In 2015, the Securities and Exchange Commission (“SEC”) proposed a requirement under the Dodd-Frank Wall Street Reform and Consumer Protection Act for publicly-traded companies to adopt clawback policies. These policies are intended to recover erroneously awarded compensation from their executive officers. On October 26, 2022, the SEC adopted the final rules which had been long-awaited by industry professionals. Following this decision, NYSE and Nasdaq-listed companies are now required to have compliant clawback policies in place by December 1, 2023.
The codification of these rules may pose substantive challenges for sponsors of nonqualified plans under Code Section 409A. This code refers to the federal law governing the taxation of nonqualified deferred compensation. Non-compliance with Section 409A regulations can lead to severe penalties, including immediate taxation of deferred amounts, a 20% penalty tax, and potential interest charges on underpayment.
Given the SEC’s recent adoption of these clawback rules, it’s important that company legal departments and their advisors are familiar with the provisions and potential impact on their organizations. Companies, particularly those listed on NYSE and Nasdaq, must adhere to these rules to not only maintain compliance with the law but also to ensure the proper distribution and recovery of executive compensation.
For more detailed information regarding the SEC’s clawback rules and their potential impact on Code Section 409A, especially for nonqualified plan sponsors, refer to the original article published on JDSupra.