SEC Adopts Two Rules, Including “Clawback” Rule
The Securities and Exchange Commission (SEC) recently adopted two rules, including a “clawback” rule intended to ensure publicly traded companies recover incentive-based compensation erroneously awarded to executives. The second adopted rule requires more transparency of mutual fund information shared with investors.
Rule: Listing Standards for Recovery of Erroneously Awarded Compensation
The SEC said that the new "clawback" rule requires securities exchanges to implement listing standards that compel companies to develop and put in place a policy to recover incentive-based compensation received by current or former executive officers that was erroneously awarded to them.
The new rule implements Section 10D of the Securities Exchange Act of 1934, a provision added by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule requires a listed issuer to file the policy as an exhibit to its annual report and include disclosures related to its recovery policy and recovery analysis where a recovery is triggered.
The final rule will become effective 60 days following publication of the adopting release in the Federal Register. Exchanges will be required to file proposed listing standards no later than 90 days following publication of the release in the Federal Register, and the listing standards must be effective no later than one year following such publication. Issuers subject to such listing standards will be required to adopt a recovery policy no later than 60 days following the date on which the applicable listing standards become effective.
The SEC first proposed compensation recovery rules in 2015 and reopened the comment period on the proposal in October 2021 and June 2022.
Rule: Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements
The SEC also recently adopted rule and form amendments to require mutual funds and exchange-traded funds to provide concise and visually engaging shareholder reports and to promote transparent and balanced presentations of fees and expenses in investment company advertisements.
The reports are required to highlight information such as fund expenses, performance and portfolio holdings. Funds must tag the information in their reports in a structured data format. The rule amendments also require funds to make certain information that may be more relevant to those who desire more in-depth information available online and available for delivery free of charge to investors on request. That information will no longer appear in funds’ shareholder reports but will remain available to investors on a website identified in the shareholder report and must be filed semi-annually with the Commission.
In addition, the SEC adopted amendments to investment company advertising rules to require that fee and expense presentations in registered investment company and business development company advertisements and sales literature be consistent with relevant prospectus fee table presentations and be reasonably current. The amendments also address representations of fees and expenses that could be materially misleading.
The amendments will become effective 60 days after publication in the Federal Register. There is an 18-month transition period after the effective date to allow mutual funds and exchange-traded funds adequate time to adjust their shareholder report and transmission practices. The SEC is also providing an 18-month transition period after the effective date to comply with the final amendments to the advertising rules. The rule amendments that address representations of fees and expenses that could be materially misleading will apply on the effective date.