On June 9, 2023, the Securities and Exchange Commission (SEC) gave its approval to the clawback listing standards proposed by two of the world’s most influential stock exchanges, the New York Stock Exchange (NYSE) and The Nasdaq Stock Market. The approval was in accordance with the SEC Rule 10D-1. All listed companies are now required to adopt and implement a compliant clawback policy by December 1, 2023. Learn More Here
The implementation of the clawback policy is significant because it allows corporations to recover, or “claw back,” cash or stock compensation from corporate executives in the occurrence of certain incidences, such as misconduct or an accounting restatement. It is seen as a key tool in maintaining corporate integrity and accountability.
However, as per current guidelines, there appears to be an exception for externally-managed Real Estate Investment Trusts (REITs). This exception is worthy of discussion as it significantly impacts the external managers of these trusts. External managers, often related to the REIT, are those who make the key operational decisions but do not participate directly in the profits of the REIT. They are compensated through management fees, which are not dependent on the REIT’s performance.
In a case where a REIT does not have an executive officer to which the clawback policy applies, the policy is not required to be adopted. In other words, external managers of REITs can avoid the clawback policy.
This development, and the exception to the clawback policy requirement for REIT external managers, is an important consideration for legal professionals working with public companies, REITs, and compensation committees. A deep understanding of these clawback policies, and how and when they are applied, is crucial for these individuals and can have significant implications for the corporations they represent. It remains to be seen whether any additional regulations or guidelines will be proposed in response to this possible loophole in the policy.