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The Business Lawyer

Summer 2023 | Volume 78, Issue 3

Section I: Regulatory Developments 2022

Subcommittee on Annual Review, Federal Regulation of Securities Committee

Summary

  • The Survey examines insider trading arrangements and related disclosures.
  • It also covers the pay versus performance rule that was adopted in accordance with the Dodd-Frank Act.
  • Enhanced reporting of proxy votes by registered management investment companies and reporting of executive compensation votes by institutional investment managers is examined.
  • In addition, the Survey covers the listing standard for recovery of erroneously awarded compensation, proxy voting advice, and inflation adjustments under Titles I and III of the Jobs Act.
Section I:  Regulatory Developments 2022
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A. Insider Trading Arrangements and Related Disclosures

On December 14, 2022, the Commission unanimously adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and related disclosure obligations for public companies. The amendments (i) add new conditions to the availability of the affirmative defense to insider trading liability contained in Rule 10b5-1 designed to address concerns about the rule’s abuse by insiders to trade securities on the basis of material nonpublic information (“MNPI”) and (ii) enhance public disclosure by issuers and insiders of trading plans designed to comply with Rule 10b5-1.

1. Background

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder prohibit purchases or sales of a security on the basis of MNPI about that security or the issuer, in breach of a duty owed to such issuer or the shareholders of such issuer or to any person who is the source of that MNPI. This prohibited conduct is more commonly referred to as “insider trading.” Rule 10b5-1 provides an affirmative defense to insider trading liability for trades undertaken pursuant to a binding contract, an instruction to another person to execute the trade for the instructing person’s account or a written plan (collectively, a “10b5-1 Plan”) adopted when the trader was not aware of MNPI. 10b5-1 Plans must be entered into in good faith and not as part of a scheme to evade the prohibitions of insider trading rules.

Since adoption of Rule 10b5-1 in 2000, the Commission, courts, members of Congress, academics, and others have grown increasingly concerned that Rule 10b5-1 has allowed traders to escape liability by trading on the basis of MNPI while still technically satisfying the Rule’s requirements. In order to address these concerns, the Commission issued a proposal a little over a year ago consistent with prior statements made by Commission Chair Gary Gensler, as well as recommendations made to the Commission by its Investor Advisory Committee, with respect to 10b5-1 Plans. The proposal included new conditions to the availability of the Rule 10b5-1 affirmative defense, such as cooling-off periods between adoption of a 10b5-1 Plan and the first trade thereunder, limitations on multiple overlapping 10b5-1 Plans, and limits on single-trade 10b5-1 Plans, as well as new disclosure requirements. The Commission received over 180 comment letters regarding the proposed amendments.

2. Amendments to Rule 10b5-1

Cooling-Off Periods for Directors and Officers. Prior to the effective date of the amendments, Rule 10b5-1 did not require any waiting or “cooling-off ” periods between the date on which a 10b5-1 Plan is adopted and the date of the first transaction made pursuant to such plan, although some plans voluntarily included, and some companies required, such a cooling-off period. Under the amendments, in order to qualify for the affirmative defense provided by Rule 10b5-1:

  • Trading under a 10b5-1 Plan adopted by a director or “officer,” as defined in Rule 16a-1(f ), must not begin until the later of (1) ninety days following plan adoption or “modification” (as described below) and (2) two business days following disclosure of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following plan adoption or modification); and
  • Trading under a 10b5-1 Plan for persons other than issuers or directors and officers (which includes non-officer employees who enter into 10b5-1 Plans) must not begin until thirty days following plan adoption or modification.

For purposes of the director and officer cooling-off period, the amendments provide that an issuer will be considered to have disclosed its financial results at the time it files a quarterly report on Form 10-Q or an annual report on Form 10-K, or, in the case of foreign private issuers (FPIs), when such FPIs file a Form 20-F or furnish a Form 6-K that discloses financial results.

In an important change from the proposal, issuers are not subject to a cooling-off period. The amendments clarify that a “modification” of an existing 10b5-1 Plan would be deemed to be a termination of such 10b5-1 Plan and would restart the applicable cooling-off period. The amendments provide that “any modification or change” to the amount, price, or timing of the purchase or sale of the securities underlying a 10b5-1 Plan is treated as a termination of the plan and the adoption of a new plan. To the extent that insiders seek to continue to rely on the affirmative defense, they would be subject to a new cooling-off period. Additionally, cancellation of one or more trades would constitute a “modification.” However, modifications that do not change the sales or purchase prices or price ranges, the amount of securities to be sold or purchased, or the timing of transactions under a 10b5-1 Plan (such as an adjustment for stock splits or a change in account information) will not trigger a new cooling-off period. The amendments do not provide any de minimis modification exception. In other words, a modification need not be “material” in order for it to trigger a new cooling-off period.

Director and Officer Certifications. Under the amendments, at the time a 10b5-1 Plan is adopted (or modified), directors and officers are required to include a representation in the 10b5-1 Plan certifying they (i) are not aware of MNPI about the issuer or its securities and (ii) are adopting (or modifying) the 10b5-1 Plan in good faith and not as part of a scheme to evade the prohibitions of the Exchange Act’s section 10(b) or Rule 10b-5. In a change from the proposal, and to eliminate any additional burden separate documentation may create, directors and officers are required to include the certification in the plan documents as representations rather than as a separate certification to the issuer. The final rules do not require directors and officers to retain the certification for ten years, as was originally proposed, although it is prudent for them to maintain accurate records, including the representations, to establish they have satisfied the conditions of the affirmative defense.

Prohibition on Overlapping 10b5-1 Plans and Limits on Single-Trade 10b5-1 Plans. The amendments eliminate Rule 10b5-1’s affirmative defense for trades by any trader other than the issuer (i.e., beyond directors and officers) who establishes multiple overlapping 10b5-1 Plans. The proposal had included issuers within this prohibition, and it is a significant change that issuers are not subject to this aspect of the amendments.

The amendments provide a few limited exceptions to the multiple overlapping plan prohibition. To address an insider’s use of multiple brokers to execute trades pursuant to a single 10b5-1 Plan that covers securities held in different accounts, the amendments treat a series of formally distinct contracts with different broker-dealers or other agents as a single “plan,” if taken together, the contracts otherwise satisfy the applicable conditions of Rule 10b5-1. In addition, the amendments provide that a broker-dealer or other agent executing trades on behalf of the insider pursuant to the 10b5-1 Plan may be substituted by a different broker-dealer or other agent as long as the purchase or sales instructions applicable to the substituted broker and the substitute are identical, including with respect to the prices of securities to be purchased or sold, the dates of the purchases or sales to be executed, and the amount of securities to be purchased or sold. This means an insider will not lose the benefit of the affirmative defense when closing a securities account with a financial institution and transferring the securities to a different financial institution. An insider also may maintain two separate Rule 10b5-1 Plans at the same time, so long as trading under the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or expire without execution, subject to compliance with applicable cooling-off period requirements.

The amendments also authorize certain “sell-to-cover” transactions in which an insider instructs its agent to sell securities in order to satisfy tax-withholding obligations at the time an award vests so the insider will not lose the benefit of the affirmative defense with respect to an otherwise eligible 10b5-1 Plan if the insider has another plan in place that would qualify for the affirmative defense, so long as the additional plan or plans only authorize qualified sell-to-cover transactions. A plan authorizing sell-to-cover transactions qualifies for the new provision if the plan authorizes an agent to sell only such securities as are necessary to satisfy tax-withholding obligations incident to the vesting of a compensatory award, such as restricted stock or stock appreciation rights, and the insider does not otherwise exercise control over the timing of such sales.

Transactions with the issuer not executed on the open market, such as employee stock purchase plans (“ESPPs”) or dividend reinvestment plans (“DRIPs”), would be excluded from the prohibition on overlapping plans.

The amendments also limit the availability of the affirmative defense by persons other than the issuer to one “single-trade” 10b5-1 Plan during any twelve-month period.

Acting in Good Faith. Rule 10b5-1 previously required that 10b5-1 Plans be entered into in good faith and not as part of a plan or scheme to evade the insider trading rules. In order to clarify that cancellations or modifications of a 10b5-1 Plan may not be conducted in a manner to benefit from MNPI, the amendments require that 10b5-1 Plans be entered into in good faith and the person who has entered into the plan must act in good faith throughout the duration of the trading arrangement.

The adopting release explains that good faith, with respect to trading under a 10b5-1 Plan, applies to activities within the insider’s control. For example, an insider would not be operating a 10b5-1 Plan in good faith if the insider, while aware of MNPI, directly or indirectly induces the issuer to publicly disclose that information in a manner that makes their trades under a 10b5-1 Plan more profitable (or less unprofitable). On the other hand, the adopting release indicates that trading suspensions directed by the issuer, which are outside the control or influence of the insider, such as an issuer-imposed trading halt due to a possible merger, may not, by themselves, implicate the good-faith condition.

3. New Disclosure Requirement for Public Companies and Insiders

Public Company Disclosures. Prior to the effective date of the amendments, there were no disclosure requirements concerning the adoption, termination, or use of 10b5-1 Plans by issuers or insiders, and issuers were not required to disclose their insider trading policies or procedures. The amendments add a new Item 408 to Regulation S-K and make certain amendments to Forms 10-Q, 10-K, and 20-F.

Public companies using domestic reporting forms (e.g., Forms 10-Q and 10-K) will be required to provide quarterly disclosure of the adoption or termination of 10b5-1 Plans and other trading arrangements for directors and officers. In a significant change, as adopted, Item 408’s disclosure requirements apply only to an issuer’s directors’ and officers’ 10b5-1 Plans and not to the issuer’s.

Disclosures must include the material terms of the 10b5-1 Plan or other arrangement, such as the name and title of the director or officer, adoption or termination date, the duration of the 10b5-1 Plan or arrangement, the aggregate number of securities to be sold or purchased pursuant to the 10b5-1 Plan or arrangement, and whether the arrangement is intended to satisfy the requirements for use of Rule 10b5-1’s affirmative defense. However, the disclosure is not required to include the pricing terms of the trading arrangement.

Public companies will also be required to disclose whether they have adopted insider trading policies and procedures reasonably designed to promote compliance with the insider trading laws. Companies that have adopted insider trading policies and procedures will be required to file such policies and procedures as an exhibit to their annual report on Form 10-K or 20-F. If a company has not adopted such policies and procedures, it will be required to disclose why it has not done so. Public companies that use domestic reporting forms would be required to make these disclosures annually in their annual reports on Form 10-K, and FPIs would similarly be required to include this information in their annual Form 20-F filings.

The amendments also create new obligations for executive compensation disclosure. Specifically, new tabular disclosures are required that identify, for each director and named executive officer (“NEO”), (i) each award of stock options, SARs, or similar option-like instruments (i.e., the grant date, the number of securities underlying the award, exercise price of the award, and the grant date fair value of the award) granted during a period starting four business days before, and ending one business day after, the filing of a periodic report on Form 10-Q or Form 10-K or the filing or furnishing of a current report on Form 8-K that discloses MNPI (other than a Form 8-K disclosing a material new option award grant); (ii) the market value of the underlying securities the trading day before disclosure of the MNPI; and (iii) the market value of the underlying securities one trading day after disclosure of MNPI.

The table format is as follows:

Name Grant date Number of securities underlying the award Exercise price of the award ($/Sh) Grant date fair value of the award Percentage change in the closing market price of the securities underlying the award between the trading day ending immediately prior to the disclosure of material nonpublic information and the trading day beginning immediately following the disclosure of material nonpublic information
PEO          
PFO          
A          
B          
C          


In addition to the tabular disclosures, the amendments require narrative disclosure about the company’s option grant policies and practices regarding the timing of option grants and the release of MNPI, including how the board determines when to grant options and whether, and if so, how, the board or compensation committee takes MNPI into account when determining the timing and terms of an award. This disclosure is required to be included in annual reports on Form 10-K and proxy and information statements related to the election of directors, approval of compensation plans, or solicitations of advisory votes to approve executive compensation. Unlike some other executive compensation disclosure, emerging growth companies and smaller reporting companies (“SRCs”) are not exempt from these disclosure requirements.

Insider Obligations Under Section 16 of the Exchange Act. Persons reporting transactions on a Form 4 or Form 5 pursuant to section 16 under the Exchange Act will be required to identify whether the reported transaction was executed pursuant to a plan “intended to satisfy the affirmative defense conditions” of Rule 10b5-1 by checking a new checkbox on Form 4 and Form 5.

Relatedly, the amendments require that bona fide gifts of securities, whether or not part of a 10b5-1 Plan, be reported on a Form 4 by the end of the second business day following the gift. Currently, these transactions are reportable on a Form 5, which is filed once a year within forty-five days after the issuer’s fiscal year end.

Inline XBRL. The amendments require public companies to tag the narrative disclosures, as well as quantitative amounts within the narrative disclosures, in Inline XBRL, in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual.

Effective Date and Phase-in Period. The amendments became effective February 27, 2023. Public companies, other than SRCs, must comply with the disclosure and Inline XBRL tagging requirements in Forms 10-Q, 10-K, and 20-F, and any proxy or information statements required to include the Item 408 and/or Item 402(x) disclosures, beginning with the first such filing covering the first full fiscal period beginning on or after April 1, 2023. SRCs will be required to provide and tag the disclosures after an additional six-month transition period or in the first filing covering the first full fiscal period beginning on or after October 1, 2023. This means that annual reports on Form 10-K and 20-F for the year ended December 31, 2022, will not need to include the disclosures required by Items 408 and 402(x). Likewise, proxy statements that contain Part III information for such annual reports on Form 10-K will not need to include these disclosures. Section 16–reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023.

B. Pay Versus Performance

On August 25, 2022, the Commission finally adopted a “pay versus performance” rule in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) mandate that requires SEC–reporting companies to disclose in a clear manner the relationship between executive compensation actually paid and the company’s financial performance. As adopted, the rule generally requires disclosure of five years of pay versus performance data in proxy and information statements in which executive compensation information is required to be included pursuant to Item 402 of SEC Regulation S-K. The new pay versus performance disclosures must be included in proxy and information statements that are required to include such compensation information for fiscal years that ended on or after December 16, 2022.

1. Background

The Dodd-Frank Act added section 14(i) to the Exchange Act, directing the Commission to adopt a pay versus performance rule in proxy and information statements in which executive compensation information is required to be included pursuant to Item 402 of Regulation S-K. The Commission originally proposed the pay versus performance rule in 2015 (“2015 Proposal”), proposing new subsection (v) to Item 402 of Regulation S-K to require a new compensation table, showing the relationship between compensation actually paid to NEOs and a company’s performance, with performance measured both by the company’s total shareholder return (“TSR”) and peer group TSR, as well as a description of the relationship of pay to performance. In early 2022, the Commission reopened the comment period on the 2015 Proposal (as opposed to re-proposing its pay versus performance rule) and requested comments on additional disclosures that were not contemplated in the 2015 Proposal.

2. Requirements of Pay Versus Performance Rule

As adopted, new Item 402(v) of Regulation S-K requires:

  • a new pay versus performance table,
  • a clear description of the relationship between the compensation actually paid to the principal executive officer (“PEO”) and to the other NEOs (“Remaining NEOs”) and the company’s performance across each of the measures included in the pay versus performance table, which may be presented as a narrative, a graph, or a combination of the two, and
  • a tabular list of the most important financial performance measures that the company uses to link NEO compensation to company performance.

Companies have flexibility as to the exact placement of the pay versus performance disclosures within the proxy or information statement, although these must appear with, and in the same format as, the rest of the executive compensation disclosures required to be provided by Item 402 of Regulation S-K. The disclosures may, but need not, be part of the Compensation Discussion and Analysis.

Pay Versus Performance Table. The pay versus performance table must disclose the compensation paid to the PEO and the average compensation paid to the Remaining NEOs as compared to four performance measures. The performance measures required to be included are:

  • company TSR,
  • peer group TSR,
  • net income, and
  • a company-selected financial performance measure (“Company-Selected Measure”).

The new table must contain data for five years, except that SRCs are permitted to provide three years of data.

Pay Versus Performance

Year Summary Compensation Table Total For PEO Compensation Actually Paid to PEO Average Summary Compensation Table Total for non-PEO Named Executive Officers Average Compensation Actually Paid to non-PEO Named Executive Officers Value of Initial Fixed $100 Investment Based on: Net Income* [Company-Selected Measure]*
Total Shareholder Return Peer Group Total Shareholder Return*
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Y1                
Y2                
Y3                
Y4*                
Y5*                

*Denotes disclosures not required for SRCs

Description of Pay Versus Performance Relationship. The required tabular disclosure must be accompanied by a clear description of the relationship between

  • both executive compensation actually paid to the PEO and the average compensation actually paid to the Remaining NEOs, and each of the following:
    • the company TSR,
    • company net income, and
    • the Company-Selected Measure; and
  • the Company’s TSR and the peer group TSR.

If a company elects to provide any additional measures in the table, each additional measure must be accompanied by a clear description of the relationship between such compensation actually paid and the additional measure over the company’s five fiscal years displayed in the table. The descriptions can be provided in narrative or graphic form, or a combination of both. For example, the adopting release indicates that the relationship could be expressed as a graph providing executive compensation actually paid and change in financial performance measure(s) on parallel axes and plotting compensation and the measure(s) over the required time period. Companies are permitted to group the descriptions, but any combined description of multiple relationships must be clear.

Companies may supplement the required disclosure with additional pay versus performance measures or descriptions (in the table or elsewhere). However, any such supplemental disclosure must be clearly identified as supplemental, not be misleading, and not be presented more prominently than the required disclosure.

Tabular List. Additionally, companies (other than SRCs) must provide an unranked list of the three to seven most important financial performance measures used to link executive compensation actually paid to NEOs during the last fiscal year with the company’s performance. Alternatively, companies may elect to include one tabular list for the PEO and one list for the Remaining NEOs, or provide lists for each NEO, setting out the applicable three to seven financial performance measures used to link the relevant individual’s compensation with company performance. Companies are permitted to include non-financial measures in the list if they consider such measures to be among their three to seven most important measures. If a company uses fewer than three measures to link NEOs’ compensation to company performance, only measures actually used must be included.

3. Additional Information

Companies Covered. The pay versus performance rule applies to all SEC–reporting companies, except FPIs, registered investment companies, and emerging growth companies. Business development companies (a category of closed-end investment company) and SRCs are subject to the rule, although the disclosure requirements for SRCs are scaled.

Filings Covered. As previously noted, pay versus performance disclosure is required in proxy and information statements that are required to contain executive compensation disclosure pursuant to Item 402 of Regulation S-K. The pay versus performance information will not be deemed to be incorporated by reference into any filing under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act unless the company specifically incorporates it.

Executives Covered. The pay versus performance table must separately provide compensation information for the PEO, on an annual basis, for each of the past five fiscal years (three in the case of SRCs). If more than one person has served as PEO in any year, data for each PEO must be reported in separate columns.

In addition, the table must provide average (i.e., mean) compensation, on an annual basis, for the Remaining NEOs for such years. The Remaining NEOs whose compensation amounts are included in the averages reported for a given year must be individually identified by a footnote. The footnote will allow investors to consider the average compensation reported with changes in composition of the Remaining NEOs.

Pay Covered. The elements of the compensation actually paid category reflects that information contained in the Summary Compensation Table is distinct from the compensation paid to an NEO in a given year. Under Item 402(v)(2) of Regulation S-K, compensation actually paid to each individual is comprised of total compensation disclosed in the Summary Compensation Table modified to adjust the amounts included for pension benefits, equity awards, and above-market or preferential earnings on deferred compensation that is not tax-qualified, each as described below.

For each year included in the pay versus performance table, companies will be required to deduct from the Summary Compensation Table total the aggregate change in the actuarial present value of all defined benefit and actuarial pension plans, and add back the aggregate of: (i) actuarially determined service cost for services rendered by the NEO during the applicable year (service cost); and (ii) the entire cost of benefits granted in a plan amendment (or initiation) during the covered fiscal year that are attributed by the benefit formula to services rendered in periods prior to the plan amendment or initiation (prior service cost), in each case, calculated in accordance with U.S. generally accepted accounting principles (“GAAP”). The change in actuarial present value would be deducted only if the value is positive. The scaled disclosure requirements do not require SRCs to make this pension adjustment.

The 2015 Proposal had proposed to treat equity awards as actually paid in the fiscal year in which such awards became vested. However, comments to the 2015 Proposal noted that such timing could create a perceived misalignment between pay and performance since such awards would be viewed as actually paid only in the year of vesting rather than actually paid in each fiscal year over the life of the award between the date of grant and the date of vesting. For example, where an award vests over a three-year period and the company’s financial performance is positive in the first two years and negative in the third, reporting the full value of the award only in the vesting year may give investors the misleading impression that the executive was not rewarded for positive performance in years one and two, and was rewarded despite negative performance in year three. To address these concerns, Item 402(v) of Regulation S-K, as adopted, generally requires that equity awards first be reported as compensation actually paid in the fiscal year during which the award is granted based on the fair value as of the last day of the year, and then, in each subsequent year, changes in the fair value of the award as of the last day of the fiscal year will be reported until a final fair value is reported for the fiscal year in which vesting occurs (i.e., the date that all applicable vesting conditions have been satisfied) determined as of the date of vesting. For any awards that are subject to performance conditions, the change in fair value is calculated based on the probable outcome of such conditions as of the last day of the fiscal year.

Specifically, to calculate compensation actually paid for equity awards for each year included in the pay versus performance table, companies need to deduct the equity award amounts shown in the Summary Compensation Table from total compensation and then add or subtract the following amounts, as applicable:

  • the year-end fair value of any equity awards granted in the covered fiscal year that are outstanding and unvested as of the end of the covered fiscal year;
  • the amount of change as of the end of the covered fiscal year (from the end of the prior fiscal year) in fair value of any awards granted in prior years that are outstanding and unvested as of the end of the covered fiscal year;
  • for awards that are granted and vest in the same covered fiscal year, the fair value as of the vesting date;
  • for awards granted in prior years that vest in the covered fiscal year, the amount equal to the change in fair value as of the vesting date (from the end of the prior fiscal year);
  • for awards granted in prior years that are determined to fail to meet the applicable vesting conditions during the covered fiscal year, a deduction for the amount equal to the fair value at the end of the prior fiscal year; and
  • the dollar value of any dividends or other earnings paid on stock or option awards in the covered fiscal year prior to the vesting date that are not otherwise reflected in the fair value of such award or included in any other component of total compensation for the covered fiscal year.

Vesting date valuation assumptions have to be disclosed by footnote if they are materially different from those disclosed as of the grant date.

Additionally, compensation actually paid must include above-market or preferential earnings on deferred compensation that is not tax-qualified. Such amounts may be viewed to approximate the value that would be set aside currently by the company to satisfy its obligations in the future. Such amounts of deferred compensation that are not tax-qualified must be included, whether or not such amounts are vested and whether or not such amounts are actually paid during such year. According to the Commission, “excluding those amounts until their eventual payout would make the amount ‘actually paid’ contingent on an NEO’s choice to withdraw or take a distribution from their account … . The Commission does not believe such treatment would accurately represent compensation ‘actually paid.’”

The pay versus performance table also must disclose, in an accompanying footnote, the amounts of compensation deducted from, and added to, the Summary Compensation Table total compensation in determining compensation actually paid to the PEO and Remaining NEOs.

Finally, any one-time payment, such as a signing or severance bonus, must be included in compensation actually paid. While such amounts may not be reflective of what an executive typically receives in a year, they are amounts that were actually paid in that year.

Measures of Performance. Company TSR and peer group TSR must be included as performance measures in the pay versus performance table, calculated in accordance with Item 201(e) of Regulation S-K, by “dividing the (i) sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the company’s share price at the end and the beginning of the measurement period; by (ii) the share price at the beginning of the measurement period.” Both company and peer group TSR are calculated based on a fixed $100 investment. The peer group TSR presented in the table must be weighted according to the respective issuers’ market capitalization at the beginning of the relevant period. The peer group must be identified by footnote or such identification may be incorporated by reference from prior Commission filings, unless the peer group is a published industry or line of business index. Additional disclosures are required any time the company modifies the peer group used for TSR. SRCs do not need to provide peer group TSR.

In addition, the final rule requires companies to include net income for each year included in the pay versus performance table.

The last column included in the pay versus performance table sets out the Company-Selected Measure, which must be a numerically quantifiable financial performance metric. The Company-Selected Measure must be the most important financial performance measure used to determine NEO compensation not already included in the pay versus performance table in the company’s view. The Company-Selected Measure can change from year to year.

Non-GAAP Financial Measures. The Company-Selected Measure, or additional measures included in the pay versus performance table, are permitted to be non-GAAP financial measures. Any disclosure of a non-GAAP financial measure that a company elects to provide as part of its pay versus performance disclosure will not be subject to Regulation G or Item 10(e) of Regulation S-K. However, the company must provide disclosure as to how the number is calculated from its audited financial statements.

XBRL. The pay versus performance table, footnotes, and related disclosures all must be separately tagged using Inline XBRL. The footnotes and description of the relationship may be tagged using block-text tags, while individual data points must be separately tagged.

Phase-In. The general phase-in for the rule requires pay versus performance disclosure for three years in the first proxy or information statement in which such disclosure is required for all companies, other than SRCs, for fiscal years that ended on or after December 16, 2022. In each of the two subsequent years, another year of disclosure would be added. SRCs only need to provide information for two years for the first filing requiring such disclosure for fiscal years that ended on or after December 16, 2022, with a third year added in their next annual proxy or information statement that requires executive compensation disclosure. Also, SRCs will not have to comply with the XBRL requirement until the third annual filing containing pay versus performance disclosure.

A newly reporting company does not need to include pay versus performance information for fiscal years prior to their first completed fiscal year as a reporting company.

C. Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers

On November 2, 2022, by a vote of three-to-two, the Commission adopted rule and form amendments to expand the information that mutual funds, closed-end funds, exchange-traded funds, and other registered investment companies must disclose about their proxy votes. Additionally, any institutional investment manager that files Form 13F will be required to file Form N-PX to begin reporting proxy votes for the first time, but limited to say-on-pay votes. The adopted rules are largely in line with the proposal from September 2021, with a few notable exceptions.

Among other things, the amendments will require funds to categorize voting matters, structure and tag the data reported, and tie the description of each voting matter to the issuer’s form of proxy. The Commission said that it believes the amendments will make these proxy voting records more user-friendly by improving investors’ ability to monitor how funds and managers vote and compare their voting records, thereby increasing transparency.

1. Amendments to Form N-PX

Say-on-Pay Disclosures—Applies to Registered Funds and 13F Filers, Generally. The amendments will require any institutional investment manager required to file Form 13F also to report annually its say-on-pay votes on Form N-PX. The types of say-on-pay votes that managers must report include (1) votes “on the approval of executive compensation,” (2) votes “on the frequency of such executive compensation approval votes,” and (3) votes “to approve ‘golden parachute’ compensation in connection with a merger or acquisition.”

An institutional investment manager will be required to report the say-on-pay votes only for a security over which the manager exercised its voting power to influence a voting decision for the security, either directly or indirectly. Voting power includes the ability to determine whether to vote the security, or to recall a security on loan before a vote.

The amendments focus on whether a manager uses its own independent judgment to influence a vote. Thus, the manager will have no reporting obligation when the client or another party determines how to vote a proxy. Additionally, multiple parties could both have and exercise voting power over the same securities. The Commission believes the new requirements will balance investor informational needs, reporting burdens, and statutory obligations.

Importantly, in contrast to the proposed amendments, the final rule limits the reporting obligations for managers who have a disclosed policy of not voting proxies and in fact have not voted during the reporting period. Managers will be required only to disclose that policy in a notice report on Form N-PX without providing additional information about each security individually.

Although the new reporting obligations apply only to institutional investment managers that are also reporting persons for the purposes of Form 13F, the scope of securities reported on Form 13F deviates significantly from the scope of securities with respect to which a manager is required to report under the new Form N-PX reporting obligations. For example:

  • Form 13F’s de minimis exemption for small holdings does not apply to Form N-PX.
  • Form N-PX will require every institutional investment manager that files Form 13F to report how it voted on any say-on-pay shareholder vote, which may include say-on-pay votes held by issuers of securities that are not reported on Form 13F.
  • Form N-PX reporting obligations are not limited to the requirements of Form 13F when a manager only reports votes for securities held at quarter-end, and there is no specific holding period requirement for Form N-PX reporting obligations to apply.

The amendments allow optional joint reporting regarding say-on-pay votes in three scenarios:

  • A single manager can “report say-on-pay votes in cases where multiple managers exercise voting power.”
  • A fund can “report a manager’s say-on-pay votes on behalf of a manager exercising voting power over some or all of the fund’s securities.”
  • “[T]wo or more managers who are affiliated persons [can] file a single report on Form N-PX for all affiliated person managers within the group, notwithstanding that they do not exercise voting power over the same securities.”

In these scenarios, the nonreporting manager will be required to file a notice or combination Form N-PX report to identify each manager or fund reporting on its behalf. Additionally, when another reporting person reports say-on-pay votes on a manager’s behalf, the report on Form N-PX that includes the manager’s votes will be required to identify the manager (and any other managers) on whose behalf the filing is made, and separately identify the number of shares the manager is reporting on behalf of the nonreporting manager. A reporting person (whether a manager or a fund) will also be required to report separately shares that are reported on behalf of different managers or groups of managers.

Voted and Loaned Shares—Applies Only to Registered Funds. Under the current framework, funds are required to report only on matters on which the fund was entitled to vote. The amendments expand the reporting obligations to securities on loan as of the record date for the shareholder meeting. This is intended to ensure that a Form N-PX filing reflects the effect of the reporting person’s securities lending activities on its proxy voting, since the reporting person is able to recall and vote these securities on loan.

Additionally, the amendments will require reporting persons of Form N-PX also to disclose the number of shares that were voted and how they were voted as reflected in their records when a Form N-PX is filed, as well as the number of shares loaned and not recalled. With respect to shares loaned and not recalled, the reporting obligations will apply only when the reporting person has loaned the securities, directly or indirectly, through a lending agent. The obligations will not apply if the reporting person does not engage in shares lending in a client’s account. To provide full context, reporting persons are also permitted to provide optional additional information about a particular vote.

Identification of Proxy Voting Matters—Applies Only to Registered Funds. The final rule adopts the proposed voting matter identification requirements but, in a departure from the proposal, applies them only when an SEC proxy card is available for that matter. That is, if a proxy is subject to Rule 14a-4 under the Exchange Act so that the proxy clearly identifies each voting matter, reporting persons are required to (1) identify proxy voting matters using the same language as is used in the issuer’s form of proxy card, (2) report matters in the same order in which they are presented on the issuer’s form of proxy card, and (3) identify each director separately for director election matters. In all other cases, reports regarding proxy voting matters instead will be required to provide “a brief identification of the matter voted on,” which is consistent with the current requirement. The usage of abbreviations will be limited in such “brief identification” in order to help investors identify and compare voting matters.

Categorization Framework. Form N-PX reporting persons will be required to identify the subject matter of each reported proxy voting item under a standardized categorization framework. Compared to the proposed framework, the final framework has a more streamlined and consolidated list of categories, which is intended to respond to commentator concerns about complexity and uncertainty among potentially overlapping categories. The final framework also eliminated the requirement to assign matters to subcategories, as had been proposed. The list of categories in the framework will be nonexclusive and reporting persons will be required to select all applicable categories.

The following table reflects the changes to categories from the proposed framework:

Proposed Category Adopted Category Change from Proposal
Board of directors Director elections Limited to elections; other board matters categorized as corporate governance
Section 14A Section 14A None
Audit-related Audit-related None
Investment company matters Investment company matters None
Shareholder rights and defenses Shareholder rights and defenses None
Extraordinary transactions Extraordinary transactions None
Security issuance n/a Consolidated with capital structure
Capital structure Capital structure Now includes security issuance
Compensation Compensation None
Corporate governance Corporate governance Includes board matters other than director elections and meeting governance
Meeting governance n/a Consolidated with corporate governance
Environment or climate Environment or climate None
Human rights or human capital/workforce Human rights or human capital/workforce None
Diversity, equity, and inclusion Diversity, equity, and inclusion None
Political activities n/a Consolidated with other social issues
Other social issues Other social issues Now includes political activities
Other Other None


Other Aspects of Amended Form N-PX—Applies Only to Registered Funds.
Registrants that offer multiple series (sometimes known as “series trusts” in which each series is its own fund having its own investment program and shareholders) will continue to be required to provide Form N-PX disclosure separately by series. The Commission observes that this is a current requirement, but some registrants simply have noted which series voted on which matters rather than organizing the entire report on a series-by-series basis. Additionally, the information otherwise reported on Form N-PX will be required to be reported in the order presented on the issuer’s form of proxy.

The amended Form N-PX will require reporting persons to indicate whether a vote was for or against management’s recommendation. In contrast to the proposed amendments, however, the final amendments will not require reporting persons to disclose whether a voting matter is a proposal or a counterproposal (as it may be challenging to distinguish between the two).

To improve access to the information, reporting will be subject to structured data (electronic “tagging”) requirements. Fund reporting also will be required to be available on a firm’s website instead of filed solely with the Commission as it is today.

Finally, the amendments adopt some changes to the cover page and add a new summary page to Form N-PX. Among other changes, the cover page will require reporting persons to check a box to categorize the report as one of the following types: “Fund Voting Report,” “Fund Notice Report,” “Institutional Manager Voting Report,” “Institutional Manager Notice Report,” or “Institutional Manager Combination Report.” Among other things, reporting persons will be required to disclose on the new summary page the names and the number of included managers with say-on-pay votes in list format.

2. Confidentiality

Form N-PX (like Form 13F) is publicly filed via the EDGAR database on the Commission website. The Commission is providing an opportunity to prevent confidential information protected from disclosure on Form 13F from being disclosed on Form N-PX. These instructions to Form N-PX will provide that a person requesting confidential treatment of information filed on Form N-PX should follow the same procedures set forth in Form 13F for filing confidential treatment requests. The Commission is also prescribing the required content of a confidential treatment request and the required filing of information that is no longer entitled to confidential treatment. The Commission explicitly states that a confidential treatment will not be justified “solely in order to prevent proxy voting information from being made public.”

3. Effective Date

Reporting persons will continue to be required to report annually on Form N-PX no later than August 31 for the twelve-month period of July 1 to June 30. The Commission delayed the effective date of the amendments until July 1, 2024, to allow time to prepare. Therefore, funds and managers will be required to file their first amended Form N-PX by August 31, 2024, covering the period from July 1, 2023, to June 30, 2024.

Additionally, as a transition measure, managers that are new filers of Form 13F will be required to file Form N-PX for the twelve-month period ending June 30 only for the calendar year following the manager’s initial filing on Form 13F. Managers also will not be required to file Form N-PX regarding any shareholder vote that occurs after September 30 of the calendar year in which the manager’s final filing on Form 13F is due. Instead, managers will file a short-period Form N-PX for the period from July 1 to September 30, which will be due no later than March 1 of the immediately following calendar year.

D. Listing Standard for Recovery of Erroneously Awarded Compensation

On October 26, 2022, the Commission adopted new Rule 10D-1, directing national securities exchanges to establish listing standards that prohibit the listing of any security of a company that does not adopt and implement a written policy requiring the recovery, or “clawback,” of certain incentive-based executive compensation. Recovery under a clawback policy must be the amount of incentive compensation that is shown to have been paid in error, based on an accounting restatement that is necessary to correct a material error of a financial reporting requirement.

In a significant expansion of the rule as originally proposed, Rule 10D-1 will require the recovery policy to apply to any accounting restatement to correct not only an error in previously issued financial statements that is material to the previously issued financial statements (also called a “Big R” restatement) but also an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (also called a “little r” restatement).

If a current or former executive officer received erroneously awarded incentive-based compensation within the three fiscal years preceding the date of determination that a restatement is required, the company must recover the excess incentive-based compensation on a “no-fault” basis. The rule also specifies disclosure requirements under newly created Item 402(w) relating to clawback policies and clawbacks.

1. Mandated Listing Standards

Incentive-Based Compensation. Rule 10D-1 defines incentive-based compensation as any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any financial reporting measure. For this purpose, the term “financial reporting measures” means measures that are determined and presented in accordance with the accounting principles used in preparing the company’s financial statements and any measures derived wholly or in part from such financial information (such as non-GAAP financial measures). Additionally, Rule 10D-1 specifically adds stock price and total shareholder return as financial reporting measures for purposes of this rule. The definition is drafted to cover any new forms of compensation and new performance measures that may arise in the future to determine or award incentive-based compensation.

Amounts Recoverable. The amount that listed companies would have to recover is the amount of incentive-based compensation received by the executive officer or former executive officer that exceeds the amount of incentive-based compensation that otherwise would have been received had it been determined based on the accounting restatement. Amounts recovered are computed without regard to taxes that may have been paid or incurred by the executive officer.

To calculate the amount of the excess after an accounting restatement, the company would first need to recalculate both the applicable financial reporting measure and the amount of incentive-based compensation that was based on this measure. Next the company would have to determine whether the executive officer received a greater amount of incentive-based compensation based on the original calculation of the financial reporting measure than such officer would have received based on the recalculated financial reporting measure, after taking into account any discretion applied by the compensation committee to reduce the amount received. If the compensation was only partially based on the financial reporting measure performance goal, the company would need to determine the portion of the original compensation that was based on or derived from the restated financial measure. The company would then have to recalculate the affected portion to determine the excess amount to be recovered.

Because incentive-based compensation that is based on stock price or total shareholder return is not subject to mathematical recalculation directly from the information in an accounting restatement, Rule 10D-1 permits companies to determine the recoverable amount based on a reasonable estimate of the effect of the accounting restatement on stock price or total shareholder return, as applicable, in such circumstances. When this occurs, the listed company must retain documentation of that estimate determination and provide it to the exchange.

Recovery Mechanics. With respect to recoverable incentive-based compensation, the recovery mechanics will depend on the form in which the executive officer holds such compensation at the time of recovery. The adopting release notes that the definition of erroneously awarded compensation is intended to be applied in a principles-based manner thereby allowing companies to adopt a more rigorous recovery policy, provided the minimum requirements set forth in the rules are satisfied. The adopting release provided examples of how to calculate the recovery of certain types of incentive compensation:

For cash awards, the erroneously awarded compensation is the difference between the amount of the cash award (whether payable as a lump sum or over time) that was received and the amount that should have been received applying the restated financial reporting measure.

  • For non-qualified deferred compensation, the executive officer’s account balance or distributions would be reduced by the erroneously awarded compensation contributed to the nonqualified deferred compensation plan and the interest or other earnings accrued thereon under the nonqualified deferred compensation plan.
  • For cash awards paid from bonus pools, the erroneously awarded compensation is the pro rata portion of any deficiency that results from the aggregate bonus pool that is reduced based on applying the restated financial reporting measure.
  • For equity awards, if the shares, options, or SARs are still held at the time of recovery, the erroneously awarded compensation is the number of such securities received in excess of the number that should have been received applying the restated financial reporting measure (or the value of that excess number). If the options or SARs have been exercised, but the underlying shares have not been sold, the erroneously awarded compensation is the number of shares underlying the excess options or SARs (or the value thereof ).

The Commission declined to provide additional guidance on recovery for other forms of incentive-based compensation, suggesting that those determinations will be made based on the individual facts and circumstances of the terms of the incentive compensation arrangements between the company and its executive officer.

If the same compensation is recouped pursuant to section 304 of the Sarbanes-Oxley Act or other recovery provisions, such payment would reduce the amounts recoverable under the listing standards.

Employees Covered. Rule 10D-1 as adopted applies to any individual who, after beginning service as an executive officer, served as an executive officer of the listed company at any time during the performance period for that incentive-based compensation, whether or not such individual is an executive officer at the time the company is seeking recovery. The clawback is not limited to NEOs (i.e., those executive officers whose compensation is described in the company’s proxy statement). Furthermore, the clawback is not limited to executive officers who engaged in misconduct or were directly involved with the accounting error.

Restatements. Rule 10D-1 requires a clawback of incentive-based compensation when a listed company is required to prepare an accounting restatement due to the material noncompliance of the company with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error (1) in previously issued financial statements that is material to the previously issued financial statements or (2) that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.

The rules as adopted consider both “Big R” and “little r” restatements to be within the scope of the recovery policy contemplated by Congress because “both result in revisions of previously issued financial statements for a correction of an error in those financial statements.”

The rules as adopted do not define “accounting restatement” or “material noncompliance.” Existing accounting standards and guidance already provide meanings for both terms. The following types of financial statement changes are not considered corrections of errors and, therefore, would not trigger a clawback under Rule 10D-1:

  • Retrospective application of a change in accounting principle;
  • Retrospective revision to reportable segment information due to a change in the structure of an company’s internal organization;
  • Retrospective reclassification due to a discontinued operation;
  • Retrospective application of a change in reporting entity, such as from a reorganization of entities under common control;
  • Retrospective adjustment to provisional amounts in connection with a prior business combination (IFRS filers only); and
  • Retrospective revision for stock splits, reverse stock splits, stock dividends, or other changes to capital structure.

Look-Back Period. Rule 10D-1 requires listed companies to recover incentive-based compensation received during the three completed fiscal years immediately preceding the date that the company is required to prepare an accounting restatement, which is considered to occur for purposes of Rule 10D-1 on the earlier to occur of:

  • The date the listed company’s board of directors, board committee, or authorized officer or officers concludes, or reasonably should have concluded, that the company is required to prepare an accounting restatement due to the material noncompliance of the company with any financial reporting requirement under the securities laws.
  • The date a court, regulator, or other legally authorized body directs the company to prepare an accounting restatement.

The adopting release provides the following example on the timing of the look-back period: if a company that reports on a calendar year basis concludes in November 2024 that a restatement of previously issued financial statements is required and files the restated financial statements in January 2025, the three-year look-back period would apply to compensation received in 2021, 2022, and 2023.

In arriving at a conclusion that an accounting restatement is required, the adopting release points out that while not dispositive, companies should carefully consider any notice from the company’s independent auditors that previously issued financial statements contain a material error. The triggering event is the determination that an accounting restatement needs to be prepared, which may precede the determination of the actual amount of the error.

Incentive-based compensation would be deemed received in the fiscal period in which the financial reporting measure is attained, even if the payment or grant occurs in a subsequent fiscal period. When the officer’s right to the incentive-based compensation is subject to multiple conditions, the award is deemed received for purposes of the clawback when the relevant financial reporting measure performance goal is attained, regardless of whether the executive officer has only a contingent right to payment.

The date of the receipt of the compensation varies depending on the terms of the award and the type of the award. The adopting release provides the following examples:

  • If the grant of the award is based, either wholly or in part, on satisfaction of a financial reporting measure performance goal, the award would be deemed received in the fiscal period when that measure is satisfied;
  • If an equity award vets only upon satisfaction of a financial reporting measure performance condition, the award would be deemed received in the fiscal period when it vests;
  • A non-equity incentive plan award would be deemed received in the fiscal year that the executive officer earns the award based on the satisfaction of the relevant financial reporting measure performance goal rather than on a subsequent date on which the award was paid; and
  • A cash award earned upon satisfaction of a financial reporting measure performance goal would be deemed received in the fiscal period when the measure is satisfied.

Ministerial acts, such as calculating the amount earned or certification of the attainment of the financial measure by the board or a board committee, do not affect the determination of the date received. Incentive-based compensation would be subject to recovery under Rule 10D-1 only if the executive officer receives such compensation while the company has a class of securities listed on an exchange.

Covered Companies. With very few exceptions, the clawback listing standards apply to all listed companies. This means that FPIs, SRCs, emerging growth companies, business development companies, and companies that list only debt or preferred securities would be subject to the clawback listing standards to the extent that they have securities listed on a national securities exchange. Rule 10D-1 does not grant securities exchanges the discretion to exempt any categories of companies from the listing standards.

Mandatory Clawback. Rule 10D-1 mandates recovery of erroneously awarded compensation in compliance with a company’s recovery policy except to the extent that pursuit of recovery would be impracticable. Despite the urging of commenters, the Commission did not provide a board of directors with very much latitude to exercise discretion. Rule 10D-1 allows for only three narrow exceptions where recovery is considered impractical: (1) the direct cost of recovery would exceed the amount of recovery, (2) the recovery would violate home country law and additional conditions are met, and (3) potential disqualification of tax-qualified retirement plans.

For each of these exceptions, the determination would have to be made by a committee of independent directors that is responsible for executive compensation decisions, such as a compensation committee or, in the absence of such a committee, by a majority of the independent directors. In addition, as discussed below, the company would need to disclose why it did not pursue the recovery. The determination is subject to review by the applicable exchange.

Rule 10D-1 does allow companies to exercise discretion in how to accomplish recovery, recognizing that the means of recovery may vary by the type of compensation arrangement, as well as by company, provided that the recovery of excess incentive-based compensation must be pursued “reasonably promptly.” However, the rule does not provide a definition for “reasonably promptly,” noting that reasonableness may vary by the costs incident to recovery efforts.

Indemnification Prohibited. Listed companies are prohibited from indemnifying their executive officers for incentive compensation recoverable pursuant to clawback policies and from paying the premiums on any insurance policy protecting against such recoveries.

Non-Compliance. Under the rules as adopted, a company would be subject to delisting if it does not adopt a compensation recovery policy that complies with applicable listing standards, adopt a compensation recovery policy that complies with applicable listing standards, or provide the required disclosures in accordance with Commission rules.

2. Disclosure Requirements

The rules require listed companies to: (1) file their clawback policies as exhibits to their annual reports on Form 10-K, Form 20-F, or Form 40-F, as applicable; (2) make disclosures relating to their compliance with their compensation recovery policy; (3) provide the additional information in Inline XBRL; and (4) include additional check box disclosure on the cover of their Form 10-K, 20-F, or 40-F.

Additional Item 402 Disclosure. The Commission has adopted new subsection (w) to Item 402 of Regulation S-K, which requires disclosure in proxy and information statements if during or after its last completed fiscal year a listed company either (1) was required to prepare an accounting restatement that required a clawback under the company’s clawback policy or (2) had an outstanding balance of unrecovered excess incentive-based compensation relating to a prior restatement. In these circumstances, a listed company would be required to disclose:

  • For each restatement:
    • The date on which the company was required to prepare an accounting restatement;
    • The aggregate dollar amount of erroneously awarded compensation resulting from the restatement (including an analysis of how the amount was calculated);
    • If the financial reporting measure that was restated related to stock price or total shareholder return, the estimates used to determine the erroneously awarded compensation attributable to the restatement, and an explanation of the methodology used for such estimates;
    • The aggregate dollar amount of erroneously awarded compensation that remains outstanding at the end of the last completed fiscal year; and
    • If the aggregate dollar amount of erroneously awarded compensation has not yet been determined, disclosure of that fact and an explanation therefor, with the information required for each restatement required to be disclosed in the next filing that includes disclosure pursuant to Item 402 of Regulation S-K.
  • If recovery would be impracticable, for each current and former named executive officer and for all other current and former executive officers as a group, the amount of recovery forgone and a brief description of the reason the company decided in each case not to pursue recovery; and
  • For each current and former named executive officer from whom, as of the end of the last completed fiscal year, erroneously awarded compensation had been outstanding for 180 days or longer since the date the company determined the amount the individual owed, the dollar amount of outstanding erroneously awarded compensation due from each such individual.

Any disclosure regarding impracticability of recovery must include the specific exception on which the company is relying, and should provide additional context relating to that exception, such as a brief explanation of the direct expenses paid to a third party to assist in enforcing the recovery policy, identification of the provision of foreign law that recovery would violate, or a description of how recovery would cause a tax-qualified retirement plan to fail to meet the applicable statutory requirements.

The new Item 402(w) disclosure requirement is separate from the compensation discussion and analysis (CD&A) requirement, but a listed company could choose to include it in its CD&A discussion if it is required to prepare a CD&A discussion.

Additionally, if at any time during or after its last completed fiscal year a company was required to prepare an accounting restatement, and concluded that recovery of erroneously awarded compensation was not required pursuant to the company’s compensation recovery policy required by the listing standards adopted pursuant to Rule 10D-1, the company must briefly explain why application of its recovery policy resulted in this conclusion.

Information disclosed pursuant to Item 402(w) will not be deemed to be incorporated by reference into any filing under the Securities Act unless specifically so incorporated. Finally, the compensation recovery disclosures must have specific data points tagged, as well as block text tagging of the disclosures, in Inline XBRL.

Summary Compensation Table Revisions. When prior year compensation disclosed in a summary compensation table has been recovered, the amount shown in the applicable column and the total column of the summary compensation table must be reduced to include only the amount retained by the executive officer, with a footnote explaining the recovery. For example, if the company reported that in 2024 its chief executive officer earned $1 million in non-equity incentive plan compensation, and in 2025 a restatement of 2024 financial statements resulted in recovery of $300,000 of that compensation, the company’s 2025 summary compensation table would revise the 2024 reported amount for non-equity incentive plan compensation to $700,000, provide footnote disclosure explaining that the company recovered $300,000 of previously reported compensation, and make a comparable change to 2024 total compensation for such officer.

Additional Check Boxes. To promote greater transparency around accounting restatements generally, the cover page to Form 10-K, Form 20-F, and Form 40-F will include new check boxes where companies must indicate separately: (1) whether the financial statements included in the filing reflect correction of an error to previously issued financial statements and (2) whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the company’s executive officers during the relevant recovery period pursuant to Rule 10D-1.

3. Transition Period

Securities exchanges must file their proposed listing standards within ninety days after the publication of Rule 10D-1 in the Federal Register. The new listing standards must be effective no later than one year following the date Rule 10D-1 is published in the Federal Register.

Once clawback listing standards become effective, each company with securities listed on the applicable exchange must adopt a compliant clawback policy within sixty days. The clawback requirement applies to erroneously awarded compensation received on or after the effective date of the applicable listing standard.

Listed companies would have to include the new clawback disclosures in proxy or information statements and Exchange Act annual reports filed on or after the effective date of the listing standards.

E. Proxy Voting Advice

On July 13, 2022, the Commission adopted final amendments regarding the applicability of the proxy rules to proxy advisory firms, which are also known as proxy voting advice businesses (“PVABs”). The amendments relating to PVABs, such as ISS and Glass Lewis, remove certain conditions to the availability of exemptions from the information and filing requirements of the proxy rules for PVABs; these conditions were added as part of rules adopted by the previous presidential administration in 2020. The key reversal from 2020 is the rescission of the conditions that:

  1. Companies that are the subject of proxy voting advice have such advice made available to them before or at the same time PVABs make it available to their clients.
  2. Clients of PVABs are notified of any written responses by companies to such proxy voting advice.

The amendments also reversed course by rescinding a related note to Rule 14a-9 of the Exchange Act and supplemental guidance regarding the proxy voting obligations of investment advisers from the 2020 rules as described below. The amendments leave intact, however, the determination that proxy voting advice is a solicitation subject to the proxy rules—including liability under Rule 14a-9 for material misstatements or omissions of fact—and the conflicts of interest disclosure requirements that were memorialized in the 2020 rules.

The amendments became effective on September 19, 2022, and are referred to below as the “2022 amendments.”

1. Background

In 2020, the Commission adopted final rules regarding proxy voting advice provided by PVABs. The 2020 rules, among other things:

  1. Codified the SEC’s interpretation that proxy voting advice is generally a “solicitation” subject to the proxy rules.
  2. Added new conditions to exemptions that PVABs generally rely on in order to avoid the proxy rules’ information and filing requirements, including:
    1. New conflicts of interest disclosure requirements.
    2. A requirement that PVABs adopt and disclose policies and procedures designed to ensure that companies that are the subject of proxy voting advice have such advice made available to them in a timely manner, as well as a requirement that clients of PVABs are provided with a means of becoming aware of any written responses by companies to proxy voting advice.
  3. Added Note (e) to Rule 14a-9, the anti-fraud provision for proxy materials, to include examples of material misstatements or omissions related to proxy voting advice.

The 2022 amendments reversed the additions of Items 2(b) and 3 in the 2020 rules, which never actually went into effect, as discussed in greater detail below.

2. Final Amendments

The 2020 rules added paragraph (9) to Rule 14a-2(b), which specifies certain conditions that a PVAB must satisfy in order to rely on the exemptions from the proxy rules’ information and filing requirements. The 2022 amendments removed the conditions that:

  1. Companies that are the subject of proxy voting advice have such advice made available to them in a timely manner.
  2. Clients of PVABs are provided with a means of becoming aware of any written responses by companies to proxy voting advice.

These conditions were adopted in 2020 in response to concerns by companies that the analyses by PVABs contained errors and methodological weaknesses that could affect the reliability of their voting recommendations, and that companies did not have adequate opportunities to engage with the PVABs regarding their advice to correct errors on a timely basis. The rescission of these conditions will reignite these concerns for companies, with companies not having a prescribed avenue to respond to proxy voting advice that contains errors or with which they disagree. In addition to the rescission of the conditions themselves, the 2022 amendments removed accompanying safe harbors and exclusions that relate to these conditions. However, the other condition added in the 2020 rules for reliance on the exemptions—that PVABs provide their clients with certain conflicts of interest disclosures in connection with their proxy voting advice—remains in place.

The 2020 rules also codified that PVABs’ proxy voting advice generally constitute a solicitation subject to the proxy rules, including Rule 14a-9, which “prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact.” Rule 14a-9 also requires that solicitations “must not omit to state any material fact necessary in order to make the statements therein not false or misleading.”

As part of the 2020 rules, Rule 14a-9 was amended to add Note (e) to provide examples of proxy voting advice that may, depending on the facts and circumstances, be misleading within the meaning of the rule, specifically citing as a potential example the failure of a PVAB to disclose its “methodology, sources of information, or conflicts of interest.” The 2022 amendments deleted Note (e) from Rule 14a-9, removing the specific examples of proxy voting advice that may be subject to the rule. However, the Commission was intentional in stating that this deletion does not alter the scope of Rule 14a-9 or its application to proxy voting advice—the deletion instead was purportedly aimed at removing the “risk of confusion” created by Note (e). The Commission also reiterated its position included in the proposing release that Rule 14a-9 liability does not extend to mere differences of opinion between PVABs and companies, subject to certain limited circumstances in which a statement of opinion contains a material misstatement or omission of fact.

Finally, the 2022 amendments rescinded supplemental guidance the Commission issued to investment advisers in 2020 about their proxy voting obligations. The 2020 supplemental guidance addressed investment advisers’ use of automated proxy voting systems hosted by PVABs, which have amounted to “robo-voting” in the views of many companies. The 2020 supplemental guidance was primarily intended to assist investment advisers in considering company responses to proxy voting advice that would have been more readily available as a result of the 2020 rules—given the rescission of the conditions discussed above, the Commission determined this guidance also should be removed.

Under the final proxy advisor rules, proxy advisory firms will be left with broad discretion in determining when and how to engage with companies relating to their voting advice. With the rescission of the conditions in the 2020 rules aimed at fostering engagement, there is no regulatory impetus for proxy advisory firms, including ISS and Glass Lewis, to engage with companies or to ensure that company responses to voting advice are received by shareholder clients. While market forces have led to engagement with companies through voluntary procedures, the timing and nature of this engagement will continue to rest with these proxy advisory firms—and there is no guarantee the current practices will be maintained.

F. Inflation Adjustments Under Titles I and III of the Jobs Act

On September 9, 2022, the Commission adopted amendments to the Jumpstart Our Business Startups Act (“JOBS Act”). Under the JOBS Act, the Commission is statutorily required to adjust rules according to inflation once every five years. These amendments applied to both the emerging growth company and Regulation Crowdfunding sections.

Emerging Growth Companies. The JOBS Act defines “emerging growth company” to mean an issuer that has a total annual gross revenue of less than $1 billion (subsequently adjusted in 2017 as noted below), indexed for inflation every five years. The Commission’s intention is to scale disclosure requirements for newly public companies, generally lasting for five years after the IPO. Due to rising inflation, and the JOBS Act recurring indexing requirement, the threshold for qualifying as an emerging growth company significantly increased. Last adjusted in 2017, the Commission increased the threshold for a business to be qualified as an emerging growth company from $1.07 billion to $1.235 billion.

Regulation Crowdfunding. The JOBS Act amended the exemption from registration requirements of section 5 of the Securities Act for certain crowdfunding transactions. The exemption is limited by a maximum amount that the issuer may sell in a twelve-month period under the crowdfunding exemption. This statute also calls for an adjustment every five years correlating to the newly indexed inflation rate. However, the Commission did not adjust the overall offering limit for Regulation Crowdfunding since the offering limit was increased effective March 2021 from $1.07 million to $5 million, and this increase was greater than the inflation-based increase that would otherwise have occurred as a result of the periodic review.

Last adjusted in 2017, the Commission made multiple dollar threshold adjustments to Rule 100 of Regulation Crowdfunding (Offering Maximum and Investment Limits):

  • The threshold for assessing investor’s annual income or net worth to determine investment limits (Rules 100(a)(2)(i) and 100(a)(2)(ii)) was increased from $107,000 to $124,000.
  • The lower threshold of Regulation Crowdfunding securities permitted to be sold to an investor if annual income or net worth is less than $124,000 (Rule 100(a)(2)(i)) was increased from $2,200 to $2,500.
  • The maximum amount that can be sold to an investor under Regulation Crowdfunding in a twelve-month period (Rule 100(a)(2)(ii)) was increased from $107,000 to $124,000.

The Commission also adjusted the threshold amounts in Rule 201(t) of Regulation Crowdfunding:

  • The threshold offering amount to qualify under 201(t)(1), where financial statements can be certified by the principal executive officer of the issuer, was raised from $107,000 to $124,000.
  • The threshold offering amount to qualify under 201(t)(2), where financial statements of the issuer can be reviewed by a public accountant that is independent of the issuer, was raised from $535,000 to $618,000.
  • The threshold offering amount to qualify under 201(t)(3), where financial statements of the issuer must be audited by a public accountant that is independent of the issuer, was raised from $1,070,000 to $1,235,000.

This final rule was considered to be exempt from the notice and comment period of the Administrative Procedures Act since it does not impose any new substantive regulatory requirements on any person.