June Edition 2023

49 that is based on the incentive-based compensation? SEC Staff confirmed that the rules are intended to apply broadly. For plans that take into account incentive-based compensation, an issuer would be expected to claw back the amount contributed to the notional account based on erroneously awarded incentive-based compensation and any earnings accrued to date on that notional amount. What is the effect on indemnification and insurance? The rules prohibit an issuer from providing insurance or indemnification to any executive officer or former executive officer for the loss of erroneously awarded compensation. An executive officer may be able to purchase a third-party insurance policy to fund potential recovery obligations. However, the indemnification provisions prohibit an issuer from paying or reimbursing the executive officer for premiums for these policies. How do you calculate recovery amounts? The SEC adopted a principles-based definition of “erroneously awarded compensation”. Issuers are generally required to recover the amount, calculated on a pre-tax basis, of any incentive-based compensation received that exceeds the amount that otherwise would have been received had the compensation been calculated based on the restated amounts. In instances where the amount of erroneously awarded compensation is not subject to mathematical recalculation directly from the information in an accounting restatement, the amount must be based on a reasonable estimate of the effect of the accounting restatement on the applicable measure, and the issuer must maintain documentation of the determination of that reasonable estimate and provide it to the applicable exchange. Generally, for equity awards, the erroneously awarded compensation is the number of shares received in excess of the number that should have been received applying the restated financial reporting measure. If the underlying shares have not been sold, the erroneously awarded compensation is the number of shares underlying the excess options. Could CEO or CFO’s be subject to duplicative reimbursement?