Reopening of Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, 58232-58237 [2021-22754]
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Federal Register / Vol. 86, No. 201 / Thursday, October 21, 2021 / Proposed Rules
regulatory action’’ under Executive
Order 12866; (2) is not a ‘‘significant
rule’’ under Department of
Transportation (DOT) Regulatory
Policies and Procedures (44 FR 11034;
February 26, 1979); and (3) does not
warrant preparation of a regulatory
evaluation as the anticipated impact is
so minimal. Since this is a routine
matter that will only affect air traffic
procedures and air navigation, it is
certified that this proposed rule, when
promulgated, will not have a significant
economic impact on a substantial
number of small entities under the
criteria of the Regulatory Flexibility Act.
Environmental Review
This proposal will be subject to an
environmental analysis in accordance
with FAA Order 1050.1F,
‘‘Environmental Impacts: Policies and
Procedures’’ prior to any FAA final
regulatory action.
Authority: 49 U.S.C. 106(f), 106(g); 40103,
40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR,
1959–1963 Comp., p. 389.
List of Subjects in 14 CFR Part 71
§ 71.1
Airspace, Incorporation by reference,
Navigation (air).
■
The Proposed Amendment
In consideration of the foregoing, the
Federal Aviation Administration
proposes to amend 14 CFR part 71 as
follows:
PART 71—DESIGNATION OF CLASS A,
B, C, D, AND E AIRSPACE AREAS; AIR
TRAFFIC SERVICE ROUTES; AND
REPORTING POINTS
[Amended]
2. The incorporation by reference in
14 CFR 71.1 of FAA Order JO 7400.11F,
Airspace Designations and Reporting
Points, dated August 10, 2021, and
effective September 15, 2021, is
amended as follows:
Paragraph 6011 United States Area
Navigation Routes.
*
*
*
*
*
1. The authority citation for part 71
continues to read as follows:
■
T–366
VANTY, AK TO JATIL, AK [NEW]
VANTY, AK
WP
CABGI, AK
WP
SUPGY, AK
WP
JODGU, AK
WP
FILEV, AK
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BARROW, AK
VOR/DME
(BRW)
JATIL, AK
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Issued in Washington, DC, on October 12,
2021.
Michael R. Beckles,
Acting Manager, Rules and Regulations
Group.
[FR Doc. 2021–22546 Filed 10–20–21; 8:45 am]
BILLING CODE 4910–13–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 229, 240, 249 and 274
[Release No. 33–10998; 34–93311; IC–
34399; File No. S7–12–15]
RIN 3235–AK99
Reopening of Comment Period for
Listing Standards for Recovery of
Erroneously Awarded Compensation
Securities and Exchange
Commission.
ACTION: Proposed rule; reopening of
comment period.
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AGENCY:
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securities associations to establish
listing standards that would require
each issuer to develop and implement a
policy providing for the recovery, under
certain circumstances, of incentivebased compensation based on financial
information required to be reported
under the securities laws that is
received by current or former executive
officers, and require disclosure of the
policy (the ‘‘Proposed Rules’’). The
Proposed Rules were set forth in a
release published in the Federal
Register on July 14, 2015 (Release No.
34–75342) (the ‘‘Proposing Release’’),
and the related comment period ended
on September 14, 2015. The reopening
of this comment period is intended to
allow interested persons further
opportunity to analyze and comment
upon the Proposed Rules in light of
developments since the publication of
the Proposing Release and our further
consideration of the Section 954
mandate.
The comment period for the
proposed rule published July 14, 2015,
at 80 FR 41143, is reopened. Comments
should be received on or before
November 22, 2021.
Comments may be
submitted by any of the following
methods:
ADDRESSES:
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DATES:
The Securities and Exchange
Commission (‘‘Commission’’) is
reopening the comment period for its
proposal to implement the provisions of
Section 954 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act of 2010 (‘‘Dodd-Frank Act’’). The
proposed rule would direct the national
securities exchanges and national
SUMMARY:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/submitcomments.htm).
Paper Comments
• Send paper comments to Vanessa
A. Countryman, Secretary, Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549–1090.
All submissions should refer to File
Number S7–12–15. This file number
should be included on the subject line
if email is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s website (https://
www.sec.gov/rules/proposed.shtml).
Comments also are available for website
viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE, Washington, DC
20549–1090 on official business days
between the hours of 10 a.m. and 3 p.m.
Operating conditions may limit access
to the Commission’s public reference
room. All comments received will be
posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly.
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Federal Register / Vol. 86, No. 201 / Thursday, October 21, 2021 / Proposed Rules
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Studies, memoranda, or other
substantive items may be added by the
Commission or staff to the comment file
during this rulemaking. A notification of
the inclusion in the comment file of any
such materials will be made available
on our website. To ensure direct
electronic receipt of such notifications,
sign up through the ‘‘Stay Connected’’
option at www.sec.gov to receive
notifications by email.
FOR FURTHER INFORMATION CONTACT:
Steven G. Hearne, Senior Special
Counsel, in the Office of Rulemaking, at
(202) 551–3430, Division of Corporation
Finance, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Background
Section 954 of the Dodd-Frank Act
added Section 10D to the Securities
Exchange Act of 1934 1 (‘‘Exchange
Act’’), which provides that the
Commission require national securities
exchanges and national securities
associations to prohibit the listing of
any security of an issuer that does not
develop and implement a policy
providing for the recovery of
erroneously awarded compensation and
for disclosure of that policy. As
described more fully in the Proposing
Release,2 under the Proposed Rules, an
issuer would be subject to delisting if it
does not adopt a compensation recovery
policy that complies with the applicable
listing standard, disclose the policy in
accordance with Commission rules, and
comply with the policy’s recovery
provisions. Specifically, the Proposed
Rules would:
1. Require national securities
exchanges and associations to establish
listing standards that require listed
issuers to adopt and comply with a
compensation recovery policy in which:
i. Recovery is required:
a. From current and former executive
officers who received incentive-based
compensation during the three fiscal
years preceding the date on which the
issuer is required to prepare an
accounting restatement to correct a
material error.
b. On a ‘‘no fault’’ basis, without
regard to whether any misconduct
occurred or an executive officer’s
responsibility for the misstated financial
statements.
ii. The amount of incentive-based
compensation to be recovered is the
1 15
U.S.C. 78a et seq.
Listing Standards for Recovery of
Erroneously Awarded Compensation, Release No.
34–75342 (Jul. 1, 2015) [80 FR 41143 (Jul. 14,
2015)].
2 See
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amount received by an executive officer
that exceeds the amount the executive
officer would have received had the
incentive-based compensation been
determined based on the restated
financial statements.
iii. Issuers must recover in
compliance with their recovery policies
except to the extent that it would be
impracticable to do so, such as where
the direct expense of enforcing recovery
would exceed the amount to be
recovered or, for foreign private issuers,
in specified circumstances where
recovery would violate home country
law.
iv. Issuers are prohibited from
indemnifying current and former
executive officers against the loss of
recoverable incentive-based
compensation.
2. Define significant terms, including:
i. ‘‘Incentive-based compensation’’ as
any compensation that is granted,
earned, or vested based wholly or in
part upon the attainment of a financial
reporting measure, and further defining
‘‘financial reporting measure’’ as a
measure that is determined and
presented in accordance with the
accounting principles used in preparing
the issuer’s financial statements, any
measure derived wholly or in part from
such financial information, and stock
price and total shareholder return. For
incentive-based compensation based on
stock price or total shareholder return,
issuers would be permitted to use a
reasonable estimate of the effect of the
restatement on the applicable measure
to determine the amount to be
recovered.
ii. ‘‘Executive officer’’ modeled on the
definition of ‘‘officer’’ under 15 U.S.C.
78p (‘‘Exchange Act Section 16’’), to
include the issuer’s president, principal
financial officer, principal accounting
officer, any vice-president in charge of
a principal business unit, division or
function, and any other person who
performs policy-making functions for
the issuer and otherwise conforms to the
full scope of the Exchange Act Section
16 definition.3
3. Require the filing of the
compensation recovery policy as an
exhibit to the issuer’s Exchange Act
annual report, and if during its last
completed fiscal year the issuer either
completed a restatement that required
recovery, or there was an outstanding
balance of excess incentive-based
compensation relating to a prior
restatement, require disclosure, block
tagged in XBRL, to accompany the
executive compensation disclosure in
3 See
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annual reports and any proxy or
information statements of:
i. The date on which the issuer was
required to prepare each accounting
restatement, the aggregate dollar amount
of excess incentive-based compensation
attributable to the restatement, and the
aggregate dollar amount of excess
incentive-based compensation that
remained outstanding at the end of its
last completed fiscal year.
ii. The name of each individual
subject to recovery from whom the
issuer decided not to pursue recovery,
the amounts due from each such
individual, and a brief description of the
reason the issuer decided not to pursue
recovery.
iii. If at the end of the issuer’s last
completed fiscal year, amounts of excess
incentive-based compensation are
outstanding from any individual for
more than 180 days, the name of, and
amount due from, each such individual.
4. Apply to all listed issuers except
for certain registered investment
companies to the extent they do not
provide incentive-based compensation
to their employees and limited
accommodations for foreign private
issuers.
II. Reopening of Comment Period
Since the enactment of Section 954 of
the Dodd-Frank Act in 2010, and the
publication of the Proposed Rules in
2015, there have been important
developments relating to clawback
policies. We have observed an increase
in the number of issuers disclosing
information about their ability to recoup
performance-based awards in the event
of fraud, restatement of financial
statements, or other reasons, and
adopting and implementing executive
compensation clawback policies
addressing these circumstances.4
In light of these developments, and
our further consideration of how best to
implement the Section 954 mandate, we
are reopening the comment period for
the Proposed Rules until November 22,
2021 to provide the public with an
additional opportunity to analyze and
comment on the Proposed Rules.
Commenters may submit, and the
Commission will consider, comments
on any aspect of the Proposed Rules. All
comments received to date on the
Proposed Rules will be considered and
need not be resubmitted. Comments are
particularly helpful to us if
accompanied by quantified estimates or
other detailed analysis and supporting
4 An Intelligize search indicates a significant
increase in the number of publicly traded
companies that adopted a clawback compensation
policy, from 982 in 2015 to 1,321 in 2018 and to
2,021 in 2020.
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Federal Register / Vol. 86, No. 201 / Thursday, October 21, 2021 / Proposed Rules
data regarding the issues addressed in
those comments. In addition to the
requests for comment included in the
Proposing Release, the Commission
specifically seeks comments on the
following:
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Request for Comment
1. Exchange Act Section 10D provides
for the implementation of a policy for
the recovery of certain incentive-based
compensation ‘‘in the event that the
issuer is required to prepare an
accounting restatement due to the
material noncompliance of the issuer
with any financial reporting
requirement under the securities laws.’’
The Commission proposed to define an
‘‘accounting restatement’’ for this
purpose as ‘‘the result of the process of
revising previously issued financial
statements to reflect the correction of
one or more errors that are material to
those financial statements.’’ The
proposed definition would not require a
recovery where an issuer’s previously
issued financial statements are required
to be restated in order to correct errors
that were not material to those
previously issued financial statements,
but would result in a material
misstatement if (a) the errors were left
uncorrected in the current report or (b)
the error correction was recognized in
the current period.
Since the Commission issued the
Proposing Release in 2015, concerns
have been expressed that issuers may
not be making appropriate materiality
determinations for errors identified.
Some commentators have suggested that
this could be because some of these
issuers are seeking to avoid
compensation recovery under their
clawback policies.5 One commenter
expressed concerns regarding
immaterial ‘‘revision restatements’’ that
would allow an issuer to avoid the
application of the proposed clawback
provisions and recommended that the
clawback trigger not be limited to
material restatements of previously
issued financial statements.6 In this
5 See, e.g., Shh! Companies Are Fixing
Accounting Errors Quietly—WSJ—Wall Street
Journal (Dec. 5, 2019). See also Choudhary, Preeti
and Merkley, Kenneth J. and Schipper, Katherine,
Immaterial Error Corrections and Financial
Reporting Reliability (June 15, 2021) available at
https://ssrn.com/abstract=2830676 or https://
dx.doi.org/10.2139/ssrn.2830676; and Thompson,
Rachel, Reporting Misstatements as Revisions: An
Evaluation of Managers’ Use of Materiality
Discretion (Sept. 17, 2021) available at https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3450828.
6 See letter in response to the Proposing Release
from AFL–CIO (Sept. 14, 2015) (‘‘AFL–CIO’’). Some
commenters supported a trigger when any revision
to previously issued financial statements occurred.
See, e.g., letters in response to the Proposing
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regard, we note that Commission staff
has provided guidance that an issuer’s
materiality evaluation of an identified
unadjusted error should consider the
effects of the identified unadjusted error
on the applicable financial statements
and related footnotes, and evaluate
quantitative and qualitative factors.7
We are considering whether the term
‘‘an accounting restatement due to
material noncompliance’’ should be
interpreted to include all required
restatements made to correct an error in
previously issued financial statements.8
This interpretation would include
restatements required to correct errors
that were not material to those
previously issued financial statements,
but would result in a material
misstatement if (a) the errors were left
uncorrected in the current report or (b)
the error correction was recognized in
the current period. Under such an
interpretation, those restatements as
well as restatements to correct errors
that are material to the previously
issued financial statements, would be
considered ‘‘an accounting restatement
due to material noncompliance’’ and
therefore would result in a clawback
recovery analysis. We believe that
revising the Proposed Rules to
encompass these types of restatements
would be an appropriate means of
implementing the statute.
Should the scope of the Proposed
Rules include (1) restatements that
correct errors that are material to
previously issued financial statements
Release from As You Sow Foundation (Sept. 15,
2015); Council of Institutional Investors (Aug. 27,
2015); California Public Employees Retirement
System (Sept. 14, 2015). Other commenters
supported the proposed standard to limit the trigger
to material restatements of previously issued
financial statements. See, e.g., letters in response to
the Proposing Release from Ernst & Young LLP
(Sept. 15, 2015) and Society of Corporate
Secretaries and Governance Professionals (Sept. 18,
2015) (‘‘SCSGP’’).
7 The staff has provided guidance to assist
registrants in carrying out these evaluations. See
Staff Accounting Bulletin No. 99, Materiality (Aug.
12, 1999) and Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year
Financial Statements (Sept. 13, 2006). The
statements in the staff accounting bulletins are not
rules or interpretations of the Commission, nor are
they published as bearing the Commission’s official
approval. They represent interpretations and
practices followed by the Division of Corporation
Finance and the Office of the Chief Accountant in
administering the disclosure requirements of the
Federal securities laws.
8 See Financial Accounting Standards Board
(‘‘FASB’’) Accounting Standards Codification
(‘‘ASC’’) Topic 250, which defines ‘‘error in
previously issued financial statements’’ as an error
in recognition, measurement, presentation, or
disclosure in financial statements resulting from
mathematical mistakes, mistakes in the application
of generally accepted accounting principles, or
oversight or misuse of facts that existed at the time
the financial statements were prepared.
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and (2) restatements that correct errors
that are not material to previously
issued financial statements, but would
result in a material misstatement if (a)
the errors were left uncorrected in the
current report or (b) the error correction
was recognized in the current period?
Are there practical or other
considerations that would make
application of the clawback policy in
these circumstances challenging or
unduly burdensome? If so, are there
additional changes we should make to
address those challenges or burdens?
For example, in instances where a
clawback analysis would be trigged by
restatements that correct errors that are
not material to previously issued
financial statements, should the rules
provide additional discretion for
compensation committees of the issuer’s
board of directors to determine whether
to pursue recovery of incentive-based
compensation and how much to
recover, and would such discretion be
consistent with Section 954? Is there an
alternative interpretation of ‘‘an
accounting restatement due to material
noncompliance’’ that would be more
appropriate and better capture required
restatements? Are there accounting
restatements that are due to material
noncompliance that would not be
captured by the proposed definition or
the interpretation set forth above that
should be subject to clawback?
2. For purposes of triggering the threeyear lookback period, the Proposed
Rules would establish the date on which
an issuer is required to prepare an
accounting restatement as the earlier of
(a) the date the issuer’s board of
directors, a committee of the board of
directors, or the officer or officers of the
issuer authorized to take such action if
board action is not required, concludes,
or reasonably should have concluded,
that the issuer’s previously issued
financial statements contain a material
error, or (b) the date a court, regulator
or other legally authorized body directs
the issuer to restate its previously issued
financial statements to correct a material
error. The Proposing Release indicated
the Commission’s belief that a definition
that incorporates the proposed
triggering events rather than leaving the
determination solely to the discretion of
the issuer would better realize the
objectives of Section 10D while
providing clarity about when a recovery
policy, and specifically the
determination of the three-year lookback period, would be triggered for
purposes of the proposed listing
standards. Some commenters expressed
concern that the ‘‘reasonably should
have concluded’’ standard adds
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Federal Register / Vol. 86, No. 201 / Thursday, October 21, 2021 / Proposed Rules
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unnecessary uncertainty to the
determination.9 Should we remove the
‘‘reasonably should have concluded’’
standard in light of concerns that the
standard adds uncertainty to the
determination? For example, should we
revise the trigger to use the earlier of (a)
the date the issuer’s board of directors,
a committee of the board of directors, or
the officer or officers of the issuer
authorized to take such action if board
action is not required, concludes that
the issuer’s previously issued financial
statements require a restatement to
correct an error in those financial
statements that is material to the
previously issued financial statements
or that would result in a material
misstatement if (1) the error was left
uncorrected in the current report or (2)
the error correction was recognized in
the current period; or (b) the date a
court, regulator or other legally
authorized body directs the issuer to
restate its previously issued financial
statements for either type of error? For
errors that are material to the previously
issued financial statements, we
generally expect the date in (a) to
coincide with the date disclosed in the
Item 4.02(a) Form 8–K filed.10 For errors
that are not material to the previously
issued financial statements but where
the issuer concludes that a restatement
is required, we believe evidence of the
conclusion that a restatement is
required is generally included in the
issuer’s documentation of its materiality
analysis of the error.11 Should we
remove the ‘‘reasonably should have
concluded’’ standard in light of
concerns raised by commenters,
regardless of whether we revise the
proposed trigger to accommodate the
additional accounting restatements that
we are considering? Is there another
standard consistent with the purposes of
the rule that may reduce the expected
complexities of applying the
‘‘reasonably should have concluded’’
standard?
3. The Commission proposed defining
a number of terms for purposes of the
9 See letters in response to the Proposing Release
from American Bar Association (Feb. 11, 2016)
(‘‘ABA’’); Business Roundtable (Sept. 14, 2015);
Center on Executive Compensation (Sept. 14, 2015);
Davis Polk & Wardwell LLC (Sept. 11, 2015); Exxon
Mobil Corporation (Sept. 14, 2015); and SCSGP.
The letter from Exxon Mobil Corporation asserted
it is not ‘‘a realistic concern’’ that issuers would
delay issuing a restatement to avoid a clawback.
10 An Item 4.02(a) Form 8–K is required to report
when the registrant concludes that its previously
issued financial statements should no longer be
relied upon because of an error in such financial
statements as addressed in FASB ASC Topic 250,
Accounting Changes and Error Corrections.
11 An Item 4.02 Form 8–K is not typically filed
for an error that is not material to the previously
issued financial statements.
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Proposed Rules. Alternatively, should
the Commission rely on common
understanding or specifically delineate
the rules without relying on a set of
definitions specific to this rule? For
example, an ‘‘accounting restatement’’
was proposed to be defined solely for
the purposes of the Proposed Rule as
‘‘the result of the process of revising
previously issued financial statements
to reflect the correction of one or more
errors that are material to those financial
statements.’’ U.S. GAAP and IFRS
include guidance on how an issuer
should correct accounting errors in
previously issued financial
statements.12 In addition, Federal
securities laws and Commission rules
require presenting information that is
not misleading. To assist registrants
with compliance with the Federal
securities laws, the staff has provided
certain guidance on how registrants
assess the materiality of an accounting
error.13 Because the revised clawback
trigger we are considering would
specifically refer to all required
restatements to previously issued
financial statements, including those
restatements that were not material to
those previously issued financial
statements, but would result in a
material misstatement if (a) the errors
were left uncorrected in the current
report or (b) the error correction was
recognized in the current period, we are
considering whether it would be more
appropriate to rely on existing guidance,
literature and definitions concerning
accounting errors rather than define
‘‘accounting restatement’’ and ‘‘material
noncompliance.’’ Should we rely on
these existing resources and remove the
proposed definitions of ‘‘accounting
restatement’’ and ‘‘material
noncompliance’’? Alternatively, are
there other definitions of ‘‘accounting
restatement’’ and ‘‘material
noncompliance’’ we should use or
would adding new definitions cause
more confusion in their application?
Additionally, if the rule does not
establish a specific definition regarding
when incentive-based compensation is
‘‘received,’’ what guidance, if any,
should we provide regarding the
meaning of that term?
4. If we interpret the statutory term
‘‘an accounting restatement due to
material noncompliance’’ to include
restatements required to correct errors
that were not material to previously
issued financial statements, but would
12 See FASB ASC Topic 250, Accounting Changes
and Error Corrections, and International
Accounting Standard 8, Accounting Policies,
Changes in Accounting Estimates and Errors.
13 See supra note 7.
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result in a material misstatement if (a)
the errors were left uncorrected in the
current report or (b) the error correction
was recognized in the current period,
then those restatements would require a
recovery analysis. Registrants do not
always label historical financial
statements as ‘‘restated’’ for these types
of restatements. Also, an Item 4.02 Form
8–K filing is not typically filed for this
type of error, because the error is not
material to the previously issued
financial statements. As such, to
provide greater transparency around
such restatements, we are considering
whether to add check boxes to the cover
page of the Form 10–K that indicate
separately (a) whether the previously
issued financial statements included in
the filing include an error correction,
and (b) whether any such corrections
are restatements that triggered a
clawback analysis during the fiscal year.
Would one or both checkboxes and the
related information be useful to
investors? Is there another method, such
as via a Form 8–K filing, that we should
consider in order to provide this
information to investors in a transparent
and prominent manner? Are there any
other disclosures that would be useful
to investors in explaining or clarifying
information surrounding any
restatements or the issuer’s decision of
whether or not to claw back
compensation?
5. As noted above, there has been an
observed increase in voluntary adoption
of compensation clawback policies in
recent years, together with
accompanying disclosures about those
policies. These developments would
impact the potential costs of the
Proposed Rules at the aggregate level.
However, such impact is likely to differ
across issuers in a variety of ways. For
example, some issuers may already have
policies that would satisfy, or easily
could be modified to satisfy, the
requirements of the Proposed Rules.
Other issuers may have clawback
policies in place that are substantially
different from the requirements of the
Proposed Rules, or may not have
clawback policies in place altogether.
We request any estimates or data that
would allow us to refine our
characterization of costs and benefits of
the clawback policies under the current
state of issuer clawback policies and
how such effects would differ under the
Proposed Rules. In particular, we
request specific estimates of the costs
that are incurred by issuers in
implementing these policies, and the
costs and benefits to investors. How
might these costs and/or benefits change
in implementing a policy pursuant to a
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Commission rulemaking and the new
potential interpretation of ‘‘an
accounting restatement due to material
noncompliance’’? We also request data
regarding the characteristics of
voluntarily adopted clawback policies
(for example, clawback triggers, scope of
covered persons, scope of compensation
covered, among other characteristics),
and data regarding compensation
structures that are used by issuers (for
example, compensation instruments
utilized, measures used to award/earn
such compensation, among others). Has
the voluntary adoption of clawback
provisions resulted in a decrease of
incentive-based compensation or an
increase in compensation tied to nonfinancial performance by issuers?
6. We understand that as part of the
materiality analysis relating to errors,
issuers already consider whether any
misstatement of previously issued
financial statements had the effect of
increasing management’s compensation.
To what extent can the evaluation
already conducted in connection with
evaluating the materiality of an error be
leveraged in connection with
determining the need for and the
amount of any clawback? Would
revising the scope of the Proposed Rules
to encompass additional accounting
restatements, as described above, affect
how an issuer conducts this evaluation
and, if so, how? Would revising the
scope largely capture situations where
issuers may have shifted from restating
previously issued financial statements
to avoid triggering compensation
clawback policies, or would there be
situations where the revised scope
becomes over-inclusive? How would
revising the scope impact the costs to
issuers or benefits to investors of the
clawback provision and the execution of
the clawback analysis as compared to
the Proposed Rules? We request data or
analysis that will assist us in evaluating
the effects of including these additional
accounting restatements within the
scope of the rule, in particular any data
that may assist in quantifying the
number of additional clawback analyses
that would be triggered and the costs
and benefits of revising the scope of the
rule. How would the potential changes
discussed in this release affect the
appropriateness of the scope of the
Proposed Rules overall? For example, in
response to the Proposing Release, some
commenters stated that the Proposed
Rules applied too broadly both to
individuals and to issuers.14 Is the rule
14 See
e.g., letters in response to the Proposing
Release from ABA; National Association of
Manufacturers (Sept. 14, 2015); and SCSGP. But
see, e.g., letters in response to the Proposing Release
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16:54 Oct 20, 2021
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as proposed appropriately tailored?
How, if at all, would the changes to the
scope of the rules discussed in this
release affect the other aspects of the
Proposed Rules?
7. The Commission proposed to
define the recoverable amount as ‘‘the
amount of incentive-based
compensation received by the executive
officer or former executive officer that
exceeds the amount of incentive-based
compensation that otherwise would
have been received had it been
determined based on the accounting
restatement.’’ 15 Applying this
definition, after an accounting
restatement, the issuer would first
recalculate the applicable financial
reporting measure and the amount of
incentive-based compensation based
thereon. The issuer would then
determine whether, based on that
financial reporting measure as
calculated relying on the original
financial statements and taking into
account any discretion that the
compensation committee had applied to
reduce the amount originally received,
the executive officer received a greater
amount of incentive-based
compensation than would have been
received applying the recalculated
financial reporting measure.
There are a number of possible
methods to reasonably estimate the
effect of an accounting restatement on
stock price with varying levels of
complexity and a range of related costs.
For incentive-based compensation based
on stock price or total shareholder
return, where the amount of erroneously
awarded compensation is not subject to
mathematical recalculation directly
from the information in the accounting
restatement, the Proposed Rules would
require an issuer to maintain
documentation of the determination of
that reasonable estimate and provide
such documentation to the relevant
exchange or association.16 The Proposed
Rules did not explicitly require
disclosure of how issuers calculated the
recoverable amount. We request
comment on whether additional
disclosures beyond what was proposed
should be required. For example, would
investors benefit from disclosure of how
issuers calculated the recoverable
amount, including their analysis of the
amount of the executive’s compensation
that is recoverable under the rule, and/
or the amount that is not subject to
recovery? For incentive-based
from Better Markets, Inc. ((Sept. 14, 2015); and
AFL–CIO (supporting the scope of the Proposed
Rules).
15 See Proposed Rule 10D–1(b)(1)(iii).
16 See Proposed Rule 10D–1(b)(1)(iii)(B).
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compensation based on stock price or
total shareholder return, would
investors benefit from disclosure
regarding the determination and
methodology that an issuer used to
estimate the effect of stock price or total
shareholder return? What are the costs
associated with such disclosure?
8. Have there been any changes or
developments since the Proposing
Release with respect to payment of
incentive-based compensation by listed
registered management investment
companies that should affect how listed
registered management investment
companies are treated under the
Proposed Rules? If an investment
company, or a business development
company, is externally, rather than
internally, managed, should this impact
how the company is treated under the
Proposed Rules? For example, should
listed business development companies
(or externally managed listed business
development companies) be treated the
same as listed registered management
investment companies and be eligible
for the conditional exemption as long as
they do not actually pay incentive-based
compensation? Should we reconsider
any of the Proposed Rules’ conditions or
disclosure requirements with respect to
registered or unregistered investment
companies? What impact would any of
those changes have on the economic
effects of the rule?
9. The Commission proposed to
require that the new compensation
recovery disclosures be block-text
tagged using XBRL. The Commission is
considering requiring that specific data
points within the new compensation
recovery disclosure be separately detail
tagged using Inline XBRL instead of, or
in addition to, the proposed block-text
tagging.17 Would Inline XBRL detail
tagging of some or all of the
compensation recovery disclosures be
valuable to investors? If so, which
disclosures should we require issuers to
detail tag and why? Is there an
alternative technology to XBRL that we
should consider? Should we enable
more flexibility by adopting other
tagging technologies?
10. Are there any other developments
since the Proposing Release that should
affect our consideration of the Proposed
17 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
considering using Inline XBRL, rather than XBRL,
for the proposed tagging requirements.
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Federal Register / Vol. 86, No. 201 / Thursday, October 21, 2021 / Proposed Rules
Rules or their potential economic
effects? Are there any changes we
should consider in the methodologies
and estimates used to analyze the
economic effects of the Proposed Rules
in the Proposing Release?
We request and encourage any
interested person to submit comments
regarding the Proposed Rules, specific
issues discussed in this release or the
Proposing Release, and other matters
that may have an effect on the Proposed
Rules. We request comment from the
point of view of issuers, shareholders,
directors, investors, and other market
participants. We note that comments are
of particular assistance to us if
accompanied by supporting data and
analysis of the issues addressed in those
comments, particularly quantitative
information as to the costs and benefits.
If alternatives to the Proposed Rules are
suggested, supporting data and analysis
and quantitative information as to the
costs and benefits of those alternatives
are of particular assistance. Commenters
are urged to be as specific as possible;
when commenting, it would be most
helpful if you include the reasoning
behind your position or
recommendation. All comments
received to date on the Proposed Rules
will be considered and need not be
resubmitted. If any commenters who
have already submitted a comment
letter wish to provide supplemental or
updated comments, we encourage them
to do so.
Dated: October 14, 2021.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021–22754 Filed 10–20–21; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF VETERANS
AFFAIRS
38 CFR Part 17
RIN 2900–AQ70
Medical Benefits Package;
Chiropractic Services
Department of Veterans Affairs.
Proposed rule.
AGENCY:
ACTION:
The Department of Veterans
Affairs (VA) proposes to revise its
medical regulations to add chiropractic
services to the definitions of medical
services and preventive care. VA would
further revise the definition of medical
services to include rehabilitative
services consistent with its statutory
definition and to reflect changes made
in other VA medical regulations and in
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prior legislation not previously codified.
The proposed amendments would make
VA medical regulations consistent with
current practices, prior changes in law
and VA’s medical regulations, and
changes in law made by the
Consolidated Appropriations Act, 2018.
These amendments would not
substantively change the current
administration of medical benefits to
veterans.
DATES: Comments must be received on
or before December 20, 2021.
ADDRESSES: Comments may be
submitted through https://
www.Regulations.gov. Comments
received will be available at
regulations.gov for public viewing,
inspection, or copies.
FOR FURTHER INFORMATION CONTACT:
Anthony Lisi, D.C., Director, Veterans
Health Administration Chiropractic
Service, Rehabilitation and Prosthetic
Services (10P4R), 810 Vermont Ave.
NW, Washington, DC 20420, (203) 932–
5711, ext. 5341. (This is not a toll-free
number.)
SUPPLEMENTARY INFORMATION: Section
1710 of title 38 of the United States
Code (U.S.C.) requires VA to furnish
hospital care and medical services
which the Secretary determines to be
needed for eligible veterans. Prior to
March 23, 2018, under 38 U.S.C.
1701(6), medical services included
medical examination and treatment,
rehabilitative services, surgical services,
dental services and appliances,
optometric and podiatric services,
preventive health services,
noninstitutional extended care services,
travel and certain incidental expenses,
and prosthetic and related items and
services. Preventive health services
were specifically listed as medical
services in section 1701(6)(D) while
rehabilitative services were listed as
medical services in the introductory text
of section 1701(6). Both rehabilitative
services and preventive health services
were further defined in 38 U.S.C.
1701(8) and 1701(9), respectively.
Rehabilitative services included
professional, counseling, and guidance
services and treatment programs
necessary to restore the physical,
mental, and psychological functioning
of an ill or disabled person, while
preventive health services included
such services as medical and dental
examinations, patient health education,
mental health preventive services,
substance abuse prevention measures,
certain immunizations, and routine
vision testing and eye care services.
On March 23, 2018, the President of
the United States signed the
Consolidated Appropriations Act, 2018,
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Frm 00012
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Sfmt 4702
58237
Public Law (Pub. L.) 115–141 (hereafter
‘‘Appropriations Act’’). In section 245 of
Division J of the Appropriations Act,
Congress amended 38 U.S.C. 1701(6) by
adding chiropractic services to the
definition of medical services.
Similarly, Congress amended the
definition of rehabilitative services
under section 1701(8) to include
chiropractic services. Congress also
amended section 1701(9) by adding
chiropractic examinations and services
to the definition of preventive services
under section 1701(9). VA proposes to
amend title 38 Code of Federal
Regulations (CFR) 17.30 and 17.38 to
conform to these statutory changes and
for additional reasons, as set forth in
more detail in the subsequent
discussions.
Section 17.30 Definitions
VA has incorporated the definitions of
medical services and preventive
services into its medical regulations.
Currently, § 17.30(a) defines the term
medical services to include medical
examination, treatment and
rehabilitative services; surgical services;
dental services and appliances as
authorized in §§ 17.160 through 17.166;
optometric and podiatric services; (in
the case of a person otherwise receiving
care or services under this chapter)
preventive health care services set forth
in 38 U.S.C. 1701(9); noninstitutional
extended care services; wheelchairs,
artificial limbs, trusses and similar
appliances; special clothing made
necessary by the wearing of prosthetic
appliances, and such other supplies and
services as are medically determined to
be reasonable and necessary.
We propose to make several changes
to this definition of medical services in
38 CFR 17.30(a) to make the regulation
easier to read, to provide clarification, to
conform to the statutory authority (38
U.S.C. 1701), including amendments
made to this authority by the
Appropriations Act, and to reference
other applicable VA medical regulations
in 38 CFR part 17.
For clarity and because of other
changes we propose to amend § 17.30 as
further explained below. We propose to
redesignate current paragraphs (a)(2)
and (a)(3) as (a)(3) and (a)(4),
respectively; propose to move the
language, medical examination,
treatment, and rehabilitative services,
from paragraph (a) to paragraph (a)(1)
and revise it; and propose to move the
language in current paragraph (a)(1) to
paragraph (a)(2) and revise it.
Paragraph (a) would continue to
include the heading of medical services
and would state that the term medical
services includes the following; after
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]]>Agencies
[Federal Register Volume 86, Number 201 (Thursday, October 21, 2021)]
[Proposed Rules]
[Pages 58232-58237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-22754]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 240, 249 and 274
[Release No. 33-10998; 34-93311; IC-34399; File No. S7-12-15]
RIN 3235-AK99
Reopening of Comment Period for Listing Standards for Recovery of
Erroneously Awarded Compensation
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; reopening of comment period.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
reopening the comment period for its proposal to implement the
provisions of Section 954 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (``Dodd-Frank Act''). The proposed rule
would direct the national securities exchanges and national securities
associations to establish listing standards that would require each
issuer to develop and implement a policy providing for the recovery,
under certain circumstances, of incentive-based compensation based on
financial information required to be reported under the securities laws
that is received by current or former executive officers, and require
disclosure of the policy (the ``Proposed Rules''). The Proposed Rules
were set forth in a release published in the Federal Register on July
14, 2015 (Release No. 34-75342) (the ``Proposing Release''), and the
related comment period ended on September 14, 2015. The reopening of
this comment period is intended to allow interested persons further
opportunity to analyze and comment upon the Proposed Rules in light of
developments since the publication of the Proposing Release and our
further consideration of the Section 954 mandate.
DATES: The comment period for the proposed rule published July 14,
2015, at 80 FR 41143, is reopened. Comments should be received on or
before November 22, 2021.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm).
Paper Comments
Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-12-15. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
website (https://www.sec.gov/rules/proposed.shtml). Comments also are
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549-1090 on official
business days between the hours of 10 a.m. and 3 p.m. Operating
conditions may limit access to the Commission's public reference room.
All comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly.
[[Page 58233]]
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on our website. To ensure direct electronic
receipt of such notifications, sign up through the ``Stay Connected''
option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Steven G. Hearne, Senior Special
Counsel, in the Office of Rulemaking, at (202) 551-3430, Division of
Corporation Finance, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Background
Section 954 of the Dodd-Frank Act added Section 10D to the
Securities Exchange Act of 1934 \1\ (``Exchange Act''), which provides
that the Commission require national securities exchanges and national
securities associations to prohibit the listing of any security of an
issuer that does not develop and implement a policy providing for the
recovery of erroneously awarded compensation and for disclosure of that
policy. As described more fully in the Proposing Release,\2\ under the
Proposed Rules, an issuer would be subject to delisting if it does not
adopt a compensation recovery policy that complies with the applicable
listing standard, disclose the policy in accordance with Commission
rules, and comply with the policy's recovery provisions. Specifically,
the Proposed Rules would:
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\1\ 15 U.S.C. 78a et seq.
\2\ See Listing Standards for Recovery of Erroneously Awarded
Compensation, Release No. 34-75342 (Jul. 1, 2015) [80 FR 41143 (Jul.
14, 2015)].
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1. Require national securities exchanges and associations to
establish listing standards that require listed issuers to adopt and
comply with a compensation recovery policy in which:
i. Recovery is required:
a. From current and former executive officers who received
incentive-based compensation during the three fiscal years preceding
the date on which the issuer is required to prepare an accounting
restatement to correct a material error.
b. On a ``no fault'' basis, without regard to whether any
misconduct occurred or an executive officer's responsibility for the
misstated financial statements.
ii. The amount of incentive-based compensation to be recovered is
the amount received by an executive officer that exceeds the amount the
executive officer would have received had the incentive-based
compensation been determined based on the restated financial
statements.
iii. Issuers must recover in compliance with their recovery
policies except to the extent that it would be impracticable to do so,
such as where the direct expense of enforcing recovery would exceed the
amount to be recovered or, for foreign private issuers, in specified
circumstances where recovery would violate home country law.
iv. Issuers are prohibited from indemnifying current and former
executive officers against the loss of recoverable incentive-based
compensation.
2. Define significant terms, including:
i. ``Incentive-based compensation'' as any compensation that is
granted, earned, or vested based wholly or in part upon the attainment
of a financial reporting measure, and further defining ``financial
reporting measure'' as a measure that is determined and presented in
accordance with the accounting principles used in preparing the
issuer's financial statements, any measure derived wholly or in part
from such financial information, and stock price and total shareholder
return. For incentive-based compensation based on stock price or total
shareholder return, issuers would be permitted to use a reasonable
estimate of the effect of the restatement on the applicable measure to
determine the amount to be recovered.
ii. ``Executive officer'' modeled on the definition of ``officer''
under 15 U.S.C. 78p (``Exchange Act Section 16''), to include the
issuer's president, principal financial officer, principal accounting
officer, any vice-president in charge of a principal business unit,
division or function, and any other person who performs policy-making
functions for the issuer and otherwise conforms to the full scope of
the Exchange Act Section 16 definition.\3\
---------------------------------------------------------------------------
\3\ See 17 CFR 240. 16a-1(f).
---------------------------------------------------------------------------
3. Require the filing of the compensation recovery policy as an
exhibit to the issuer's Exchange Act annual report, and if during its
last completed fiscal year the issuer either completed a restatement
that required recovery, or there was an outstanding balance of excess
incentive-based compensation relating to a prior restatement, require
disclosure, block tagged in XBRL, to accompany the executive
compensation disclosure in annual reports and any proxy or information
statements of:
i. The date on which the issuer was required to prepare each
accounting restatement, the aggregate dollar amount of excess
incentive-based compensation attributable to the restatement, and the
aggregate dollar amount of excess incentive-based compensation that
remained outstanding at the end of its last completed fiscal year.
ii. The name of each individual subject to recovery from whom the
issuer decided not to pursue recovery, the amounts due from each such
individual, and a brief description of the reason the issuer decided
not to pursue recovery.
iii. If at the end of the issuer's last completed fiscal year,
amounts of excess incentive-based compensation are outstanding from any
individual for more than 180 days, the name of, and amount due from,
each such individual.
4. Apply to all listed issuers except for certain registered
investment companies to the extent they do not provide incentive-based
compensation to their employees and limited accommodations for foreign
private issuers.
II. Reopening of Comment Period
Since the enactment of Section 954 of the Dodd-Frank Act in 2010,
and the publication of the Proposed Rules in 2015, there have been
important developments relating to clawback policies. We have observed
an increase in the number of issuers disclosing information about their
ability to recoup performance-based awards in the event of fraud,
restatement of financial statements, or other reasons, and adopting and
implementing executive compensation clawback policies addressing these
circumstances.\4\
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\4\ An Intelligize search indicates a significant increase in
the number of publicly traded companies that adopted a clawback
compensation policy, from 982 in 2015 to 1,321 in 2018 and to 2,021
in 2020.
---------------------------------------------------------------------------
In light of these developments, and our further consideration of
how best to implement the Section 954 mandate, we are reopening the
comment period for the Proposed Rules until November 22, 2021 to
provide the public with an additional opportunity to analyze and
comment on the Proposed Rules. Commenters may submit, and the
Commission will consider, comments on any aspect of the Proposed Rules.
All comments received to date on the Proposed Rules will be considered
and need not be resubmitted. Comments are particularly helpful to us if
accompanied by quantified estimates or other detailed analysis and
supporting
[[Page 58234]]
data regarding the issues addressed in those comments. In addition to
the requests for comment included in the Proposing Release, the
Commission specifically seeks comments on the following:
Request for Comment
1. Exchange Act Section 10D provides for the implementation of a
policy for the recovery of certain incentive-based compensation ``in
the event that the issuer is required to prepare an accounting
restatement due to the material noncompliance of the issuer with any
financial reporting requirement under the securities laws.'' The
Commission proposed to define an ``accounting restatement'' for this
purpose as ``the result of the process of revising previously issued
financial statements to reflect the correction of one or more errors
that are material to those financial statements.'' The proposed
definition would not require a recovery where an issuer's previously
issued financial statements are required to be restated in order to
correct errors that were not material to those previously issued
financial statements, but would result in a material misstatement if
(a) the errors were left uncorrected in the current report or (b) the
error correction was recognized in the current period.
Since the Commission issued the Proposing Release in 2015, concerns
have been expressed that issuers may not be making appropriate
materiality determinations for errors identified. Some commentators
have suggested that this could be because some of these issuers are
seeking to avoid compensation recovery under their clawback
policies.\5\ One commenter expressed concerns regarding immaterial
``revision restatements'' that would allow an issuer to avoid the
application of the proposed clawback provisions and recommended that
the clawback trigger not be limited to material restatements of
previously issued financial statements.\6\ In this regard, we note that
Commission staff has provided guidance that an issuer's materiality
evaluation of an identified unadjusted error should consider the
effects of the identified unadjusted error on the applicable financial
statements and related footnotes, and evaluate quantitative and
qualitative factors.\7\
---------------------------------------------------------------------------
\5\ See, e.g., Shh! Companies Are Fixing Accounting Errors
Quietly--WSJ--Wall Street Journal (Dec. 5, 2019). See also
Choudhary, Preeti and Merkley, Kenneth J. and Schipper, Katherine,
Immaterial Error Corrections and Financial Reporting Reliability
(June 15, 2021) available at https://ssrn.com/abstract=2830676 or
https://dx.doi.org/10.2139/ssrn.2830676; and Thompson, Rachel,
Reporting Misstatements as Revisions: An Evaluation of Managers' Use
of Materiality Discretion (Sept. 17, 2021) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3450828.
\6\ See letter in response to the Proposing Release from AFL-CIO
(Sept. 14, 2015) (``AFL-CIO''). Some commenters supported a trigger
when any revision to previously issued financial statements
occurred. See, e.g., letters in response to the Proposing Release
from As You Sow Foundation (Sept. 15, 2015); Council of
Institutional Investors (Aug. 27, 2015); California Public Employees
Retirement System (Sept. 14, 2015). Other commenters supported the
proposed standard to limit the trigger to material restatements of
previously issued financial statements. See, e.g., letters in
response to the Proposing Release from Ernst & Young LLP (Sept. 15,
2015) and Society of Corporate Secretaries and Governance
Professionals (Sept. 18, 2015) (``SCSGP'').
\7\ The staff has provided guidance to assist registrants in
carrying out these evaluations. See Staff Accounting Bulletin No.
99, Materiality (Aug. 12, 1999) and Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
(Sept. 13, 2006). The statements in the staff accounting bulletins
are not rules or interpretations of the Commission, nor are they
published as bearing the Commission's official approval. They
represent interpretations and practices followed by the Division of
Corporation Finance and the Office of the Chief Accountant in
administering the disclosure requirements of the Federal securities
laws.
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We are considering whether the term ``an accounting restatement due
to material noncompliance'' should be interpreted to include all
required restatements made to correct an error in previously issued
financial statements.\8\ This interpretation would include restatements
required to correct errors that were not material to those previously
issued financial statements, but would result in a material
misstatement if (a) the errors were left uncorrected in the current
report or (b) the error correction was recognized in the current
period. Under such an interpretation, those restatements as well as
restatements to correct errors that are material to the previously
issued financial statements, would be considered ``an accounting
restatement due to material noncompliance'' and therefore would result
in a clawback recovery analysis. We believe that revising the Proposed
Rules to encompass these types of restatements would be an appropriate
means of implementing the statute.
---------------------------------------------------------------------------
\8\ See Financial Accounting Standards Board (``FASB'')
Accounting Standards Codification (``ASC'') Topic 250, which defines
``error in previously issued financial statements'' as an error in
recognition, measurement, presentation, or disclosure in financial
statements resulting from mathematical mistakes, mistakes in the
application of generally accepted accounting principles, or
oversight or misuse of facts that existed at the time the financial
statements were prepared.
---------------------------------------------------------------------------
Should the scope of the Proposed Rules include (1) restatements
that correct errors that are material to previously issued financial
statements and (2) restatements that correct errors that are not
material to previously issued financial statements, but would result in
a material misstatement if (a) the errors were left uncorrected in the
current report or (b) the error correction was recognized in the
current period? Are there practical or other considerations that would
make application of the clawback policy in these circumstances
challenging or unduly burdensome? If so, are there additional changes
we should make to address those challenges or burdens? For example, in
instances where a clawback analysis would be trigged by restatements
that correct errors that are not material to previously issued
financial statements, should the rules provide additional discretion
for compensation committees of the issuer's board of directors to
determine whether to pursue recovery of incentive-based compensation
and how much to recover, and would such discretion be consistent with
Section 954? Is there an alternative interpretation of ``an accounting
restatement due to material noncompliance'' that would be more
appropriate and better capture required restatements? Are there
accounting restatements that are due to material noncompliance that
would not be captured by the proposed definition or the interpretation
set forth above that should be subject to clawback?
2. For purposes of triggering the three-year lookback period, the
Proposed Rules would establish the date on which an issuer is required
to prepare an accounting restatement as the earlier of (a) the date the
issuer's board of directors, a committee of the board of directors, or
the officer or officers of the issuer authorized to take such action if
board action is not required, concludes, or reasonably should have
concluded, that the issuer's previously issued financial statements
contain a material error, or (b) the date a court, regulator or other
legally authorized body directs the issuer to restate its previously
issued financial statements to correct a material error. The Proposing
Release indicated the Commission's belief that a definition that
incorporates the proposed triggering events rather than leaving the
determination solely to the discretion of the issuer would better
realize the objectives of Section 10D while providing clarity about
when a recovery policy, and specifically the determination of the
three-year look-back period, would be triggered for purposes of the
proposed listing standards. Some commenters expressed concern that the
``reasonably should have concluded'' standard adds
[[Page 58235]]
unnecessary uncertainty to the determination.\9\ Should we remove the
``reasonably should have concluded'' standard in light of concerns that
the standard adds uncertainty to the determination? For example, should
we revise the trigger to use the earlier of (a) the date the issuer's
board of directors, a committee of the board of directors, or the
officer or officers of the issuer authorized to take such action if
board action is not required, concludes that the issuer's previously
issued financial statements require a restatement to correct an error
in those financial statements that is material to the previously issued
financial statements or that would result in a material misstatement if
(1) the error was left uncorrected in the current report or (2) the
error correction was recognized in the current period; or (b) the date
a court, regulator or other legally authorized body directs the issuer
to restate its previously issued financial statements for either type
of error? For errors that are material to the previously issued
financial statements, we generally expect the date in (a) to coincide
with the date disclosed in the Item 4.02(a) Form 8-K filed.\10\ For
errors that are not material to the previously issued financial
statements but where the issuer concludes that a restatement is
required, we believe evidence of the conclusion that a restatement is
required is generally included in the issuer's documentation of its
materiality analysis of the error.\11\ Should we remove the
``reasonably should have concluded'' standard in light of concerns
raised by commenters, regardless of whether we revise the proposed
trigger to accommodate the additional accounting restatements that we
are considering? Is there another standard consistent with the purposes
of the rule that may reduce the expected complexities of applying the
``reasonably should have concluded'' standard?
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\9\ See letters in response to the Proposing Release from
American Bar Association (Feb. 11, 2016) (``ABA''); Business
Roundtable (Sept. 14, 2015); Center on Executive Compensation (Sept.
14, 2015); Davis Polk & Wardwell LLC (Sept. 11, 2015); Exxon Mobil
Corporation (Sept. 14, 2015); and SCSGP. The letter from Exxon Mobil
Corporation asserted it is not ``a realistic concern'' that issuers
would delay issuing a restatement to avoid a clawback.
\10\ An Item 4.02(a) Form 8-K is required to report when the
registrant concludes that its previously issued financial statements
should no longer be relied upon because of an error in such
financial statements as addressed in FASB ASC Topic 250, Accounting
Changes and Error Corrections.
\11\ An Item 4.02 Form 8-K is not typically filed for an error
that is not material to the previously issued financial statements.
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3. The Commission proposed defining a number of terms for purposes
of the Proposed Rules. Alternatively, should the Commission rely on
common understanding or specifically delineate the rules without
relying on a set of definitions specific to this rule? For example, an
``accounting restatement'' was proposed to be defined solely for the
purposes of the Proposed Rule as ``the result of the process of
revising previously issued financial statements to reflect the
correction of one or more errors that are material to those financial
statements.'' U.S. GAAP and IFRS include guidance on how an issuer
should correct accounting errors in previously issued financial
statements.\12\ In addition, Federal securities laws and Commission
rules require presenting information that is not misleading. To assist
registrants with compliance with the Federal securities laws, the staff
has provided certain guidance on how registrants assess the materiality
of an accounting error.\13\ Because the revised clawback trigger we are
considering would specifically refer to all required restatements to
previously issued financial statements, including those restatements
that were not material to those previously issued financial statements,
but would result in a material misstatement if (a) the errors were left
uncorrected in the current report or (b) the error correction was
recognized in the current period, we are considering whether it would
be more appropriate to rely on existing guidance, literature and
definitions concerning accounting errors rather than define
``accounting restatement'' and ``material noncompliance.'' Should we
rely on these existing resources and remove the proposed definitions of
``accounting restatement'' and ``material noncompliance''?
Alternatively, are there other definitions of ``accounting
restatement'' and ``material noncompliance'' we should use or would
adding new definitions cause more confusion in their application?
Additionally, if the rule does not establish a specific definition
regarding when incentive-based compensation is ``received,'' what
guidance, if any, should we provide regarding the meaning of that term?
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\12\ See FASB ASC Topic 250, Accounting Changes and Error
Corrections, and International Accounting Standard 8, Accounting
Policies, Changes in Accounting Estimates and Errors.
\13\ See supra note 7.
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4. If we interpret the statutory term ``an accounting restatement
due to material noncompliance'' to include restatements required to
correct errors that were not material to previously issued financial
statements, but would result in a material misstatement if (a) the
errors were left uncorrected in the current report or (b) the error
correction was recognized in the current period, then those
restatements would require a recovery analysis. Registrants do not
always label historical financial statements as ``restated'' for these
types of restatements. Also, an Item 4.02 Form 8-K filing is not
typically filed for this type of error, because the error is not
material to the previously issued financial statements. As such, to
provide greater transparency around such restatements, we are
considering whether to add check boxes to the cover page of the Form
10-K that indicate separately (a) whether the previously issued
financial statements included in the filing include an error
correction, and (b) whether any such corrections are restatements that
triggered a clawback analysis during the fiscal year. Would one or both
checkboxes and the related information be useful to investors? Is there
another method, such as via a Form 8-K filing, that we should consider
in order to provide this information to investors in a transparent and
prominent manner? Are there any other disclosures that would be useful
to investors in explaining or clarifying information surrounding any
restatements or the issuer's decision of whether or not to claw back
compensation?
5. As noted above, there has been an observed increase in voluntary
adoption of compensation clawback policies in recent years, together
with accompanying disclosures about those policies. These developments
would impact the potential costs of the Proposed Rules at the aggregate
level. However, such impact is likely to differ across issuers in a
variety of ways. For example, some issuers may already have policies
that would satisfy, or easily could be modified to satisfy, the
requirements of the Proposed Rules. Other issuers may have clawback
policies in place that are substantially different from the
requirements of the Proposed Rules, or may not have clawback policies
in place altogether. We request any estimates or data that would allow
us to refine our characterization of costs and benefits of the clawback
policies under the current state of issuer clawback policies and how
such effects would differ under the Proposed Rules. In particular, we
request specific estimates of the costs that are incurred by issuers in
implementing these policies, and the costs and benefits to investors.
How might these costs and/or benefits change in implementing a policy
pursuant to a
[[Page 58236]]
Commission rulemaking and the new potential interpretation of ``an
accounting restatement due to material noncompliance''? We also request
data regarding the characteristics of voluntarily adopted clawback
policies (for example, clawback triggers, scope of covered persons,
scope of compensation covered, among other characteristics), and data
regarding compensation structures that are used by issuers (for
example, compensation instruments utilized, measures used to award/earn
such compensation, among others). Has the voluntary adoption of
clawback provisions resulted in a decrease of incentive-based
compensation or an increase in compensation tied to non-financial
performance by issuers?
6. We understand that as part of the materiality analysis relating
to errors, issuers already consider whether any misstatement of
previously issued financial statements had the effect of increasing
management's compensation. To what extent can the evaluation already
conducted in connection with evaluating the materiality of an error be
leveraged in connection with determining the need for and the amount of
any clawback? Would revising the scope of the Proposed Rules to
encompass additional accounting restatements, as described above,
affect how an issuer conducts this evaluation and, if so, how? Would
revising the scope largely capture situations where issuers may have
shifted from restating previously issued financial statements to avoid
triggering compensation clawback policies, or would there be situations
where the revised scope becomes over-inclusive? How would revising the
scope impact the costs to issuers or benefits to investors of the
clawback provision and the execution of the clawback analysis as
compared to the Proposed Rules? We request data or analysis that will
assist us in evaluating the effects of including these additional
accounting restatements within the scope of the rule, in particular any
data that may assist in quantifying the number of additional clawback
analyses that would be triggered and the costs and benefits of revising
the scope of the rule. How would the potential changes discussed in
this release affect the appropriateness of the scope of the Proposed
Rules overall? For example, in response to the Proposing Release, some
commenters stated that the Proposed Rules applied too broadly both to
individuals and to issuers.\14\ Is the rule as proposed appropriately
tailored? How, if at all, would the changes to the scope of the rules
discussed in this release affect the other aspects of the Proposed
Rules?
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\14\ See e.g., letters in response to the Proposing Release from
ABA; National Association of Manufacturers (Sept. 14, 2015); and
SCSGP. But see, e.g., letters in response to the Proposing Release
from Better Markets, Inc. ((Sept. 14, 2015); and AFL-CIO (supporting
the scope of the Proposed Rules).
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7. The Commission proposed to define the recoverable amount as
``the amount of incentive-based compensation received by the executive
officer or former executive officer that exceeds the amount of
incentive-based compensation that otherwise would have been received
had it been determined based on the accounting restatement.'' \15\
Applying this definition, after an accounting restatement, the issuer
would first recalculate the applicable financial reporting measure and
the amount of incentive-based compensation based thereon. The issuer
would then determine whether, based on that financial reporting measure
as calculated relying on the original financial statements and taking
into account any discretion that the compensation committee had applied
to reduce the amount originally received, the executive officer
received a greater amount of incentive-based compensation than would
have been received applying the recalculated financial reporting
measure.
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\15\ See Proposed Rule 10D-1(b)(1)(iii).
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There are a number of possible methods to reasonably estimate the
effect of an accounting restatement on stock price with varying levels
of complexity and a range of related costs. For incentive-based
compensation based on stock price or total shareholder return, where
the amount of erroneously awarded compensation is not subject to
mathematical recalculation directly from the information in the
accounting restatement, the Proposed Rules would require an issuer to
maintain documentation of the determination of that reasonable estimate
and provide such documentation to the relevant exchange or
association.\16\ The Proposed Rules did not explicitly require
disclosure of how issuers calculated the recoverable amount. We request
comment on whether additional disclosures beyond what was proposed
should be required. For example, would investors benefit from
disclosure of how issuers calculated the recoverable amount, including
their analysis of the amount of the executive's compensation that is
recoverable under the rule, and/or the amount that is not subject to
recovery? For incentive-based compensation based on stock price or
total shareholder return, would investors benefit from disclosure
regarding the determination and methodology that an issuer used to
estimate the effect of stock price or total shareholder return? What
are the costs associated with such disclosure?
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\16\ See Proposed Rule 10D-1(b)(1)(iii)(B).
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8. Have there been any changes or developments since the Proposing
Release with respect to payment of incentive-based compensation by
listed registered management investment companies that should affect
how listed registered management investment companies are treated under
the Proposed Rules? If an investment company, or a business development
company, is externally, rather than internally, managed, should this
impact how the company is treated under the Proposed Rules? For
example, should listed business development companies (or externally
managed listed business development companies) be treated the same as
listed registered management investment companies and be eligible for
the conditional exemption as long as they do not actually pay
incentive-based compensation? Should we reconsider any of the Proposed
Rules' conditions or disclosure requirements with respect to registered
or unregistered investment companies? What impact would any of those
changes have on the economic effects of the rule?
9. The Commission proposed to require that the new compensation
recovery disclosures be block-text tagged using XBRL. The Commission is
considering requiring that specific data points within the new
compensation recovery disclosure be separately detail tagged using
Inline XBRL instead of, or in addition to, the proposed block-text
tagging.\17\ Would Inline XBRL detail tagging of some or all of the
compensation recovery disclosures be valuable to investors? If so,
which disclosures should we require issuers to detail tag and why? Is
there an alternative technology to XBRL that we should consider? Should
we enable more flexibility by adopting other tagging technologies?
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\17\ 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 considering using Inline XBRL, rather than XBRL, for
the proposed tagging requirements.
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10. Are there any other developments since the Proposing Release
that should affect our consideration of the Proposed
[[Page 58237]]
Rules or their potential economic effects? Are there any changes we
should consider in the methodologies and estimates used to analyze the
economic effects of the Proposed Rules in the Proposing Release?
We request and encourage any interested person to submit comments
regarding the Proposed Rules, specific issues discussed in this release
or the Proposing Release, and other matters that may have an effect on
the Proposed Rules. We request comment from the point of view of
issuers, shareholders, directors, investors, and other market
participants. We note that comments are of particular assistance to us
if accompanied by supporting data and analysis of the issues addressed
in those comments, particularly quantitative information as to the
costs and benefits. If alternatives to the Proposed Rules are
suggested, supporting data and analysis and quantitative information as
to the costs and benefits of those alternatives are of particular
assistance. Commenters are urged to be as specific as possible; when
commenting, it would be most helpful if you include the reasoning
behind your position or recommendation. All comments received to date
on the Proposed Rules will be considered and need not be resubmitted.
If any commenters who have already submitted a comment letter wish to
provide supplemental or updated comments, we encourage them to do so.
Dated: October 14, 2021.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-22754 Filed 10-20-21; 8:45 am]
BILLING CODE 8011-01-P
