The U.S. Securities and Exchange Commission (SEC) has recently published new proposed rules relating to Section 10D of the Securities Exchange Act of 1934 (“Section 10D“), which requires listed issuers to enforce compensation recovery policies that recoup from executive officers incentive compensation resulting from specified accounting restatements during the applicable three-year look back period (the famous “clawback” concept).
As Section 10D applies also to foreign private issuers (i.e. to most Israeli companies listed in the U.S. markets), your attention is required.
While Section 10D was adopted in 2010, the SEC has only now published a release with its proposed rules (requesting the public’s comments). Once the SEC issues final rules, which will be no earlier than September 2015 (to allow for the required comment period), the exchanges will have 90 days to issue their proposed listing rules, which must be effective no later than one year following the publication of the SEC’s final rules. Companies would then be required to adopt a clawback policy no later than 60 days following the effectiveness of the exchanges’ rules. Since all Israeli companies already have a clawback policy as part of their Compensation Policy they will probably only need to adapt them to the new rules.
Under the proposed rules, mandatory recovery policies will apply to any compensation that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure, including measures determined by or presented in a company’s financial statements, as well as its stock price and total shareholder return.
Please note that recovery policies will not be mandatory for equity awards that vest exclusively on the basis of service, without any performance condition, or to bonus awards that are discretionary, based on subjective goals, or on goals unrelated to financial reporting measures.
The board discretion’s not to seek recovery will be very limited under the proposed rules, and would only apply when seeking recovery would be impracticable because it would impose enforcement costs on the company exceeding the recovery amounts or would violate home country law.
The recovery policy applying to a company’s “executive officers”, shall include, for this purpose, a group that is broader than a company’s “Office Holders” (as defined under Israeli Companies law), and will also include executives who have policy-making functions or are responsible for preparing the company’s financial reports.
A foreign private issuer would be required to disclose its recovery policy in its annual reports, and additional disclosure requirements may apply if it has been required to perform an act of recovery.
A copy of the SEC release with the proposed rules can be found at the following link – http://www.sec.gov/rules/proposed/2015/33-9861.pdf.