investors).
    \313\ See comment letter from OPERS 1.
    \314\ See, e.g., comment letters on the Reopening Release from
Better Markets 2 (supporting disclosure of how issuers calculate the
recoverable amount, especially with regards to compensation based on
stock price or TSR); CFA Institute 2; CII 3 (noting that such
disclosures could be particularly helpful in assessing the company's
executive compensation policies and practices for purposes of
shareholder voting); ICGN; Public Citizen 2; and Occupy. See also
comment letter from the Second Reopening Release from AFR 2
(supporting disclosure of how issuers calculate the recoverable
amount). But see comment letter on the Reopening Release from ABA 2
(generally supporting disclosure, but suggesting inclusion of stock
price and TSR would lead to complex disclosures regarding
determination and methodology).
    \315\ See comment letter from ABA 1 (supporting tracking any
amount of incentive-based compensation subject to recovery through
the duration of the recovery obligation until that amount either is
recovered or the issuer concludes that recovery would be
impracticable).
    \316\ See, e.g., comment letters from Better Markets 1; and
Public Citizen 1. These commenters recommended requiring
identification of each executive officer from whom recovery is
sought or obtained, the respective amounts, how the amounts were
determined, and the status of the recovery effort. See also comment
letters on the Reopening Release from CFA Institute 2; and ICGN
(supporting disclosure of the timing, and materiality
determination); and comment letter from ABA 1 (recommending
requiring the issuer to identify the incentive-based compensation
arrangements that were subject to recovery, to provide context for
the amount of excess incentive-based compensation resulting from the
restatement).
    \317\ See comment letter from ABA 1 (recommending guidance as to
when a restatement is considered completed for purposes of
triggering the disclosure requirement and clarification that
disclosure would be required where the issuer's calculation results
in no erroneously awarded compensation and where no such
compensation is recovered because the board determines recovery
would be impracticable).
---------------------------------------------------------------------------

    In contrast, some commenters recommended reducing or omitting
certain of the proposed disclosure requirements.\318\ A number of
commenters expressed concern or objected to identifying specific
executive officers from whom recovery has not yet been made or where

recovery was not pursued,\319\ others raised concerns that the
disclosure could violate data privacy laws of foreign
jurisdictions,\320\ and two others suggested that this disclosure would
invite second-guessing the board's decisions.\321\ Several of these
commenters offered various alternative approaches to the disclosure
requirement.\322\
---------------------------------------------------------------------------

    \318\ See, e.g., comment letters from BRT 1; CAP; Compensia;
Exxon; Japanese Bankers; Mercer; NACD; Pay Governance; S&C 1; and
UBS. A few commenters objected to the inclusion of the disclosure in
Item 402. See comment letter from Pay Governance (suggesting more
disclosure in the proxy statement would be administratively
burdensome); and comment letters from NACD; and Public Citizen 1
(recommending disclosure on Form 8-K). See also comment letters on
the Reopening Release from Davis Polk 3 (suggesting that disclosure
of the methodology for calculating the recoverable amounts would be
burdensome, lack comparability, and involve litigation risk);
McGuireWoods; and SCG 2 (suggesting that the disclosure could be
confusing and would add legal, audit, compensation consulting, and
other expenses).
    \319\ See, e.g., comment letters from BRT 1 (recommending board
discretion to omit individuals' names given the range of potential
factors including, security or safety concerns, the likelihood of
ongoing confidential legal negotiations, or the potential personal
impact of disclosure); CAP (expressing reputational concerns);
Mercer (recommending against the disclosure and suggesting that
exchanges could require individualized information in an issuer's
submission to the exchange if critical to their compliance
analysis); S&C 1 (suggesting that the specific identity of an
executive will in most cases not be material to the evaluation of
the boards' determination not to pursue recovery); and UBS
(suggesting that naming individuals from whom the issuer determines
not to recover is irrelevant and provides no benefit to
shareholders). See also comment letter on the Reopening Release from
McGuireWoods (recommending that compensation recovery disclosure
regarding non-named executive officers be generalized).
    \320\ See, e.g., comment letters from Exxon (expressing concern
that identifying the status of specific individuals in certain
European Union and other jurisdictions could violate local data
privacy laws); Japanese Bankers (expressing concern that the
proposed disclosure may violate local personal information
protection acts and noting that under Japanese law the scope of
separate disclosure for financial reporting purposes is limited to
certain highly compensated executives); and UBS (suggesting data
privacy laws or regulations in various foreign jurisdictions could
affect a listed issuer's ability to disclose personal information).
    \321\ See comment letters from ABA 1 (further noting the
requirement could subject executives to embarrassing disclosure as
to why they are unable to pay); and Compensia.
    \322\ See, e.g., comment letters from CAP (recommending
identifying only named executive officers); BRT 1 (recommending
providing board discretion over whether to identify executive
officers); and Japanese Bankers (recommending disclosure on forgone
recovery only for those executive officers responsible for preparing
and disclosing financial statements). See also comment letters from
ABA 1; and Mercer (recommending aggregate disclosure of amounts
forgone and outstanding together with the number of executives from
whom recovery was not pursued and amounts outstanding).
---------------------------------------------------------------------------

    In response to the request for comment in the Reopening Release
some commenters supported adding check boxes to the cover page of Form
10-K.\323\ Other commenters believed the check boxes would not provide
useful information to investors and were not consistent with the
Commission's modernization and simplification efforts.\324\
---------------------------------------------------------------------------

    \323\ See, e.g., comment letters on the Reopening Release from
CFA Institute 2; CII 3; ICGN (also supporting Form 8-K disclosure);
and Occupy. See also comment letter on the Second Reopening Release
from AFR 2.
    \324\ See, e.g., comment letters on the Reopening Release from
Davis Polk 3; McGuireWoods (stating that information regarding
restatements and recovery of compensation are sufficiently covered
by other disclosure rules such that this check box would provide
little additional informational value to investors); and SCG 2.
---------------------------------------------------------------------------

    We similarly received varied comments on our proposal to require
the disclosure be tagged using XBRL. Some commenters expressed support
for the proposed implementation of XBRL data tagging.\325\ Other
commenters opposed the data tagging requirement,\326\ while some
recommended making tagging optional,\327\ or exempting SRCs and EGCs in
view of the burden.\328\ In response to the request for comment in the
Reopening Release regarding compensation recovery disclosure being
separately detail tagged using Inline XBRL, some commenters supported
Inline XBRL requirements for the compensation recovery information,
suggesting that such requirements would lead to more timely and less
costly analysis of the new disclosures.\329\ In contrast, some other
commenters expressed concern or opposed the Inline XBRL requirements
discussed in the Reopening Release, citing compliance costs and lack of
comparability across filers as specific concerns.\330\
---------------------------------------------------------------------------

    \325\ See, e.g., comment letters from CII 1; CalPERS 1; and
OPERS 1 (contending that tagging would lower investors' costs to
collect the data and permit the information to be analyzed more
efficiently).
    \326\ See, e.g., comment letters from CCMC 1; Davis Polk 1; FSR;
FedEx 1; Hay Group; Mercer (recommending a comprehensive approach to
tagging the proxy statement); and Pearl Meyer. Many of these
commenters expressed concern regarding the cost of implementation
versus the perceived benefits, such as the utility of the
information to investors. See, e.g., comment letters from CCMC 1;
Davis Polk 1 (expressing concern about the comparability of the
data); FSR; FedEx 1; and Pearl Meyer.
    \327\ See comment letter from Hay Group.
    \328\ See comment letters from ABA 1; and Hay Group.
    \329\ See, e.g., comment letters on the Reopening Release from
CFA Institute 2; CII 3; and XBRL US (Aug. 30, 2021) (recommending
that the disclosure be tagged using Inline XBRL and be incorporated
into the definitive proxy or information statement).
    \330\ See, e.g., comment letters on the Reopening Release from
ABA 2; Davis Polk 3; and McGuireWoods. These commenters suggested
that varying recovery processes may necessitate custom tagging,
which would undermine comparability issues and thus limit the
benefits of tagging.
---------------------------------------------------------------------------

3. Final Amendments
    After considering the views of commenters, we are adopting
substantially as proposed rules to require that listed issuers disclose
their recovery policies as an element of the listing standards and to
require disclosure about, and the filing of, the issuer's recovery
policy, in Commission filings. After considering comments to the
Reopening Release, and in a change from the proposal, the final rules
will additionally require: disclosure relating to an issuer's
compensation recovery policy and recovery; tagging of the additional
information in Inline XBRL; and additional check box disclosure on the
cover of the Forms 10-K, 20-F, and 40-F.
    We believe Sections 10D(a) and (b) are intended to require listed
issuers to adopt, comply with, and provide disclosure about their
compensation recovery policies. Accordingly, Rule 10D-1 requires the
listing standards adopted by exchanges to include that listed issuers
disclose their recovery policies.\331\ As noted above, as a result of
implementing the disclosure requirement as an element of the listing
standards, we would expect exchanges to commence delisting proceedings
for issuers that fail to make the required disclosure. 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 permits 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.
---------------------------------------------------------------------------

    \331\ See 17 CFR 240.10D-1(b)(2).
---------------------------------------------------------------------------

    The 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. To provide consistent disclosure across exchanges, Rule 10D-1
provides that the required disclosure about the issuer's recovery
policy must be filed in accordance with the disclosure requirements of
the Federal securities laws. \332\ Amended Item 601(b) of Regulation S-
K requires that an issuer file its recovery policy as an exhibit to its
annual report on Form 10-K.\333\ Structuring the provision in this

manner provides that, in addition to making the disclosure a condition
to listing, it is also subject to Commission oversight to the same
extent as other disclosure required in Commission filings.
---------------------------------------------------------------------------

    \332\ Id.
    \333\ 17 CFR 229.601(b)(97). In a modification from the
proposal, we are designating the exhibit containing the compensation
recovery policy as Item 601(b)(97) rather than Item 601(b)(96) as
was proposed because Item 601(b)(96) is currently in use. In
addition, we are moving the definition of the affected registrant to
the operative text rather than defining ``listed registrant'' for
purposes of Item 601(b)(97). Corresponding filing requirements will
apply to listed FPIs and registered management investment companies
subject to Rule 10D-1. We are correspondingly amending the Form 20-F
Instructions as to Exhibits to add new Instruction 97 and Form 40-F
to add new paragraph 19(a) to General Instruction B. Form N-CSR is
also being amended to renumber Item 18 (Exhibits) as Item 19 and add
new paragraph (a)(2) to that item (and redesignating current
paragraph (a)(2) as paragraph (a)(3)) for those registered
management investment companies that are subject to the requirements
of Rule 10D-1.
---------------------------------------------------------------------------

    In connection with our implementation of Section 10D(b)(1), we are
also using our discretionary authority to amend Item 402 of Regulation
S-K, Form 40-F, and Form 20-F to require listed issuers to disclose how
they have applied their recovery policies.\334\ In addition to new Item
402(w), we are adding substantially as proposed a new instruction to
the Summary Compensation Table to require that any amounts recovered
pursuant to a listed issuer's compensation recovery policy reduce the
amount reported in the applicable column, as well as the ``total''
column'' for the fiscal year in which the amount recovered initially
was reported and be identified by footnote.\335\
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    \334\ See new Item 402(w) of Regulation S-K, Item 6.F. of Form
20-F, and Instruction 19 of Form 40-F.
    \335\ See Instruction 5 to 17 CFR 229.402(c), and Instruction 5
to 17 CFR 229.402(n). The language from the proposal has been
revised for clarity but the revisions do not affect the substance of
the instructions.
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    As adopted,\336\ 17 CFR 229.402(w)(1) (``Item 402(w)(1)'') \337\
applies if at any time during or after its last completed fiscal year
the issuer was required to prepare an accounting restatement that
required recovery of erroneously awarded compensation pursuant to the
listed issuer's compensation recovery policy required by the listing
standards adopted pursuant to Rule 10D-1, or there was an outstanding
balance as of the end of the last completed fiscal year of erroneously
awarded compensation to be recovered from the application of that
policy to a prior restatement.\338\
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    \336\ In a nonsubstantive modification from the proposed rules
and in order to streamline the rule, we have removed the separate
definitions of certain terms and incorporated the substance of the
definition into the text of the rule.
    \337\ All domestic listed issuers are subject to Item 402(w)
disclosure and are required to provide the disclosure along with the
issuer's other Item 402 disclosure as part of an issuer's annual
reporting obligation. See Item 11. Executive Compensation of Form
10-K.
    \338\ See Item 402(w)(1). The revised language of Item 402(w)(1)
more clearly delineates when the disclosure is required and also
addresses the commenter who asked for clarification of when a
restatement is considered ``completed.'' This is because the trigger
for disclosure is now when the issuer determines that it is required
to prepare the restatement, which is the same event that triggers
the issuer to comply with its compensation recovery policy pursuant
to Rule 10D-1.
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    In these circumstances, an issuer will be required to provide the
following information in its Item 402 disclosure:
     The date on which the listed issuer was required to
prepare an accounting restatement and the aggregate dollar amount of
erroneously awarded compensation attributable to such accounting
restatement (including an analysis of how the recoverable amount was
calculated) \339\ or, if the amount has not yet been determined, an
explanation of the reasons and disclosure of the amount and related
disclosures in the next filing that is subject to Item 402 of
Regulation S-K; \340\
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    \339\ In a modification from the proposal, 17 CFR
229.402(w)(1)(i)(B) will require an analysis of how the amount of
erroneously awarded compensation was calculated. We believe that
investors will benefit from disclosure of the analysis of how the
amount was calculated and agree with commenters that suggested such
disclosures could be particularly helpful in assessing the issuer's
executive compensation policies and practices for purposes of
shareholder voting.
    \340\ See 17 CFR 229.402(w)(1)(i)(A), (B), and (E). In another
modification from the proposal, proposed Instruction 4 to Item
402(w) has been incorporated into the rule as 17 CFR
229.402(w)(1)(i)(E) (``Item 402(w)(1)(i)(E)'') and provides as
proposed that if the aggregate dollar amount of erroneously awarded
compensation has not yet been determined, the listed issuer must
disclose this fact and explain the reasons. Item 402(w)(1)(i)(E)
also now includes a requirement, when the amount has not yet been
determined, to disclose the amount and related disclosures in the
next filing that is subject to Item 402 of Regulation S-K. This
modification was necessary, because otherwise the issuer would not
be required to disclose the determined amount in a subsequent year
unless the amount is still outstanding at the end of the year.
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     The aggregate dollar amount of erroneously awarded
compensation that remains outstanding at the end of its last completed
fiscal year; \341\
---------------------------------------------------------------------------

    \341\ See 17 CFR 229.402(w)(1)(i)(D). To the extent that a
company determines recovery is impracticable in reliance on the
exceptions in 17 CFR 240.10D-1(b)(1)(iv), the balance would no
longer be outstanding and disclosure under this section would no
longer be provided.
---------------------------------------------------------------------------

     If the financial reporting measure related to a stock
price or TSR metric, the estimates used to determine the amount of
erroneously awarded compensation attributable to such accounting
restatement and an explanation of the methodology used for such
estimates; \342\
---------------------------------------------------------------------------

    \342\ See 17 CFR 229.402(w)(1)(i)(C).
---------------------------------------------------------------------------

     If recovery would be impracticable pursuant to 17 CFR
240.10D-1(b)(1)(iv) (``Rule 10D-1(b)(1)(iv)''), for each current and
former named executive officer and for all other current and former
executive officers as a group, disclose the amount of recovery forgone
and a brief description of the reason the listed registrant decided in
each case not to pursue recovery; \343\ and
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    \343\ See 17 CFR 229.402(w)(1)(ii).
---------------------------------------------------------------------------

     For each current and former named executive officer,
disclose the amount of erroneously awarded compensation still owed that
had been outstanding for 180 days or longer since the date the issuer
determined the amount owed.\344\
---------------------------------------------------------------------------

    \344\ In response to commenters' concerns regarding the privacy
of executive officers, in a modification from the Proposing Release
the final amendments limit these detailed disclosures to current and
former named executive officers. We are requiring the more detailed
disclosure for current and former named executive officers for the
same reasons as those discussed at note 343 supra. See 17 CFR
229.402(w)(1)(iii). More general information about amounts remaining
outstanding is required by 17 CFR 229.402(w)(1)(i)(D).
---------------------------------------------------------------------------

    We continue to believe that disclosure regarding the use of the
impracticability exception in Rule 10D-1(b)(1)(iv) will provide
information to shareholders and exchanges that will help them monitor
the implementation of an issuer's recovery policy. Any brief
description of the reason an issuer determined not to pursue recovery
should include the element of Rule 10D-1(b)(1)(iv) that caused the
impracticability, and should provide additional context relating to
that element, such as:
     A brief explanation of the types of direct expenses paid
to a third party to assist in enforcing the recovery policy, if the
issuer is relying on Rule 10D-1(b)(1)(iv)(A);
     Identification of the provision of foreign law the
recovery policy would violate if the issuer is relying on Rule 10D-
1(b)(1)(iv)(B); or
     A brief explanation of how the recovery policy would cause
an otherwise tax-qualified retirement plan to fail to meet the
requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a), if the issuer
is relying on Rule 10D-1(b)(1)(iv)(C).
    Upon further consideration and in response to commenters concerns
regarding the privacy of executive officers,\345\ in a modification
from the Proposing Release the final amendments require specific
disclosure regarding use of the impracticability exception with respect
only to the current and former named executive officers. The final
amendments require more generalized disclosure regarding use of the
impracticability exception with respect to other current and former
executive officers as a group. Aggregated disclosure of recovery from
the group of officers other than named executive officers is consistent
with the registrant's reporting obligations for executive compensation
purposes, and will help investors to monitor the registrant's
implementation of its recovery obligation. However, we believe that
more detailed information

for the named executive officers is appropriate, as it will be relevant
to investors' understanding of current and prior compensation
disclosures.
---------------------------------------------------------------------------

    \345\ See notes 319 through 322.
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    We are also adopting the amendment to Item 404(a) providing that an
issuer that complies with its Item 402(w) disclosure requirements need
not disclose any incentive-based compensation recovery pursuant to Item
404(a).\346\
---------------------------------------------------------------------------

    \346\ Item 404(a) requires a description of certain transaction
between the issuer and a related person. To avoid duplicative
disclosure, we are amending Instruction 5.a.iii to Item 404(a) of
Regulation S-K largely as proposed. We are clarifying the
description of affected compensation in the instruction to indicate
that it applies to erroneously awarded compensation computed as
provided in 17 CFR 240.10D-1(b)(1)(iii) and the applicable listing
standards for the registrant's securities. See also Instruction 1 to
Item 22(b)(20) of Schedule 14A for registered management investment
companies (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)). See also Item 7.B to Form 20-F for
FPIs (disclosure need not be provided pursuant to this Item if the
transaction involves the recovery of erroneously awarded
compensation that is disclosed pursuant to Item 6.F).
---------------------------------------------------------------------------

    The requirements elicit disclosure regarding an issuer's activity
to recover erroneously awarded compensation during its last completed
fiscal year. In a nonsubstantive modification from the proposal, we are
adopting the substance of Instruction 5 to Item 402(w) as new 17 CFR
229.402(w)(3), which limits the disclosure requirement to proxy or
information statements that call for Item 402 disclosure and the
issuer's annual report on Form 10-K and provides that the information
required by Item 402(w) will not be deemed to be incorporated by
reference into any filing under the Securities Act, except to the
extent that the listed registrant specifically incorporates it by
reference. As this information is similar to other executive
compensation information required by Item 402 and is likely to serve a
similar purpose for investors in evaluating the issuer and making
voting decisions, we believe that the information is most relevant to
shareholders in an issuer's proxy or information statements that call
for Item 402 disclosure and the issuer's annual report on Form 10-K.
    As proposed, the disclosure will be required as a separate item
rather than as an amendment to the CD&A requirement because the
requirements apply to any current or former executive officer, not just
``named executive officers'' and CD&A requirements do not apply to
SRCs, EGCs, and FPIs,\347\ all of which are subject to the new
requirements.\348\
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    \347\ SRCs and EGCs are not required to provide CD&A in
accordance with the scaled disclosure requirements contained in Item
402 of Regulation S-K. See 17 CFR 229.402(l) and Section 102(c) of
the JOBS Act. FPIs 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, FPIs 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 17 CFR
229.402(a)(1) of Regulation S-K.
    \348\ We note that a listed issuer required to provide CD&A
could choose to include the Item 402(w) disclosure in its CD&A
discussion of its recovery policies and decisions pursuant to 17 CFR
229.402(b)(2)(viii) of Regulation S-K, which could benefit investors
by disclosing all compensation recovery information together in the
filing.
---------------------------------------------------------------------------

    With respect to registered management investment companies subject
to Rule 10D-1, the final rules will require information mirroring the
Item 402(w) disclosure to be included in annual reports on Form N-CSR
and in proxy statements and information statements relating to the
election of directors.\349\ Similarly for listed FPIs, the same
information called for by Item 402(w) will be required in their annual
reports filed with the Commission pursuant to Section 13(a) or Section
15(d) of the Exchange Act, such as on Form 20-F or, if the issuer
elects to use the registration and reporting forms that U.S. issuers
use, on Form 10-K.\350\ MJDS filers will be required to provide this
information in annual reports on Form 40-F.\351\
---------------------------------------------------------------------------

    \349\ See Item 18 of Form N-CSR; Item 22(b)(20) of Schedule 14A.
We are also amending General Instruction D to Form N-CSR to permit
registered management investment companies subject to Rule 10D-1 to
answer the information required by Item 18 by incorporating by
reference from the company's definitive proxy statement or
definitive information statement. In addition, we are amending 17
CFR 270.30a-2 to reflect the new item numbers in Form N-CSR. We are
also cross-referencing Item 18 of Form N-CSR in Item 22(b)(20) of
Schedule 14A rather than restating the requirements of Form N-CSR in
Schedule 14A.
    \350\ Because securities registered by these listed issuers are
exempt from Section 14(a) of the Exchange Act, these issuers are not
required to disclose any proxy or consent solicitation materials
with respect to their securities under that provision. See Item 6.F
of Form 20-F.
    \351\ See Paragraph (19) of General Instruction B of Form 40-F.
---------------------------------------------------------------------------

    In addition, we are amending the cover page of Form 10-K, Form 20-
F, and Form 40-F to add check boxes that indicate separately (a)
whether the financial statements of the registrant included in the
filing reflect correction of an error to previously issued financial
statements, and (b) whether any of those error corrections are
restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant's executive officers
during the relevant recovery period pursuant to Sec.  240.10D-
1(b).\352\ Comments in response to the Reopening Release generally
supported the addition of check boxes to the cover page of Form 10-
K.\353\ Particularly as it relates to ``little r'' restatements which
typically are not disclosed or reported as prominently as ``Big R''
restatements, the check boxes provide greater transparency around such
restatements and easier identification for investors of those that
triggered a compensation recovery analysis. Although the Reopening
Release did not specifically ask about Forms 20-F and 40-F, these forms
serve corresponding purposes as Form 10-K, and for similar reasons, we
believe it will be beneficial to investors to include similar check
boxes on the cover pages of these forms and note that their inclusion
will be a relatively low burden. We are not adopting the check-box
requirement for annual reports filed on Form N-CSR because the current
content and formatting requirements for registered management
investment companies' annual reports do not otherwise include check
boxes, and because we anticipate that a limited number of registered
management investment companies will be affected by the final
rules.\354\
---------------------------------------------------------------------------

    \352\ In a nonsubstantive change from the Reopening Release, we
have refined certain terminology for clarity.
    \353\ While we recognize some commenters' concerns regarding the
usefulness of the information provided by the check boxes and their
views that additional check boxes do not simplify the disclosure, we
believe that the check boxes will help investors more readily
identify restatements by issuers and whether any of the restatements
triggered a compensation recovery analysis. See supra note 324. We
agree with those commenters that suggested that compensation
recovery analysis is relevant to investors such that a check box
appropriately highlights the issue. See supra note 323.
    \354\ We estimate that only seven registered management
investment companies that are listed issuers and are internally
managed may have executive officers who receive incentive-based
compensation, and thus could be subject to the new rules.
---------------------------------------------------------------------------

    Relatedly, in a modification from the proposal, to allow investors
to understand the check boxes in the appropriate context of the
issuer's application of its recovery policy, we are adding a disclosure
requirement in a new 17 CFR 229.402(w)(2) to require that, if at any
time during its last completed fiscal year a registrant prepared an
accounting restatement, and the registrant concluded that recovery of
erroneously awarded compensation was not required pursuant to the
registrant's

compensation recovery policy required by the listing standards adopted
pursuant to Rule 10D-1, the issuer must briefly explain why application
of its recovery policy resulted in this conclusion. The additional
disclosure will provide useful context to investors and the exchanges
when an issuer has issued an accounting restatement and facilitates a
better understanding of how an issuer is applying its recovery policy.
    Finally, in a modification from the proposal, we are requiring
tagging of any specific data points included within the compensation
recovery disclosures, as well as block text tagging of those
disclosures, in Inline XBRL.\355\ Because existing Commission rules
require the Inline XBRL tagging of all cover page information on Forms
10-K, 20-F, and 40-F, the two new cover page check boxes will be tagged
in Inline XBRL.\356\ We recognize some commenters' concerns relating to
the costs of implementing the use of XBRL and their additional concerns
that the data may lack comparability across filers, including as a
result of custom tagging, which may limit its utility to investors.
However, we agree with other commenters that Inline XBRL requirements
will facilitate analysis of the new compensation recovery disclosures,
even in situations where the particular characteristics of compensation
recovery programs, such as the methods by which filers calculate the
amount of erroneously awarded compensation, may not be fully comparable
across filers (e.g., by enabling analysis of trends in a single filer's
disclosures over multiple reporting periods). Requiring Inline XBRL
tagging of the compensation recovery disclosure benefits investors by
making the disclosures more readily available and easily accessible to
investors, market participants, and others for aggregation, comparison,
filtering, and other analysis, as compared to requiring a non-machine-
readable data language such as ASCII or HTML. At the same time, we do
not expect the incremental compliance burden associated with tagging
the additional information to be unduly burdensome, because issuers
subject to the tagging requirements are, or in the near future will be,
subject to similar Inline XBRL requirements in other Commission
filings.\357\
---------------------------------------------------------------------------

    \355\ See 17 CFR 229.402(w)(4) of Regulation S-K and 17 CFR
232.405 (Rule 405 of Regulation S-T). In a nonsubstantive
modification from the proposal, we have moved the appearance and
formatting requirement to 17 CFR 229.402(w)(3) and have separately
addressed requirements relating to interactive data in 17 CFR
229.402(w)(4).
    \356\ See 17 CFR 229.601(b)(104) and 17 CFR 232.406 (Rule 406 of
Regulation S-T). Issuers will thus be required to use the most
updated versions of all taxonomies used to tag the filing to comply
with the rule.
    \357\ As noted in the Reopening Release, subsequent to the
proposal, the Commission adopted rules replacing XBRL tagging
requirements for issuer financial statements and open-end fund risk/
return summary disclosures with Inline XBRL tagging requirements.
Inline XBRL embeds the machine-readable tags in the human-readable
document itself, rather than in a separate exhibit. See Inline XBRL
Filing of Tagged Data, Release No. 33-10514 (June 28, 2018) [83 FR
40846 (Aug. 16, 2018)]. As a result of those changes, we are using
Inline XBRL, rather than XBRL, for the tagging requirements. See
also Securities Offering Reform for Closed-End Investment Companies,
Release No. 33-10771 (Apr. 8, 2020) [85 FR 33290 (June 1, 2020) at
33318]. Inline XBRL requirements for business development companies
will take effect beginning Aug. 1, 2022 (for seasoned issuers) and
Feb. 1, 2023 (for all other issuers).
---------------------------------------------------------------------------

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. In the context of Securities
Act registration statements, a registrant is required to state the
general effect of any statute, charter provisions, bylaws, contract or
other arrangements under which any controlling person, director, or
officer of the registrant is insured or indemnified in any manner
against liability which he may incur in his capacity as such.\358\
---------------------------------------------------------------------------

    \358\ See 17 CFR 229.702.
---------------------------------------------------------------------------

1. Proposed Amendments
    The Commission proposed that listed issuers would be prohibited
from indemnifying any executive officer or former executive officer
against the loss of erroneously awarded compensation. 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 officer for premiums for such an insurance policy.
Comments
    We received mixed comments on the proposal that listed issuers be
prohibited from indemnifying any executive officer or former executive
officer against the loss of erroneously awarded compensation. A number
of commenters expressly supported the proposed treatment of
indemnification and insurance.\359\ Some of these commenters suggested
that permitting indemnification would fundamentally undermine the
purpose of the statute and effectively nullify the mandatory nature of
the compensation recovery.\360\ Some commenters recommended that the
Commission go even further, such as by discouraging or prohibiting
executive officers from procuring their own insurance.\361\
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    \359\ See, e.g., comment letters from; AFL-CIO; AFR 1; CalPERS
1; and Rutkowski 1. See also comment letter from ABA 1 (expressing
qualified support, but stating that issuers should not be prohibited
from indemnifying executives' litigation expenses in compensation
recovery actions consistent with state law, noting that these
arrangements permit advancement of legal expenses incurred in
defending a claim by the issuer if the executive ``acted `in good
faith' and in a manner reasonably believed to be, or not opposed to,
the best interests of the issuer'').
    \360\ See, e.g., comment letters from AFL-CIO; AFR 1; and
Rutkowski 1.
    \361\ See, e.g., comment letters from American Insurance
Association (``AIA''); Better Markets 1; FSR; and TCA.
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    In contrast, a number of commenters expressed concerns with the
proposed prohibition.\362\ Some of these commenters contended that
Section 10D does not prohibit indemnification.\363\ One commenter
recommended the approach in 17 CFR 229. 512(h) where the Commission
expresses its opinion regarding indemnification, but does not prohibit
it by rule.\364\ Some others asserted that a prohibition on
indemnification or issuer-paid insurance would be appropriate only
where recovery is premised on fraud or

misconduct.\365\ Commenters additionally expressed concern that the
rule could be construed to conflict with state law provisions providing
for indemnification under certain circumstances.\366\
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    \362\ See, e.g., comment letters from Bishop (expressing concern
over retroactive application to existing compensation agreements);
CCMC 1; Compensia (suggesting compensation payments in the ordinary
course of business could be mistaken for indemnification and
recommending guidance); NACD; Pearl Meyer (expressing concern that a
prohibition on indemnification could adversely affect a public
company's ability to hire executive officers); and SCG 1.
    \363\ See, e.g., comment letters from Bishop (suggesting that
``will'' in Section 10D expresses ``a simple futurity'' whereas
``shall'' expresses an obligation); CCMC 1 (suggesting the proposal
may exceed the Commission's authority as it would touch on state
regulation of insurance products); and SCG 1.
    \364\ See comment letter from CCMC 1. 17 CFR 229.512(h) provides
that if acceleration of a Securities Act registration statement is
requested, the registration statement is required to include an
undertaking stating that the registrant has been advised that in the
opinion of the Securities and Exchange Commission indemnification of
directors, officers and controlling persons for liabilities arising
under the Securities Act is against public policy as expressed in
the Securities Act and is therefore unenforceable. The undertaking
further provides that in the event that such a claim for
indemnification is asserted, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
    \365\ See comment letters from NACD; and SCG 1.
    \366\ See comment letters from Bishop; and SCG 1 (suggesting
that the risk of private litigation would justify issuer
indemnification and insurance and citing to the General Corporation
Law of Delaware that provides for indemnification where the agent
has been successful on the merits).
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3. Final Amendments
    After considering the views of commenters, we are adopting as
proposed rules to prohibit issuers from insuring or indemnifying any
executive officer or former executive officer against the loss of
erroneously awarded compensation.\367\ While an executive officer may
be able to purchase a third-party insurance policy to fund potential
recovery obligations, the indemnification provision prohibits an issuer
from paying or reimbursing the executive officer for premiums for such
an insurance policy.\368\
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    \367\ See 17 CFR 240.10D-1(b)(1)(v).
    \368\ Such indemnification or reimbursement would also be
prohibited through modification to current compensation arrangements
or other means that would amount to de facto indemnification, such
as, for example, by providing an executive a new cash award which
the issuer would then ``cancel'' to effect recovery of outstanding
recoverable amounts.
---------------------------------------------------------------------------

    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.'' \369\ The Proposing Release acknowledged
that 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.\370\ However, 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.\371\
Indemnification arrangements that permit executive officers to retain
or recover compensation that they were not entitled to receive based on
restated financial statements would fundamentally undermine the purpose
of Section 10D.\372\
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    \369\ See Senate Report at 136.
    \370\ See Proposing Release at Section II.F.
    \371\ See Cohen v. Viray, 622 F.3d 188, 195 (2d Cir. 2010)
(holding that an indemnification agreement cannot be used to release
the CEO and CFO from liability to repay compensation under Sarbanes-
Oxley Act Section 304, 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 officer's
purchase of this coverage, the executive officer retains the excess
compensation to which he or she was not entitled.
    \372\ See 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 void and unenforceable to the
extent that the agreement purported to relieve the issuer of its
obligation under Section 10(D), Rule 10D-1, and a resulting listing
standard to recover erroneously paid incentive-based compensation.
Section 29(a) provides that any 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.\373\ 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.' '' \374\
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    \373\ 15 U.S.C. 77cc. National securities exchanges and national
securities associations are self-regulatory organizations. 15 U.S.C.
78c(a)(26).
    \374\ See 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)). See also Cohen v. Viray,
622 F.3d at 195 (citing Section 29(a) in rejecting indemnification
against Sarbanes-Oxley Act Section 304 liability); and 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).
---------------------------------------------------------------------------

    We acknowledge commenters who raised various concerns with respect
to the prohibition on issuers insuring or indemnifying executive
officers with respect to recoverable compensation. While we acknowledge
that states may have specific provisions permitting issuers to
indemnify or insure their executive officers in certain circumstances,
we are unaware of any provisions that mandate such indemnification or
insurance, and as such, we do not believe the final rules are in
conflict with such provisions. We also acknowledge, as one commenter
observed, that states regulate certain insurance products.
Nevertheless, we believe Rule 10D-1's prohibition is necessary to
ensure that the recovery policy mandated by Congress for issuers listed
on U.S. national exchanges is given actual effect. Additionally,
because the rules apply to all listed issuers, with limited exceptions,
we do not find the assertions by commenters that such prohibitions
would put issuers at a disadvantage in the ability to hire executive
officers to be compelling. In light of Section 10D's mandate to return
to issuers and shareholders compensation that was erroneously awarded,
we agree with commenters who asserted that any issuer indemnification
or insurance of an executive officer's obligation to return erroneously
awarded compensation would be contrary to the statute, and therefore,
we continue to believe it is appropriate to restrict an issuer's
ability to do so.

F. Transition and Timing

    Section 10D does not address transition and timing of
implementation of the rules.
1. Proposed Amendments
    The Commission proposed that each exchange be required to file its
proposed listing standards no later than 90 days following publication
of the final rules in the Federal Register, and that such listing
standards be effective no later than one year following that same
publication date. Further, each listed issuer would be required to
adopt a compliant recovery policy no later than 60 days following the
date on which the listing rules to which it is subject become
effective. The Commission also proposed that each listed issuer be
required to recover pursuant to the issuer's recovery policy 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.
    Finally, the Commission proposed that an issuer be required to file
the required disclosures in the applicable Commission filings required
on or after the date on which the listing standards become effective.
2. Comments
    We received limited comment on transition and timing. One commenter
found the proposed schedule for the exchanges to file their proposed
listing standards and have them declared effective to be ``workable and
appropriate.'' \375\
---------------------------------------------------------------------------

    \375\ See comment letter from ABA 1.
---------------------------------------------------------------------------

    Commenters that addressed the issue generally supported applying
recovery policies only to incentive-based awards granted or performance
periods that begin after the effective date of the relevant exchange
listing standards \376\ or the effective date of the final rules.\377\
Some of these commenters expressed concerns regarding retroactive
application of the rules,\378\ with one noting that applying the rule
to awards earned or vested after the effective date of Rule 10D-1 could
pick up awards granted prior to the effective date.\379\ A number of
commenters also expressed concern regarding the effect of the rules on
existing contracts, noting that existing contracts typically can be
amended only with consent.\380\ Finally, some commenters thought the
proposed 60-day period for issuers to adopt their recovery policies
following the effective date of the exchanges' listing rules was too
short and recommended additional time.\381\
---------------------------------------------------------------------------

    \376\ See, e.g., comment letters from ABA 1; BRT 1; Compensia;
Chevron; Mercer; and NACD.
    \377\ See, e.g., comment letters from CCMC 1; Coalition;
Meridian; and SCG 1.
    \378\ See comment letters from CCMC; and Coalition.
    \379\ See comment letter from Chevron.
    \380\ See, e.g., comment letters from ABA 1 (stating that if the
rule is not applied on a wholly prospective basis, it should apply
only to erroneously awarded compensation granted after the effective
date of final Rule 10D-1); BRT 1; CCMC 1; Coalition; Mercer;
Meridian; NACD (stating that questions of contractual violations are
serious and may not be resolved merely through an amendment to by-
laws); and SCG 1 (suggesting that issuers may only be able to amend
plans on a prospective basis, as plans often prohibit amendments
that impair a participant's rights to an outstanding award, unless
the participant consents). See also comment letters in response to
the Reopening Release from ABA 2; Cravath; Hunton; McGuireWoods; and
SCG 2. Some of these commenters recommended exceptions for existing
contracts or awards (Cravath and Hunton) or an exception for
compensation paid pursuant to existing employment and equity award
agreements (SCG 2).
    \381\ See comment letters from ABA 1 (recommending an exemption
or a delayed phase-in of at least two years for SRCs and EGCs); NACD
(recommending 90 days); and Davis Polk 1 (recommending six months).
---------------------------------------------------------------------------

3. Final Amendments
    After considering the views of commenters, we are adopting
transition and timing requirements substantially as proposed, with a
modification in response to commenters (as described below). Under the
final amendments, issuer compliance is 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.
    Under the rules we are adopting: (i) each exchange will be required
to file its proposed listing standards no later than 90 days following
the November 28, 2022, (ii) the listing standards must be effective no
later than one year following the November 28, 2022, and (iii) each
issuer subject to such listing standards will be required to adopt a
recovery policy no later than 60 days following the date on which the
applicable listing standards become effective.\382\ We would not expect
compliance with the disclosure requirement until issuers are required
to have a policy under the applicable exchange listing standard.
---------------------------------------------------------------------------

    \382\ See 17 CFR 240.10D-1(a)(2) and (3).
---------------------------------------------------------------------------

    As noted above, several commenters raised concerns about
application of the mandated recovery policy to compensation that was
granted prior to the effective date of the rules. In a modification
from the proposal in response to these concerns, and to provide an
additional transition period, the final rules provide that each listed
issuer is required to comply with the recovery policy for all
incentive-based compensation received (as defined in 17 CFR 240.10D-
1(d) \383\) by current or former executive officers on or after the
effective date of the applicable listing standard (as opposed to the
effective date of Rule 10D-1).\384\ In addition, each listed issuer is
required to provide the disclosures required by the rule and Item
402(w) in the applicable Commission filings required on or after the
date on which the exchanges' listing standards become effective.\385\
---------------------------------------------------------------------------

    \383\ Rule 10D-1 states ``[i]ncentive-based compensation is
deemed received in the issuer's fiscal period during which the
financial reporting measure specified in the incentive-based
compensation award is attained, even if the payment or grant of the
incentive-based compensation occurs after the end of that period.''
    \384\ See 17 CFR 240.10D-1(a)(3)(ii). Notwithstanding the look-
back requirement in 17 CFR 240.10D-1(b)(1)(i)(D), an issuer is only
required to apply the recovery policy to incentive-based
compensation received after the effective date of the applicable
listing standard.
    \385\ See 17 CFR 240.10D-1(a)(3)(iii). Issuers subject to such
listing standards will be required to adopt a recovery policy no
later than 60 days following the date on which the applicable
listing standards become effective and must begin to comply with
these disclosure requirements in proxy and information statements
and the issuer's annual report on Form 10-K on or after the issuer
adopts its recovery policy.
---------------------------------------------------------------------------

    Notwithstanding these extended transition periods, we recognize
that there could be incentive-based compensation that is the subject of
a compensation contract or arrangement that existed prior to the
effective date of Rule 10D-1 which was not received until after the
effective date of the applicable listing standards--and therefore would
be subject to recovery under the final amendments. We do not believe
this would be an inappropriate application of the mandated recovery
policy. In our view, executives do not have a reasonable settled
expectation in retaining compensation that was erroneously awarded
based on misreported financial metrics, particularly when those
financial metrics were attained on or after the effective date of the
applicable listing standards, as contemplated by the final amendments.
For similar reasons, we do not believe it is inappropriate to apply the
mandated recovery policy to pre-existing compensation contracts or
arrangements.
    While we acknowledge commenter concerns about the need for adequate
time to prepare for the application of the listing standards and the
development of appropriate recovery policies, including in some cases
the renegotiation of certain contracts, we believe the final rules
provide ample time for such preparations. In that regard, we note that
issuers will have more than a year from the date the final rules are
published in the Federal Register to prepare and adopt compliant
recovery policies. We believe the prescriptive nature of Rule 10D-1
provides issuers with sufficient notice to begin such preparations
concurrently with listing standards being finalized.

III. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application.

    Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these rules a ``major rule,'' as
defined by 5 U.S.C. 804(2).

IV. 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 exchanges and associations to prohibit the listing of issuers
that do not develop and implement policies to recover erroneously
awarded incentive-based compensation.\386\ The policies must provide
that, in the event that the issuer is required to prepare an accounting
restatement due to the issuer's material noncompliance with any
financial reporting requirement under the securities laws,\387\ the
issuer will recover from any of the issuer's current or former
executive officers who received incentive-based compensation (including
stock options awarded as compensation) during the three-year period
preceding the date the issuer is required to prepare the accounting
restatement, based on the erroneous data, in excess of what would have
been paid to the executive officer under the accounting restatement.
From an economic perspective, when implemented, this change will
effectively return the erroneously awarded compensation to the
shareholders. 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 adopting a new rule and rule amendments to
satisfy the statutory mandates of Section 10D. As discussed above, we
believe the intent of these statutory mandates is to require the return
of executive compensation that was awarded erroneously to the issuer
and its shareholders.
---------------------------------------------------------------------------

    \386\ See Section I.
    \387\ The trigger events would include both ``Big R'' and
``little r'' restatements that correct errors in previously issued
financial statements. See Section II.B.
---------------------------------------------------------------------------

    We have reviewed the letters and information provided by
commenters, and performed an analysis of the main economic effects that
may flow from the rules being adopted in this release. We consider the
economic impact--including the costs and benefits and the impact on
efficiency, competition, and capital formation--of the final rule
requirements on issuers and other affected parties, relative to the
baseline discussed below. 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.\388\ Further,
Section 23(a)(2) of the Exchange Act requires us, when making rules
under the Exchange Act, to consider the impact any new rule would have
on competition and 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.\389\ Where practicable, we have attempted
to quantify the effects of the final rules; however, in many cases, we
are unable to do so because we lack the data necessary to provide a
reasonable estimate. For purposes of this economic analysis, we address
the costs and benefits resulting from the statutory mandate and from
our exercise of discretion together, recognizing that it is difficult
to separate the costs and benefits arising from these two sources.
---------------------------------------------------------------------------

    \388\ See 15 U.S.C. 78c(f); 15 U.S.C. 80a-2(c).
    \389\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

A. Baseline

    To assess the economic impact of the final rules, 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. We begin by analyzing affected issuers,
including the prevalence of incentive-based compensation. Next, we
provide information on the frequency of restatements as triggering
events. We also provide information on the regulatory baseline.
Finally, we provide information on how many issuers currently have
compensation recovery provisions, as well as descriptive information
regarding those provisions.
    We recognize that a substantial number of issuers \390\ will be
affected, since incentive-based compensation \391\ is widely used.
Although statistics reflecting the prevalence of incentive-based
compensation precisely as defined in this rulemaking are not available,
one study \392\ found that 97% of a representative sample of the S&P
500 companies grant performance-based compensation as part of their
long-term incentive plans, though the prevalence might be lower among
smaller companies.\393\
---------------------------------------------------------------------------

    \390\ As a starting point to describe the number of affected
issuers, we identify the number of exchange listed companies. As of
Dec. 31, 2021, there were approximately 5,300 exchange listed
companies (excluding closed end funds and REITs). We recognize that
there are many companies that, because they are not exchange listed,
will not be affected by these rules. For instance, on Aug. 22, 2022,
there were 12,454 securities quoted on OTCmarket.com, (see OTC
Markets Grp. Inc., Current Market, OTC Markets (Aug. 22, 2022),
https://www.otcmarkets.com/market-activity/current-market) and from
2013-2015 there were roughly 10,000 stocks quoted on OTC markets.
See Josh White, Outcomes of Investing in OTC Stocks, (working paper,
Dec. 16, 2016), available at https://www.sec.gov/files/White_OutcomesOTCinvesting.pdf.
    \391\ Compensation that may trigger recovery under the final
rules includes amounts awarded under long-term incentive plans (such
as performance-based equity) or short-term incentive plans (such as
cash bonuses) that are granted, vested, or whose size is determined
based on a financial metric.
    \392\ See Meridian Compensation Partners, 2021 Corporate
Governance and Incentive Design Survey (Fall 2021), available at
https://www.meridiancp.com/insights/2021-corporate-governance-and-incentive-design-survey/ (``Meridian Report'') (97% of a
representative sample of S&P 500 companies grant performance-based
vehicles as part of their long-term incentive plans as of 2021); see
also Andrea Pawliczek, Performance-Vesting Share Award Outcomes and
CEO Incentives, 96 Acct. Rev. 337 (2021) (``As of 2014, about 60
percent of S&P 1500 companies granted some form of performance-based
equity awards''). These studies describe performance-based incentive
awards, which may often, but not always, be included in the
incentive-based compensation affected by this rulemaking. For
example, as described in Section II.C.2.a.iii, incentive-based
compensation would not include awards based on nonfinancial events,
such as opening a specified number of stores, and it would include
cash awards based on satisfaction of a performance target that is
based on a financial reporting measure even if the performance
target was not pre-established or communicated, or the outcome was
not substantially uncertain.
    \393\ The three most common performance metrics used by the
representative sample of the S&P 500 companies in long-term
incentive plans were relative TSR (74%), return measures (46%), and
earnings per share (31%). See Meridian Report. An alternative sample
of firms, including smaller and foreign firms, yields slightly
different results. Based on Commission staff analysis of 145
randomly sampled issuers drawn from the full population of issuers
that filed an annual proxy statement in calendar year 2021, we
estimate that approximately 42% of proxy statement filers used stock
price and/or TSR as an element of their incentive-based
compensation. Staff manually examined the CD&A in each of the 145
proxy statements to identify issuers that disclosed the use of stock
price and/or TSR as compensation performance metrics in 2021. For
purposes of this analysis, TSR may refer to relative TSR as well as
TSR. This estimate is broadly consistent (see Scott Allen, et al.,
The Latest Trends in Incentive Plan Design as Firms Adjust Plans
Amid Uncertainty, Humancapital/Aon Blog (Oct. 2020), available at
https://humancapital.aon.com/insights/articles/2020/the-latest-trends-in-incentive-plan-design-as-firms-adjust-plans-amid-uncertainty (indicating, in Figure 9, that TSR is the most commonly
used metric in the CEO's long-term incentive plan among S&P 500
companies in most industries, where the use of TSR ranges from 22%
to 61% of companies depending on the industry). See also comment
letter from CEC 2, noting that in 2020, the average portion of
equity awards tied to performance metrics (not including stock
options) surpassed 50%, and that the average portion of at risk pay
in a CEO's compensation package exceeds 80%.
---------------------------------------------------------------------------

    The incidence of events where incentive-based compensation would be

required to be recovered is affected by the number of restatements. One
report indicates that 4.8% of companies disclosed a restatement in
2020.\394\ As discussed above, both ``Big R'' and ``little r''
restatements may trigger compensation recovery analysis under the final
rules.\395\ As reported in the 2022 staff memorandum, we estimate that
``little r'' restatements may account for roughly three times as many
restatements as ``Big R'' restatements.\396\ Similarly, one recent
study of accounting restatements between 2008 and 2015 identifies 634
``Big R'' restatements and 1,653 ``little r'' restatements.\397\
---------------------------------------------------------------------------

    \394\ See A Twenty-One Year Review. In 2021, the number of
restatements was substantially higher due to Special Purpose
Acquisition Company (``SPAC'') restatements. Excluding SPAC
restatements, there was a 10% year-over-year decrease in the number
of restatements. See A Twenty-One-Year Review. Studies cited and
data included in this release on ``little r'' restatement frequency
may define ``little r'' restatements differently than the definition
included in Section II, and are generally based on the total number
of revisions to previously issued financial statements where the
issuer did not file an Item 4.02 8-K. We note that one commenter
observed that, ``if Dodd-Frank section 954 were in place in 2009,
executive officers at up to 674 companies would have been subject to
the clawback provisions,'' see comment letter from Kovachev, 2015.
The commenter cited Audit Analytics, 2009 Financial Restatements, A
Nine Year Comparison. The number of restatements has substantially
declined since 2009 to 338 in 2021, after excluding SPAC
restatements, see A Twenty-One Year Review (non-SPAC restatements
comprise 23% of the total 1,470 restatements). We note that another
commenter observed that since the initial 2015 proposal,
``improvements in checks and balances--such as board governance,
audit committee oversight, and company systems of internal control
over financial reporting--along with increased regulatory scrutiny
by the SEC and PCAOB have occurred and act to help mitigate the
likelihood of misstatements in financial statements filed with the
Commission,'' see comment letter from CCMC (Nov. 22, 2021) (``CCMC
2'').
    \395\ See Section II.B.1.c. The following estimates are based on
historical rates and types of restatements, which may not be
indicative of future rates and types of restatements.
    \396\ This estimate, based on exchange-listed companies during
calendar year 2021, excluding SPACs, reflects approximately 54 ``Big
R'' restatements and 173 ``little r'' restatements; including SPACs
would have yielded 837 ``Big R'' and 474 ``little r'' restatements.
These estimates were obtained from the Audit Analytics Restatement
database which covers all Commission registrants who have disclosed
a financial statement restatement in electronic filings since Jan.
1, 2000. To remove SPACs from the restatements, these calculations
exclude blank check companies (SIC code 6770) and shell companies.
SPAC restatements were excluded because they were unusually high in
2021 due to Commission guidance that year that SPACs account for
their warrants as liabilities instead of equity, prompting a wave of
one-time restatements.
    \397\ These figures were provided in the 2022 staff memorandum.
That memo also noted that ``little r'' restatements as a percentage
of total restatements rose to nearly 76% in 2020, up from
approximately 35% in 2005.
---------------------------------------------------------------------------

    We note that not all accounting restatements will trigger a
recovery of compensation that was earned as a result of meeting
performance measures. Using incentive-based compensation tied to net
income as an example, in order for that compensation to be required to
be recovered, there would have to be an accounting error that increased
net income. Based on one recent study, 60% of all ``Big R''
restatements made between 2008 and 2015 had a negative impact on net
income, and only 25% of ``little r'' restatements had a negative impact
on net income.\398\ Thus, not every restatement would trigger a
recovery of compensation that is tied to net income.\399\ Also, we
expect that recovery of incentive-based compensation that is tied to
TSR would be relatively small and infrequent as a result of ``little
r'' restatements, since these restatements are less likely to be
associated with significant stock price reactions.\400\
---------------------------------------------------------------------------

    \398\ See Choudhary et al., supra note 61. See also Thompson,
supra note 79 (finding that 74% of ``Big R'' and 31% of ``little r''
restatements have a negative effect on net income); Christine Tan
and Susan Young, An Analysis of `Little r' Restatements, 29 Acct.
Horizons 667 (2015) (finding that 11.8% of ``little r'' restatements
revise net income downwards).
    \399\ Incentive-based compensation is more likely to be
recovered if it is tied to more reported items on the financial
statements. For example, incentive-based compensation tied to
earnings or operating income is more likely to be recovered than
incentive-based compensation tied to only revenue or only expenses.
Between 2008 and 2015, approximately eight% of restatements involved
expense recording (such as payroll or selling, general and
administrative expenses). See Choudhary et al., supra note 61.
    \400\ See Choudhary et al., supra note 61 (finding an average
stock price reaction of -3.3% to ``Big R'' restatements and -0.3%
for ``little r'' restatements); Thompson, supra note 79 (finding an
average stock price reaction of -1.5% to ``Big R'' restatements and
-0.3% for ``little r'' restatements).
---------------------------------------------------------------------------

    The final rules will require exchanges to apply the compensation
recovery requirement to all listed issuers, including EGCs, SRCs, FPIs,
debt-only issuers, and controlled companies, with only limited
exceptions. As outlined in the table below, we estimate that Rule 10D-1
would be applicable to approximately 5,364 registrants.\401\ We
estimate that, of those 5,364 registrants, there are 1,039 SRCs (that
are not also EGCs), 160 EGCs (that are not also SRCs or FPIs),\402\ 757
issuers that are both SRCs and EGCs, 722 FPIs (filing annual reports on
Form 20-F), and 132 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 final rules.\403\
---------------------------------------------------------------------------

    \401\ We estimate the number of issuers subject to the final
rule based upon Commission staff analysis of issuers that filed
annual reports on Form 10-K, Form 20-F, or Form 40-F in calendar
year 2021, regardless of the fiscal year of the filing, and that
filed a proxy statement in 2021. The staff verified an issuer's Form
10-K to determine if the issuer is an SRC. The staff also checked an
issuer's Form 10-K and registration statement to determine if the
issuer is an EGC. The issuer's 12B status was used to identify
exchange-listed companies. Staff determined an issuer's Section
12(b) registration status based, in part, on the self-reported
status disclosed on the annual report cover page, as well as other
determining factors such as the number or holders of record, the
issuer's total assets, and the issuer's filing history of long- and
short-form registrations (on Form 10-12 or Form 8-A12,
respectively), deregistration filings (on Form 15), and delisting
filings (on Form 25 or Form 25-NSE). 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.
    \402\ We include the U.S. EGCs only (that are not also SRCs or
FPIs) in our estimate. The total count of EGCs (that are not also
SRCs) including U.S. EGCs, FPI EGCs, and MJDS EGCs (that are not
also SRCs) was 434 based on 2021 registrant filings).
    \403\ See supra note 41. Certain commenters describe the costs
associated with compliance for registered management investment
companies. We recognize that, in addition to internally managed
funds, some externally managed funds may incur compliance costs if,
for instance, they employ a chief compliance officer and include
incentive based compensation as part of their pay package. See,
e.g., comment letter from ICI.

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

    As described in the 2022 staff memorandum, compared to the baseline
for the Proposing Release, in today's markets, many more companies have
adopted compensation recovery policies.\404\ For instance, one study of
more than 17,000 companies from 1996 to 2017 reports that as of
December 2017, 5,358 companies had a compensation recovery policy in
place.\405\ The rate of adoption may be higher among the larger U.S.-
listed companies. Survey results indicate that 98% of a representative
sample of S&P 500 companies have adopted compensation recovery policies
as of 2021,\406\ and 83% of a representative sample of mid-cap (S&P
400) companies as of 2020.\407\
---------------------------------------------------------------------------

    \404\ See 2022 staff memorandum.
    \405\ Ilona Babenko, et al., Clawback Provisions and Firm Risk
(working paper 2021), available at http://ssrn.com/abstract=4006661
(retrieved from SSRN Elsevier database) (``Babenko et al.''). One
commenter reports 100% of the S&P 500 companies, and 99.7% of the
remaining 2,500 companies in the Russell 3000 index, have some form
of compensation recovery policy, according to the ISS QualityScore
database, see comment letter from the Office of the Comptroller of
the State of New York. See also comment letter from CEC 2
(indicating based on an Oct. 2021 survey of their subscribers, more
than 90% maintain a clawback policy, and citing a study finding that
the number of large companies with clawback policies may be as high
as 97%). As discussed below, we expect that most of these policies
will require revision to meet the requirements in this rule. See,
e.g., note 413.
    \406\ See Meridian Report.
    \407\ See Clearbridge Compensation Grp., Executive Compensation
Policies, The Clearbridge 100 Report for Mid-Cap Companies (Dec
2020) available at https://www.clearbridgecomp.com/wp-content/uploads/CB100-Report-for-Mid-Cap-Companies-Exec-Comp-Policies-12-11-20.pdf (``Clearbridge Report'').
---------------------------------------------------------------------------

    As outlined in the table below, we estimate that approximately 46%
of all filers currently disclose some form of an executive compensation
recovery policy.\408\ We further estimate that approximately 34% of
SRCs, 19% of EGCs, nine % of issuers that are both SRCs and EGCs, 25%
of FPIs, and 13% of MJDS issuers disclose some form of a recovery
policy.
---------------------------------------------------------------------------

    \408\ 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, et al.). In
contrast to the analysis provided in the Proposing Release, we
modified the keyword search because the searches identified issuers
that disclosed they had not adopted or were considering adopting,
compensation recovery provisions. Specifically, 3 out of 5,367
(0.6%) of companies did not file DEF 14A in 2021. We further
eliminated 235 out of 5,364 (4%) of issuers flagged by the keyword
search because the disclosures indicated the absence or
consideration of compensation recovery provisions rather than their
presence. 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)..................................            2,451            5,364              46%
SRCs.........................................................              352            1,039               34
EGCs.........................................................               31              160               19
SRC and EGCs.................................................               71              757                9
FPIs.........................................................              178              722               25
MJDS.........................................................               17              132               13
All other filers.............................................            1,804            2,554               71
----------------------------------------------------------------------------------------------------------------

    In addition to the issuers with company-specific executive
compensation recovery policies, under the baseline there are existing
provisions of law concerning the recovery of such compensation under
certain circumstances, as well as certain disclosure requirements.
Sarbanes-Oxley Act Section 304 contains a recovery provision that is
triggered when a restatement is the result of issuer misconduct. This
provision applies only to CEOs and 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.\409\ In addition, interim final
rules under Section 111 of the Emergency Economic Stabilization Act of
2008 (``EESA'') required institutions receiving assistance under the
Troubled Asset Relief Program (``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.\410\ As discussed above, relative to either the Sarbanes-
Oxley Act or EESA, the compensation recovery requirement of the final
rules has a different scope because it would affect any current or
former executive officer of a listed issuer 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 officer in preparing the
financial statements. Finally, we note that currently issuers other
than SRCs, EGCs, and FPIs are required to disclose in their 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.\411\
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    \409\ See 15 U.S.C. 7243.
    \410\ 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
Exchange Act. See Department of Treasury interim final rule, TARP
Standards for Compensation and Corporate Governance, 74 FR 28394
(June 15, 2009).
    \411\ See 17 CFR 229.402(b)(2)(viii).
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    Although there has been a large increase in the percentage of
filers that disclose a compensation recovery policy since 2015,\412\
recent studies indicate that these policies establish more limited
circumstances in which a compensation recovery analysis would be
triggered than would be the case under the final rules.\413\ Many of
the issuers that disclose having recovery policies require misconduct
on the part of the executive officer to trigger recovery. For instance,
a recent study reports that 52 out of 98 firms with misstatements and
compensation recovery provisions required the employee to have
contributed to the

restatement with fraudulent actions or misconduct, whereas 46 of the 98
do not explicitly require fraud or misconduct as a condition of the
recovery.\414\ By contrast, the final rules would require a listed
issuer to have a recovery policy that applies to ``Big R'' and ``little
r'' restatements, without regard to misconduct.
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    \412\ See 2022 staff memorandum.
    \413\ See, e.g., Tor-Erik Bakke et al., The Value Implications
of Mandatory Clawback Provisions (working paper June 28, 2018),
available at https://ssrn.com/abstract=2890578 (retrieved from SSRN
Elsevier database) (as of 2014-2015, only 5% (43 of 1,123) of
companies with a voluntarily adopted compensation recovery policy
have policies that are comparable to the Proposing Release); see
also Meridian Report and ClearBridge Report. Cf. Erkens et al.,
supra note 62 (developing a ``Clawback Strength Index,'' and finding
that adopters of stronger policies experience more benefits).
    \414\ See Thompson, supra note 78. Similarly, according to a
study of a representative sample of S&P 500 companies, 53% of
compensation recovery policies are triggered by financial
restatements without requirement of ethical misconduct, regardless
of cause, see Meridian Report. In addition, Babenko et al. (finding
that 69% of compensation recovery policies specify that recovery
applies only to persons directly responsible for the triggering
event, and that 63% of companies have a disclosed ``statute of
limitations'' for the recovery policy that is less than three
years). In an earlier study of 2,326 companies in the Corporate
Library database, DeHaan et al. supra note 62 find that 39% had
compensation recovery policies that did not require executive
misconduct in order to be triggered.
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    There appears to be considerable variation in the coverage of
executive officers subject to recovery under currently disclosed
recovery policies.\415\ Under the final rules, a listed issuer's
compensation recovery policy will require recovery of erroneously
awarded compensation received after an individual began serving as an
executive officer of the issuer during the recovery period. As a
result, in some cases, recovery will be required from individuals who
may be former executive officers either at the time they receive the
incentive-based compensation or at the date when the listed issuer is
required to prepare an accounting restatement. By contrast, most of the
issuer-specific executive compensation recovery policies do not apply
to former executive officers. For example, in a representative sample
of firms from the S&P 500, only 13% of executive compensation recovery
policies would apply to former executive officers as well as current
executive officers,\416\ and a study of mid-cap companies reports that
19% of executive compensation recovery policies would apply to former
executive officers.\417\ Therefore, according to recent studies, the
majority of issuers disclose having recovery policies that require
compensation recovery from a narrower range of individuals than a
recovery policy that would comply with the final rule requirements.
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    \415\ As of 2021, approximately 60% of a representative sample
of S&P 500 companies had recovery policies that applied to current
key executives (e.g., Section 16 officers); approximately 23%
applied to all incentive (annual and/or equity) plan participants;
approximately 13% applied to current and former key executives
(e.g., Section 16 officers); and the remaining 4% applied to current
named executive officers only. See Meridian Report. See also
Shearman & Sterling, Corporate Governance & Executive Compensation
Survey 2021 (2021), available at https://www.shearman.com/Perspectives/2021/11/Shearman-Releases-19th-Annual-Corporate-Governance-and-Executive-Compensation-Survey (reporting similar
results from a survey of the 100 largest U.S. public companies)
(``S&S Report''). One commenter estimated that the rule may cover
approximately 50,000 executives, if there are on average ten
executive officers subject to recovery provisions at each issuer
subject to Rule 10D-1. See comment letter from Fried. Although in
some cases, there may be many affected executive officers, we expect
that the number of affected executive officers will vary depending
on several factors, including the structure of the issuer and its
history of executive turnover.
    \416\ See Meridian Report. See also S&S Report.
    \417\ See Clearbridge Report.
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    While recent studies have shown that many issuers' current recovery
policies differ from the requirements of the final rules, certain
aspects of currently disclosed recovery policies are generally
consistent with the final rules. For example, in a representative
sample of firms from the S&P 500, 98% of issuers that disclosed
recovery policies indicate that both cash and equity incentives would
be included in the policy.\418\ Also, most mid-cap issuers (74%)
specified a look-back period of three years.\419\ Thus a number of
issuers with disclosed recovery policies include compensation scope and
look-back provisions that may be consistent with the requirements under
the final rules.
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    \418\ See Meridian Report. Similarly, a study of the largest 100
U.S. public companies shows that 79 of the 95 companies that
maintain a compensation recovery policy may recoup both cash and
equity incentives (see S&S Report), and a study of midcap companies
shows that 95% of companies with a compensation recovery policy
would include the annual cash bonus and 90% would include PSUs (see
Clearbridge Report).
    \419\ See Clearbridge Report.
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    In summary, many issuers have voluntarily adopted compensation
recovery policies. However, studies suggest that there may be
substantial gaps between those voluntarily adopted policies and the new
requirements, particularly with respect to inclusion of former
executive officers, the events that would trigger recovery analyses,
and the ``no-fault'' nature of the final rules.

B. Analysis of Potential Economic Effects

    The final rules require exchanges and associations to establish
listing standards that will require each issuer to implement and
disclose a policy providing for the recovery of erroneously awarded
incentive-based compensation. Consistent with Section 10D, the final
rules 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.\420\ The final rules are
predicated on the premise that an executive officer should not retain
compensation that, had the issuer's accounting been done properly in
the first instance, would never have been received by the executive
officer, regardless of any fault of the executive officer for the
accounting errors. One benefit of the rule is that it will effectively
return the erroneously awarded compensation to issuers and
shareholders. In addition, the rule may reduce the likelihood of
accounting errors because executive officers--insofar as they have the
ability to affect financial reporting--may have an enhanced incentive
to ensure that greater care is exerted in preparing accurate financial
reports, and a reduced incentive to engage in inappropriate accounting
practices for the purpose of increasing incentive-based compensation
awarded to them.\421\ While these incentives could result in higher-
quality financial reporting \422\ that would benefit investors, they
may also distort capital allocation decisions.
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    \420\ The set of relevant restatements includes those that
correct errors in previously issued financial statements that are
material to those previously issued financial statements or that
would result in a material misstatement if the errors were corrected
in or left uncorrected in the current report. See Section II.B.1.
    \421\ We recognize that some of the executive officers affected
by the amendments may not have the ability to directly affect the
financial reporting of the issuer.
    \422\ For purposes of this economic analysis, high-quality
financial reporting means that the financial disclosure is
informative about the actual performance and condition of the
issuer, and should be informative about its value.
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    The requirement that an issuer implement a recovery policy may
introduce uncertainty about the amount of incentive-based compensation
the executive officer will be able to retain.\423\ As a result,
executive officers may demand that incentive-based compensation
comprise a smaller portion of their compensation packages, or that they
receive a greater total amount of compensation, to adjust for the
possibility that the awarded

incentive-based compensation may be reduced due to future recovery. And
to the extent that executive officers respond negatively to the
expected effects of the compensation recovery policies developed and
implemented by issuers, the final rules may cause affected issuers to
be less able to attract and retain executive talent. But we expect that
investors may benefit to the extent that incentive based compensation
will become more sensitive to the true performance of the issuer, which
would better align the interests of the executive officers with those
of the shareholders.
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    \423\ The recovery policy would require listed issuers to
recover excess compensation paid, but it would not require them to
provide additional payment to executive officers in cases where a
restatement would have resulted in a greater amount of compensation.
We recognize that, absent any requirements and under the baseline,
issuers may voluntarily compensate executives under such
circumstances. But if executives are not compensated when a
restatement would have resulted in a greater amount of compensation,
this asymmetry may further reduce the value executive officers place
on compensation subject to such a recovery policy.
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    Thus, as previewed above and discussed in more detail below, the
final rule may produce both benefits and costs for the affected
parties. Economists have analyzed the effects of the benefits and costs
of issuer compensation recovery policies on issuer valuation.
Specifically, one study analyzed the stock price reactions to the
issuance of the Proposing Release and a second study examined stock
price reactions to the adoption of voluntary compensation recovery
provisions. The studies find, with certain caveats and limitations,
positive average stock price reactions to the announcement of the
events--whether the proposal of the regulations, or a particular
issuer's adoption of voluntary compensation recovery provisions.\424\
These stock price reactions indicate that market participants have
assigned an overall positive value to the adoption of such provisions,
leading to the observed increase in stock price on the date of the
announcement.\425\ These results support the inference that the
benefits associated with adoption of compensation recovery provisions
may justify the costs.\426\
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    \424\ We note that the events studied may reflect the
expectation and adoption of less stringent recovery provisions than
required by the new rules. The studies report that issuers with more
powerful management teams (see Bakke et al.) and issuers with
previous restatements (see Iskandar-Datta et al.) experience larger
economic gains associated with the Proposing Release and the
adoption of voluntary recovery provisions.
    \425\ There are certain limitations on these event studies. The
results reflect market participants' response to the new information
released in the event, relative to the expectations prior to the
event. As a result, the positive market reaction to the Proposing
Release reflects the difference between expectations and the actual
proposing release. We also note that the observed stock price
reaction to individual issuer's adoption of compensation recovery
provisions would reflect the benefits associated with the specific
provisions adopted by those firms, which were likely tailored to the
issuer's needs and also unlikely to fully comply with the new rules.
    \426\ Bakke et al., supra note 413, find that issuers without a
compensation recovery provision experienced positive abnormal
returns of 0.6% on average around the announcement of the Proposing
Release, relative to issuers with an existing compensation recovery
provision. These results suggest that the effects of the proposed
rules would provide a net benefit to issuers that do not have a
compensation recovery provision, but that the aggregate benefits of
the rulemaking would be reduced due to the increase in issuers with
compensation recovery provisions in place. More broadly, there is
evidence regarding the benefits to issuers of adopting compensation
recovery provisions. See, e.g., Mai Iskandar-Datta and Yonghang Jia,
Valuation Consequences of Clawback Provisions, 88 Acct. Rev. 171
(2013) (finding that shareholders of issuers that adopt voluntary
recovery provisions experience statistically significant positive
stock-valuation consequences ranging between 0.79% and 1.23%, and
that issuers with previous financial restatements had the largest
gains).
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    The discussion below analyzes the economic effects of the final
rules, including the anticipated costs and benefits as well as the
likely impact on efficiency, competition, and capital formation. For
purposes of this analysis, we address the potential economic effects
resulting from the statutory mandate and from our exercise of
discretion together, recognizing that it is often difficult to separate
the costs and benefits arising from these two sources. Below we discuss
the direct effects of the final rule on issuers and shareholders. We
also discuss the effects on U.S. exchanges and discuss the costs of
recovery. We then examine the indirect effects the final rule may have
on financial reporting and executive compensation. We analyze the
expected effects of the rule's disclosure requirements, as well as the
effects from the rule's provisions on indemnification and insurance.
Finally, we note that these effects may differ for different types of
issuers.
1. Direct Effects on Issuers and Shareholders
    The most immediate outcome of the final rules will be the
establishment of listing standards that will result in issuers
implementing recovery policies consistent with Section 10D.\427\ Such
recovery policies, when triggered, will provide a direct benefit for a
listed issuer as well as its shareholders, when the company recovers
incentive-based compensation that was erroneously paid to current or
former executive officers. The recovered amounts will be available for
the issuer to return to investors or invest in productive assets to
generate value for shareholders.\428\ Thus when erroneously awarded
compensation is recovered, the recovered amounts will directly benefit
issuers and shareholders.
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    \427\ Although, as described in the baseline section, many
issuers have already implemented recovery policies that may be
somewhat consistent with the final rule requirements, we recognize
that most of the existing recovery policies will require revision to
comply with the listing standards.
    \428\ Given the number of affected issuers and size of executive
compensation packages, the amount of compensation recovered by
issuers under the policies could be substantial. Although recovery
of erroneously paid compensation would provide an immediate benefit
for issuers and shareholders, these funds may not be large relative
to the issuer's business operations. Based on an analysis of
executive compensation using Standard & Poor's Compustat and
Executive Compensation databases, in fiscal year 2020 non-salary
compensation for all named executive officers combined was 0.7% of
net income, and 0.44% of its market value of equity. This represents
an upper bound for the amount of incentive-based compensation for
named executive officers. These ratios do not include current and
former executive officers that would be covered by the final rule
but are not named executive officers.
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    We also expect a number of direct costs for issuers resulting from