SEC Clawback Rules: Recovering Executive Compensation.

Last Updated on: 4th August 2026, 01:33 am

The SEC’s Rule 10D-1 establishes a separate recovery regime under Section 954 of the Dodd-Frank Act without requiring an officer’s personal fault or misconduct. Instead, a qualifying accounting restatement is sufficient to trigger the SEC’s recovery regime. Under the SEC’s rule, recovery is generally mandatory, subject to limited impracticability exceptions.

Comparison with Sarbanes-Oxley and DOJ Clawback Regimes

While Sarbanes-Oxley Section 304 authorizes the SEC to seek compensation recovery under appropriate circumstances, the SEC’s new rule allows for enforcement regardless of the executive’s involvement. Thus, while there are three distinct regimes under which the SEC, Sarbanes-Oxley, and DOJ can seek to recover compensation from executives, the newly amended SEC rules specifically focus on mandatory recovery without an executive’s personal fault.

Can Company Officers Be Subject to the SEC Clawback Rule if They Had No Involvement in the Reporting Error?

Yes, the SEC’s clawback rule could force a company’s officers, including CEOs and CFOs, to return the incentive-based compensation they received if a company must issue an accounting restatement. This means an officer could lose the company-related compensation they earned during the three completed fiscal years preceding the restatement, even if they had no personal involvement in the errors.

Can the DOJ Seek Compensation Clawbacks?

Yes, the DOJ has the ability to seek restitution from corporate executives under the Mandatory Victims Restitution Act, 18 U.S.C. § 3663A. However, the statute is unusually broad and not normally used to recover compensation in federal corporate investigations.

Has the SEC Targeted Corporate Officers Individually?

Yes, the SEC has taken individual enforcement action against corporate officers in a range of cases. As of October 2022, the SEC has pursued 11 executives in a twelve-month period under Section 304. Nine of those 11 cases were initiated within the preceding four months. In previous years, §304 cases usually targeted executives linked to the alleged misconduct at the company.

Which Companies and Executives Face Current Exchange Clawback Standards?

SEC, NYSE, and Nasdaq Clawback Rules

The SEC’s final rule was adopted on October 26, 2022. The rule was published in the Federal Register on November 28, 2022, took effect on January 27, 2023, and required exchange listing standards to become effective no later than November 28, 2023. Following the SEC’s publication of Rule 10D-1, the NYSE and Nasdaq similarly adopted their own rule changes, Section 303A.14 and Rule 5608, respectively, with both becoming effective on October 2, 2023. Listed issuers were then given until December 1, 2023, to adopt clawback policies compliant with the amended standards.

Which Corporate Executives are Subject to the New Clawback Rules?

Under Rule 10D-1, the exchange-mandated clawback rules apply to all executives that serve as the company’s president, principal financial officer, principal accounting officer, or that “perform similar functions.” Thus, Rule 10D-1 incorporates the definition of an “executive officer” found in Rule 16a-1(f). Importantly, Rule 10D-1(c) also clarifies that the new clawback standards apply to “former” executives as well, provided that they were executive officers during the applicable performance period and received the compensation while the issuer was listed.

When and Why Did the SEC Initiate the New Clawback Regime?

The SEC’s new clawback standards are the result of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010. In Section 954, Congress authorized and directed the SEC to require listed companies to adopt rules, policies, and procedures “under which each listed company shall require all company executives of such company to reimburse the company, without regard to regardless of actual fault, any incentive-based compensation” that was “received based on incorrect financial information.” Under the statute’s definition, “incorrect financial information” includes any information that “led to a material misstatement of the company’s financial statements.” The SEC initially proposed rules to implement Section 954 in 2015, but, after several years of refining and revising the proposed rules, it finally adopted the final clawback rules in October 2022.

Which Restatements Trigger Recovery and How Far Back Does it Reach?

Which Restatements Trigger Recovery?

Under Rule 10D-1, the two types of restatements that trigger the SEC’s clawback rule are “big R” restatements and “little r” revisions.

• A “big R” restatement is a restatement that corrects a material error in the financial statements for the prior period.
• A “little r” revision is a restatement that corrects a “non-material” error that, if not corrected, would “come to have a material effect on the prior-period’s financial statements.”

Both types of restatements can trigger recovery under the SEC’s Rule 10D-1. However, a “little r” revision that does not require a restatement would not trigger recovery under Rule 10D-1.

How Far Back Does the Rule Reach?

Rule 10D-1 applies a three-year look-back period to recover executive compensation. Specifically, if a company must issue a restatement, then the company can recover incentive-based compensation that executives received “in the three completed fiscal years preceding the date the company determines that a restatement is required.” This “required-restatement date” is determined based on one of three factors:

• The date the company’s board, or a relevant committee of the board, concludes that a restatement is necessary under the rule;
• The date on which the board, or a relevant committee of the board, reasonably should have concluded that a restatement was required; or,
• The date that a court or regulator determines that a restatement is necessary, or requires a restatement in a final order.

How is Recoverable Incentive Compensation Calculated Under Rule 10D-1?

When is Compensation “Received”?

Under Rule 10D-1, the key concept for calculating incentive compensation is the “received” date. Incentive-based compensation is deemed to be received “at the date the applicable financial reporting measure is attained.” Importantly, the rule clarifies that for calculations under Rule 10D-1, “the grant, vesting, or date of payment” are not determining factors.

What are “Financial Reporting Measures”?

The SEC defines “financial reporting measure” as “a numerical measure that is calculated, based on financial statements as presented in accordance with GAAP (or any similar accounting standard that is adopted by the company’s reporting exchange), or other measure as specified in the company’s incentive compensation plan.” This also includes the company’s stock price and shareholder returns, which are financial reporting measures even though they are not necessarily based on financial statements as presented in accordance with GAAP.

For recoveries based on stock prices and shareholder returns, companies may use “a reasonable estimate of the financial statement’s effect.” However, they must document those estimates, and they must make the documentation available to the exchange upon request.

Calculating Erroneously Awarded Compensation

Under Rule 10D-1, when calculating “erroneously awarded compensation,” the company calculates the compensation award “before any tax was withheld.” The rule applies to all types of incentive compensation, from traditional annual bonuses to more complex long-term equity compensation, and includes both monetary and non-monetary (e.g., stock and option) awards.

This means that if a board erroneously awarded a company officer compensation based on inaccurate and non-GAAP financial reporting measures, that officer can face repayment of that erroneously awarded compensation without need for proving misconduct or even personal fault.

Among the most commonly used financial reporting measures used by companies in calculating award incentives are revenue growth and earnings per share. If these (or other similar measures) are miscalculated as a result of an error in a company’s financial statements that trigger the SEC’s clawback rule, this may lead to executive clawbacks.

Can a Company Seek Recovery under the SEC’s Clawback Rule from an Executive Officer?

Yes, the SEC’s clawback rules allow companies to seek recovery of incentive-based compensation from executives when the financial reporting measure that the executive officer received their incentive based on is incorrect. This includes both “big R” and “little r” restatements.

Todd Spodek is the managing partner of Spodek Law Group, a second generation criminal defense firm that has been practicing since 1976.

How does Sarbanes-Oxley Section 304 Differ from Rule 10D-1?

What are the Major Differences Between Sarbanes-Oxley Section 304 and Rule 10D-1?

There are three major differences between Sarbanes-Oxley Section 304 and the SEC’s Rule 10D-1:

1. Misconduct-Related Restatement Trigger: While Rule 10D-1 includes all “big R” and qualifying “little r” restatements as triggers for clawback, Section 304 triggers the SEC’s ability to claw back compensation when a company’s restatement results from “material noncompliance, as a result of misconduct, with the company’s financial reporting requirements.”

2. Applicability to Company Officers: Sarbanes-Oxley Section 304 only applies to the issuer’s chief executive officer and chief financial officer. Rule 10D-1, however, applies to “president, principal financial officer, principal accounting officer, or any other officer who performs similar functions.”

3. The Nature of Recoupable Compensation: Section 304 is only recoupable when bonuses, incentive compensation, and equity-based compensation were tied to financial reports that are subject to a restatement under Section 304. However, Section 304 also includes profits from any issuer-security sales within a twelve-month period, a concept that is absent under the SEC’s clawback rule.

Does the SEC Need to Prove Culpability or Conduct under Section 304?

The SEC can seek reimbursement under Section 304 even if the executive officers involved in the alleged misconduct had no personal fault or involvement in reporting inaccuracies. The SEC need only prove material noncompliance resulting from the issuer’s misconduct; it does not have to show that the chief executive officer or chief financial officer personally participated in that misconduct.

What Is the Compensation and Trading Profit Clawback Period under Section 304?

Sarbanes-Oxley Section 304 mandates a twelve-month period for both compensation and trading profit. Unlike Rule 10D-1, the twelve-month period under Section 304 runs forward from the first public issuance or filing of the financial document at issue. That twelve-month period begins on whichever of those two dates occurs first.

How and When did Sarbanes-Oxley Act § 304 Become Law?

The Sarbanes-Oxley Act was passed by Congress in 2002, in response to the massive financial scandals at several large American publicly-traded corporations. One of the Act’s most powerful and controversial provisions is Section 304, and as we discussed, this is the section that triggers the recovery regime that gives the SEC power to seek incentive compensation and stock profits from corporate officers when their companies must issue a restatement as a result of material misconduct.

What Does the DOJ Expect When Employee Misconduct Affects Compensation?

DOJ Charging Decisions

In determining whether to charge a company in a criminal case, the DOJ considers several factors, including the company’s compensation and incentive arrangements. This is especially true where employee misconduct is a factor in the company’s potential criminal culpability. When making these charging decisions, the DOJ looks for:

• Adoption of written policies to recoup compensation in the event of employee misconduct
• Evidence that the company has actually sought to pursue clawbacks
• The extent and effort of the company’s attempts to claw back compensation
• Evidence of compensation recoupment

The Dormant Written Policy

Under the DOJ’s guidance, simply having a written policy does not entitle a company to mitigation. As an example, the guidance specifically notes that the DOJ’s “evaluation will look for more than just a dormant written policy.” This underscores the importance of maintaining comprehensive and, critically, properly implemented clawback policies.

Are the DOJ Clawbacks Different from those under the SEC and Sarbanes-Oxley?

The DOJ’s clawbacks are different from the SEC’s clawbacks in one important respect: the DOJ can target compensation recoupment even in situations not involving accounting restatements. However, when pursuing clawbacks, the DOJ’s focus will typically remain on incentive compensation based on financial information that is either inaccurate or which has undergone misstatement, with or without a correction.

The DOJ Compensation-Clawback Incentive Pilot Program

In March 2023, the DOJ launched its first compensation-clawback incentive program. The pilot program incentivizes companies to recoup compensation and provides companies with the ability to seek reduction of their company’s fine equal to the amount of compensation the company clawed back and retained. In other words, the pilot program creates a financial incentive for companies to pursue clawbacks under the new exchange-mandated and Sarbanes-Oxley clawback regimes.

DOJ’s Revised Corporate Criminal Enforcement Policies (September 2022)

In September 2022, the DOJ announced revised corporate criminal enforcement policies that shifted the emphasis from whether a company “has” an effective compliance program to whether the compliance program was “effective” in the instance in question. The new policies create a clear connection between the DOJ’s corporate charging decisions and the effectiveness of companies’ efforts to avoid criminal prosecution of their executives.

DOJ Resolving Corporate Criminal Cases

When resolving corporate criminal cases, the DOJ considers a company’s compensation practices as one factor among many when determining a company’s level of cooperation.

What Must Companies Disclose and How Should They Collect?

What must Listed Issuers Disclose Regarding Clawbacks?

Listed issuers have multiple disclosure and filing obligations under the SEC’s Rule 10D-1. Among these obligations are:

• Clawback policy disclosures filed as Exhibit 97 to the company’s annual report.
• Restatement-related cover-page checkboxes contained on Forms 10-K, 20-F and 40-F.
• Inline XBRL tagged clawback disclosures.
• Additional required disclosures, including individual disclosures for each named executive officer who has long-outstanding “recoupments from the company’s financial reporting measures.”

Is the SEC Rule Imposing Additional Clawback Disclosure and Reporting Duties?

Yes, among the others listed above, the SEC’s Rule 10D-1, along with Exchange Rule 10D-1, imposes a range of additional clawback-related disclosure and reporting duties. With respect to the clawback of erroneously awarded compensation, Rule 10D-1(f) requires issuer compliance with a range of “related disclosure requirements.” With respect to the enforcement of the clawback, Issuer Rule 10D-1(g) requires additional, specific disclosures, including the “amount of recoupments that the issuer has sought from executive officers under the company’s clawback policy.”

These requirements have triggered an increased need for companies to not only establish effective clawback policies, but also for companies to maintain comprehensive recordkeeping systems to ensure compliance with these complex, interrelated requirements.

How Can Listed Issuers Seek to Collect From Company Officers?

Under both the SEC’s and the listing exchanges’ rules, companies have the authority to select the manner in which they collect clawback from company officers. However, they must ensure that the company pursues recovery in a reasonably prompt manner.

Generally, a company’s efforts to collect incentive compensation under the new clawback rules will be initiated when the company makes a formal payment demand. If the executives are not prepared to comply with the demand, then the company has the authority to cancel award(s) and issue offsetting compensation. As a result, companies can seek offsets “from an officer’s pay and any other lawful means to recover unlawfully awarded compensation.”

However, the SEC’s rules do not authorize companies to pursue the cost of enforcing a clawback. This is a key aspect of the SEC’s rules, which give companies the broad authority to collect recoveries from corporate officers but not to shift costs for pursuing those clawbacks onto those officers as well.

Can Executive Recovery Obligations be Precluded by Contracts, Insurance, or Foreign Law?

The Enforcement-Cost Exception

Listed issuers, when pursuing clawbacks from company officers, are not permitted to stop pursuit unless, and only to the extent that, “the cost of enforcement of such recovery exceeds the amount to be recovered on a reasonably prompt basis.” In other words, a company is not permitted to stop efforts to collect from an executive officer unless a “reasonable effort” has been made and the cost of continuing enforcement would exceed the amount of compensation to be recouped. Companies’ reliance on the enforcement-cost exception must be documented by an independent director who may be “vested with the discretion” to make this determination.

Preexisting Employment Contracts, Wage-Law Restrictions and Other Legal Protections

None of the protections mentioned below will excuse recovery from a company officer in most cases:

• Preexisting employment contracts that specifically exclude or that affirmatively exempt compensation from the company’s clawback policy are not eligible for the protections of Rule 10D-1.
• Rule 10D-1 provides no general exception for federal or state wage laws. Although the rule says that no company “shall be forced to do anything that would otherwise violate” federal or state wage laws, this will generally be limited to situations where issuers would be required to pursue “unreasonable efforts” to collect.
• Home country legal protections may in some circumstances offer an exception to Rule 10D-1. According to Rule 10D-1, a company’s failure to pursue clawbacks under Rule 10D-1 for the recovery of a compensation award will not cause a violation of the rule when, as the issuer’s exchange agrees, the issuer provides “an appropriate legal opinion” from a home country law firm as to the recoupment’s unavailability under that law and is, then, “prepared to undertake reasonable efforts to recover the amount.”

Executive-Focused Indemnity and Insurance

Rule 10D-1 places explicit constraints on issuers that are intended to protect executive officers from clawbacks under the exchange-mandated standards:

• No provision of Rule 10D-1 shall be interpreted to permit “issuer to indemnify an executive officer from recoupment liability incurred under Rule 10D-1.”
• Rule 10D-1 prohibits issuers from funding insurance premiums of policies which “would cover an executive officer’s repayment obligation” that may otherwise be incurred under Rule 10D-1.
• Rule 10D-1 imposes prohibition on issuance indemnification and insurance coverage of repayment obligations in cases in which a company officers’ compensation was subject to Rule 10D-1, not on the basis of “whether the company’s efforts to recover the incentive compensation were reasonable in scope and duration, or whether it cost to seek a clawback under Rule 10D-1 exceeded the amount of compensation that the issuer sought to recoup.”
• Rule 10D-1’s prohibitions regarding issuance indemnification and funding of insurance coverage of repayment obligations that would be incurred under Rule 10D-1 do not explicitly forbid coverage of the defense costs of executives during clawback proceedings under Rule 10D-1.

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 212-300-5196.