Document ID: SEC-2023-0624-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2023-06-15T04:00Z

[Federal Register Volume 88, Number 115 (Thursday, June 15, 2023)]
[Notices]
[Pages 39295-39300]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-12757]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97687; File No. SR-NASDAQ-2023-005]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To 
Establish Listing Standards Related to Recovery of Erroneously Awarded 
Executive Compensation

June 9, 2023.

I. Introduction

    On February 22, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt Nasdaq Rule 5608 to establish listing 
standards related to recovery of erroneously awarded executive 
compensation as required by Rule 10D-1 under the Act (``Rule 10D-1''). 
The proposed rule change was published for comment in the Federal 
Register on March 13, 2023.\3\ On April 24, 2023, the Commission 
extended the time period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to approve or disapprove the proposed rule 
change.\4\ On June 6, 2023, the Exchange filed partial Amendment No. 1 
to the proposed rule change.\5\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as modified by 
Amendment No. 1, from interested persons and is approving the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 97060 (March 7, 
2023), 88 FR 15500 (``Notice''). Comments received on the proposed 
rule change are available at: https://www.sec.gov/comments/sr-nasdaq-2023-005/srnasdaq2023005.htm.
    \4\ See Securities Exchange Act Release No. 97353, 88 FR 26369 
(April 28, 2023).
    \5\ Amendment No. 1 is available on the Commission's website at 
https://www.sec.gov/comments/sr-nasdaq-2023-005/srnasdaq2023005-200459-401302.pdf. In Amendment No. 1, the Exchange proposes to 
amend Rule 5608(e) to (i) provide that the effective date of Rule 
5608 would be October 2, 2023; and (ii) clarify, consistent with the 
requirements of Rule 10D-1 and the rule language as originally 
proposed, that each company is required to comply with its recovery 
policy for all incentive-based compensation received (as such term 
is defined in proposed Rule 5608(d)) by executive officers on or 
after October 2, 2023.
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II. Background and Description of the Proposal, as Modified by 
Amendment No. 1

    On October 26, 2022, the Commission adopted final Rule 10D-1 \6\ to 
implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank Act''), which added Section 10D to 
the Act. Section 10D of the Act requires the Commission to adopt rules 
directing the national securities exchanges to prohibit the listing of 
any security of an issuer that is not in compliance with the 
requirements of Section 10D of the Act. Rule 10D-1 requires national 
securities exchanges that list securities to establish listing 
standards that require each issuer to adopt and comply with a written 
executive compensation recovery policy and to provide the disclosures 
required by Rule 10D-1 and in the applicable Commission filings.\7\ 
Under Rule 10D-1, listed companies must recover from current and former 
executive officers incentive-based compensation received during the 
three completed fiscal years preceding the date on which the issuer is 
required to prepare an accounting restatement.
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    \6\ 17 CFR 240.10D-1.
    \7\ See Securities Exchange Act Release No. 96159, 87 FR 73076 
(November 28, 2022) (``Adopting Release''). Rule 10D-1 requires such 
exchange listing rules to be effective no later than one year after 
November 28, 2022. Rule 10D-1 further requires that each listed 
issuer: (i) adopt the required recovery policy no later than 60 days 
following the effective date of the listing standard; (ii) comply 
with the recovery policy for all incentive-based compensation 
received by executive officers on or after the effective date of the 
applicable listing standard; and (iii) provide the required 
disclosures on or after the effective date of the listing standard.
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    As required by Rule 10D-1, Nasdaq proposed to adopt Nasdaq Rule 
5608

[[Page 39296]]

entitled ``Recovery of Erroneously Awarded Compensation.'' Proposed 
Nasdaq Rule 5608 (the ``Rule'') mirrors the text of Rule 10D-1. 
Specifically, proposed Nasdaq Rule 5608(a) would require companies \8\ 
to adopt a compensation recovery policy, comply with that policy, and 
provide the compensation recovery policy disclosures required by the 
Rule and in the applicable Commission filings.
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    \8\ For purposes of this order, ``companies'' or ``company'' 
refers to the issuer of a security listed or an issuer who is 
applying to list on Nasdaq. See, e.g., Nasdaq Rule 5005(a)(6).
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    Proposed Nasdaq Rule 5608(b)(1) would require that each company 
adopt and comply with a written policy providing that the company will 
recover reasonably promptly the amount of erroneously awarded 
incentive-based compensation in the event that the company is required 
to prepare an accounting restatement due to the material noncompliance 
of the company with any financial reporting requirement under the 
securities laws, including any required accounting restatement to 
correct an error in previously issued financial statements that is 
material to the previously issued financial statements, or that would 
result in a material misstatement if the error were corrected in the 
current period or left uncorrected in the current period.
    The company's recovery policy must apply to all incentive-based 
compensation received by a person: (A) after beginning service as an 
executive officer; (B) who served as an executive officer at any time 
during the performance period for that incentive-based compensation; 
(C) while the company has a class of securities listed on a national 
securities exchange or a national securities association; and (D) 
during the three completed fiscal years immediately preceding the date 
that the company is required to prepare an accounting restatement as 
described in paragraph (b)(1) of the Rule.\9\ A company's obligation to 
recover erroneously awarded compensation is not dependent on if or when 
the restated financial statements are filed.
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    \9\ See proposed Rule 5608(b)(1)(i). In addition to these last 
three completed fiscal years, the recovery policy must apply to any 
transition period (that results from a change in the company's 
fiscal year) within or immediately following those three completed 
fiscal years. However, a transition period between the last day of 
the company's previous fiscal year end and the first day of its new 
fiscal year that comprises a period of nine to 12 months would be 
deemed a completed fiscal year.
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    For purposes of determining the relevant recovery period, the date 
that a company is required to prepare an accounting restatement as 
described in paragraph (b)(1) of the Rule is the earlier to occur of: 
(A) the date the company's board of directors, a committee of the board 
of directors, or the officer or officers of the company authorized to 
take such action if board action is not required, concludes, or 
reasonably should have concluded, that the company is required to 
prepare an accounting restatement as described in paragraph (b)(1) of 
this Rule; or (B) the date a court, regulator, or other legally 
authorized body directs the company to prepare an accounting 
restatement as described in paragraph (b)(1) of the Rule.\10\
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    \10\ See proposed Rule 5608(b)(1)(ii).
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    The amount of incentive-based compensation that must be subject to 
the company's recovery policy (``erroneously awarded compensation'') is 
the amount of incentive-based compensation received that exceeds the 
amount of incentive-based compensation that otherwise would have been 
received had it been determined based on the restated amounts, and must 
be computed without regard to any taxes paid. For incentive-based 
compensation based on stock price or total shareholder return, 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 stock price 
or total shareholder return upon which the incentive-based compensation 
was received, and the company must maintain documentation of the 
determination of that reasonable estimate and provide such 
documentation to Nasdaq.\11\
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    \11\ See proposed Rule 5608(b)(1)(iii).
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    The company must recover erroneously awarded compensation in 
compliance with its recovery policy except to the extent that one of 
the conditions set forth below is met, and the company's Compensation 
Committee, or in the absence of such a committee, a majority of the 
independent directors serving on the board, has made a determination 
that recovery would be impracticable.
     The direct expense paid to a third party to assist in 
enforcing the policy would exceed the amount to be recovered. Before 
concluding that it would be impracticable to recover any amount of 
erroneously awarded compensation based on expense of enforcement, the 
company must make a reasonable attempt to recover such erroneously 
awarded compensation, document such reasonable attempt(s) to recover, 
and provide that documentation to Nasdaq.
     Recovery would violate home country law where that law was 
adopted prior to November 28, 2022. Before concluding that it would be 
impracticable to recover any amount of erroneously awarded compensation 
based on violation of home country law, the company must obtain an 
opinion of home country counsel, acceptable to Nasdaq, that recovery 
would result in such a violation, and must provide such opinion to 
Nasdaq.
     Recovery would likely cause an otherwise tax-qualified 
retirement plan, under which benefits are broadly available to 
employees of the registrant, to fail to meet the requirements of 26 
U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.\12\
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    \12\ See proposed Rule 5608(b)(1)(iv).
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    The company is prohibited from indemnifying any executive officer 
or former executive officer against the loss of erroneously awarded 
compensation.\13\
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    \13\ See proposed Rule 5608(b)(1)(v).
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    Proposed Nasdaq Rule 5608(b)(2) would require that each company 
file all disclosures with respect to such recovery policy in accordance 
with the requirements of the federal securities laws, including the 
disclosure required by the applicable Commission filings.
    Proposed Nasdaq Rule 5608(c) would provide that the requirements of 
the Rule do not apply to the listing of: (1) any security issued by a 
unit investment trust, as defined in 15 U.S.C. 80a-4(2); and (2) any 
security issued by a management company, as defined in 15 U.S.C. 80a-
4(3), that is registered under section 8 of the Investment Company Act 
of 1940 (15 U.S.C. 80a-8), if such management company has not awarded 
incentive-based compensation to any executive officer of the company in 
any of the last three fiscal years, or in the case of a company that 
has been listed for less than three fiscal years, since the listing of 
the company.
    Proposed Nasdaq Rule 5608(d) would provide that, unless the context 
otherwise requires, the following definitions apply for purposes of the 
Rule (and only for purposes of Rule 5608):
     Executive Officer. An executive officer is the company's 
president, principal financial officer, principal accounting officer 
(or if there is no such accounting officer, the controller), any vice-
president of the company in charge of a principal business unit, 
division, or function (such as sales, administration, or finance), any 
other officer who performs a policy-making function, or

[[Page 39297]]

any other person who performs similar policy-making functions for the 
company. Executive officers of the company's parent(s) or subsidiaries 
are deemed executive officers of the company if they perform such 
policy making functions for the company. In addition, when the company 
is a limited partnership, officers or employees of the general 
partner(s) who perform policy-making functions for the limited 
partnership are deemed officers of the limited partnership. When the 
company is a trust, officers, or employees of the trustee(s) who 
perform policy-making functions for the trust are deemed officers of 
the trust. Policy-making function is not intended to include policy-
making functions that are not significant. Identification of an 
executive officer for purposes of the Rule would include at a minimum 
executive officers identified pursuant to 17 CFR 229.401(b).
     Financial Reporting Measures. Financial reporting measures 
are measures that are determined and presented in accordance with the 
accounting principles used in preparing the company's financial 
statements, and any measures that are derived wholly or in part from 
such measures. Stock price and total shareholder return are also 
financial reporting measures. A financial reporting measure need not be 
presented within the financial statements or included in a filing with 
the Commission.
     Incentive-Based Compensation. Incentive-based compensation 
is any compensation that is granted, earned, or vested based wholly or 
in part upon the attainment of a financial reporting measure.
     Received. Incentive-based compensation is deemed received 
in the company's fiscal period during which the financial reporting 
measure specified in the incentive-based compensation award is 
attained, even if the payment or grant of the incentive-based 
compensation occurs after the end of that period.
    Proposed Nasdaq Rule 5608(e) would provide that the effective date 
of the Rule (``effective date'') is October 2, 2023, and that each 
company is required to (i) adopt a policy governing the recovery of 
erroneously awarded compensation as required by the Rule no later than 
60 days following October 2, 2023; (ii) comply with its recovery policy 
for all incentive-based compensation received (as such term is defined 
in Rule 5608(d)) by executive officers on or after October 2, 2023; and 
(iii) provide the disclosures required by the Rule and in the 
applicable Commission filings on or after October 2, 2023.\14\ Proposed 
Nasdaq Rule 5605(e) also states that notwithstanding the look-back 
requirement in proposed Rule 5608(b)(1)(i)(D), a company is only 
required to apply the recovery policy to incentive-based compensation 
received on or after October 2, 2023.\15\
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    \14\ See Amendment No. 1, supra note 5. In support of proposing 
an effective date of October 2, 2023, the Exchange states it 
believes this is consistent with Section 10D ``and the goal of 
implementing the proposed rule promptly while also being consistent 
with the expectations of listed issuer that the proposed rules would 
take effect a year after the adoption of SEC Rule 10D-1 based on the 
issuers' understanding of a statement made . . . in the Listing 
Standards Release.'' See id.
    \15\ As described above, a Nasdaq listed company would have to 
comply with its recovery policy for all incentive-based compensation 
received by executive officers on or after the effective date of the 
applicable listing standard (i.e. Nasdaq Rule 5608). Incentive-based 
compensation that is the subject of a compensation contract or 
arrangement that existed prior to the effective date of Rule 10D-1 
would still be subject to recovery under the Exchange's rule if such 
compensation was received on or after the effective date of Rule 
5608, as required by Rule 10D-1. See Adopting Release, supra note 6, 
and also definitions of ``incentive based compensation'' and 
``received'' in proposed Nasdaq Rule 5608(d).
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    Nasdaq also proposes additional clarifying changes to Nasdaq Rule 
5210 (Prerequisites for Applying to List on the Nasdaq Stock Market), 
Nasdaq Rule 5701 (Preamble to the Listing Requirements to Other 
Securities) and Nasdaq Rule 5702 governing listing requirements for 
debt securities to make clear the application of proposed Nasdaq Rule 
5608 under these provisions.\16\
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    \16\ Nasdaq states that the change to Nasdaq Rule 5210 will 
clarify that any company newly listing on Nasdaq must comply with 
these requirements. The proposed amendments to Nasdaq Rules 5701 and 
5702 make clear that proposed Nasdaq Rule 5608 would apply, except 
to the extent exempted as set forth above. See supra discussion of 
proposed Rule 5608(c).
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    Nasdaq states that the new requirements described above will help 
facilitate effective oversight of executive compensation and promote 
accountability to investors by not allowing executive officers to 
retain compensation that they were awarded erroneously.\17\
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    \17\ See Notice, supra note 3, 88 FR at 15502.
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    As described above, Rule 10D-1 requires national securities 
exchanges to prohibit the initial or continued listing of any security 
of an issuer not in compliance with its rules adopted to comply with 
Rule 10D-1. Nasdaq proposes therefore to require that a company will be 
subject to delisting if it does not adopt a compensation recovery 
policy that complies with the applicable listing standard, disclose the 
policy in accordance with Commission rules or comply with its recovery 
policy. Nasdaq states that the administrative process for a company 
that fails to comply with proposed Nasdaq Rule 5608 will follow the 
established pattern used for similar corporate governance 
deficiencies.\18\ Specifically, Nasdaq proposes to amend Nasdaq Rule 
5810(c)(2)(A)(iii) to provide that a company that fails to comply with 
proposed Nasdaq Rule 5608 may submit to Nasdaq Staff \19\ a plan to 
regain compliance and, consistent with its process for similar 
corporate governance deficiencies, Nasdaq Staff may provide the issuer 
up to 180 days to cure the deficiency.\20\ Nasdaq Rule 5810(c)(2)(B) 
further provides that notifications of deficiencies that allow for 
submission of a compliance plan may also result, after review of the 
compliance plan, in issuance of a Staff Delisting Determination or a 
Public Reprimand Letter. However, Nasdaq proposes to amend Nasdaq Rules 
5810(c)(4), 5815(c)(1)(D), 5820(d)(1) and 5825(d) to provide that a 
Public Reprimand Letter may not be issued for violations of a listing 
standard required by Rule 10D-1 or upon appeal of such violations.\21\ 
If Nasdaq Staff provides the issuer with a period to cure the 
deficiency, and if the company does not regain compliance within the 
time period provided, Nasdaq Staff would be required to issue a Staff 
Delisting Determination,\22\ which the issuer could appeal to the 
Hearings Panel, as provided in Nasdaq Rule 5815. The Hearings Panel 
could allow the issuer up to an additional 180 days to cure the 
deficiency.\23\
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    \18\ See id. See also Nasdaq Rule 5805(c)(2)(B).
    \19\ Nasdaq Rule 5805(g) defines the term ``Staff'' as employees 
of the Listing Qualifications Department (the department of Nasdaq 
responsible for evaluating company compliance with quantitative and 
qualitative listing standards and determining eligibility for 
initial and continued listing of a company's securities). See also 
Nasdaq Rule 5805(h).
    \20\ See Notice, supra note 3, 88 FR at 15502. See also Nasdaq 
Rule 5805(c)(2)(B).
    \21\ Nasdaq also proposes to amend the definition of ``Public 
Reprimand Letter'' in Rule 5805(j) to provide that a Public 
Reprimand Letter may not be issued for violations of a listing 
standard required by Rule 10D-1. Under the existing definition in 
Rule 5805(j), Public Reprimand Letters can be issued for violations 
of Nasdaq corporate governance or notification listing standards 
except for violations of a listing standard required by Rule 10A-3 
of the Act.
    \22\ See Nasdaq Rule 5805(c)(2)(E).
    \23\ See Nasdaq Rule 5815(c).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national

[[Page 39298]]

securities exchange.\24\ In particular, the Commission finds that the 
proposed rule change is consistent with the requirements of Section 
6(b) of the Act.\25\ Specifically, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\26\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest, and are not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers. 
In addition, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(7) of the Act,\27\ which requires, among 
other things, that the rules of a national securities exchange provide 
a fair procedure for the prohibition or limitation by the exchange of 
any person with respect to access to services offered by the exchange. 
The proposed rule change, as modified by Amendment No. 1, is also 
consistent with Section 10D of the Act \28\ and Rule 10D-1 thereunder, 
as further described below.\29\
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    \24\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ 15 U.S.C. 78(b)(7).
    \28\ 15 U.S.C. 78j-4.
    \29\ 17 CFR 240.10D-1.
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    The development and enforcement of meaningful listing standards for 
a national securities exchange is of substantial importance to 
financial markets and the investing public. Meaningful listing 
standards are especially important given investor expectations 
regarding the nature of companies that have achieved an exchange 
listing for their securities, and the role of an exchange in overseeing 
its market and assuring compliance with its listing standards.\30\ The 
corporate governance standards embodied in the listing rules of 
national securities exchanges, in particular, play an important role in 
assuring that companies listed for trading on the exchanges' markets 
observe good governance practices, including a fair approach and 
greater accountability for the recovery of erroneously awarded 
compensation.\31\
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    \30\ See, e.g., Securities Exchange Release Nos. 65708 (November 
8, 2011), 76 FR 70799 70802 (November 15, 2011) (SR-NASDAQ-2011-
073); 63607 (December 23, 2010), 75 FR 82420, 82422 (December 30, 
2010) (SR-NASDAQ-2010-137); 57785 (May 6, 2008), 73 FR 27597, 27599 
(May 13, 2008) (SR-NYSE-2008-17); and 93256 (October 4, 2021), 86 FR 
56338 (October 8, 2021) (SR-NASDAQ-2021-007).
    \31\ See, e.g., Securities Exchange Release No. 68639 (January 
11, 2013), 78 FR 4570, 4579 (January 22, 2013) (SR-NYSE-2012-49) 
(stating, in connection with the modification of exchange rules for 
compensation committees of listed issuers to comply with Rule 10C-1 
of the Act, that corporate governance listing standards ``play an 
important role in assuring that companies listed for trading on the 
exchanges' markets observe good governance practices, including a 
reasoned, fair, and impartial approach for determining the 
compensation of corporate executives'' and stating that the proposal 
would foster ``greater transparency, accountability and 
objectivity'' in oversight of compensation practices).
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    In enacting Section 10D of the Act,\32\ Congress resolved to 
require national securities exchanges to establish listing standards to 
require listed issuers to develop and comply with a policy to recover 
incentive-based compensation erroneously awarded on the basis of 
financial information that requires an accounting restatement.\33\ In 
October 2022, as required by this legislation, the Commission adopted 
Rule 10D-1 under the Act, which directs the national securities 
exchanges to establish listing standards that require issuers to: (i) 
develop and comply with written policies for recovery of incentive-
based compensation based on financial information required to be 
reported under the securities laws, applicable to the issuers' 
executive officers, during the three completed fiscal years immediately 
preceding the date that the issuer is required to prepare an accounting 
restatement; and (ii) disclose those compensation recovery policies in 
accordance with Commission rules. In response, the Exchange has filed 
the proposed rule change, which includes rules intended to comply with 
the requirements of Rule 10D-1.
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    \32\ Public Law 111-203, sec. 954, 124 Stat. 1376, 1904 (2010) 
(codified at 15 U.S.C. 78j-4).
    \33\ As a part of the Dodd-Frank Act legislative process, in a 
2010 report, the Senate Committee on Banking, Housing and Urban 
Affairs stated that it is ``unfair to shareholders for corporations 
to allow executive officers to retain compensation that they were 
awarded erroneously.'' See Report of the Senate Committee on 
Banking, Housing, and Urban Affairs, S.3217, Report No. 111-176 at 
135-36 (Apr. 30, 2010) (``Senate Report'') at 135. See also Adopting 
Release, supra note 7, 87 FR at 73077 (citing to the Senate Report) 
(``The language and legislative history of the Dodd-Frank Act make 
clear that Section 10D is premised on the notion that an executive 
officer should not retain incentive-based compensation that, had the 
issuer's accounting been correct in the first instance, would not 
have been received by the executive officer, regardless of any fault 
of the executive officer for the accounting errors. The Senate 
Report also indicates that shareholders should not `have to embark 
on costly legal expenses to recoup their losses' and that 
`executives must return monies that should belong to the 
shareholders.''').
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    The Exchange's proposed Rule 5608 incorporates the requirements of 
Rule 10D-1. The Commission believes that the Exchange's proposal will 
foster greater fairness, accountability, and transparency to 
shareholders of listed issuers by advancing the recovery of incentive-
based compensation that was erroneously awarded on the basis of 
financial information that requires an accounting restatement, 
consistent with Section 10D of the Act \34\ and Rule 10D-1 
thereunder,\35\ and will therefore further the protection of investors 
consistent with Section 6(b)(5) of the Act.\36\ In addition, as the 
Commission stated in the Adopting Release, the recovery requirements 
may provide executive officers with an increased incentive to take 
steps to reduce the likelihood of inadvertent misreporting and will 
reduce the financial benefits to executive officers who choose to 
pursue impermissible accounting methods, which can further discourage 
such behavior.\37\ The Commission believes that these benefits of the 
Exchange's new rules on the recovery of erroneously awarded 
compensation will protect investors and the public interest as required 
under Section 6(b)(5) of the Act.
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    \34\ 15 U.S.C. 78j-4.
    \35\ 17 CFR 240.10D-1.
    \36\ 15 U.S.C. 78f(b)(5).
    \37\ See Adopting Release, supra note 7, 87 FR at 73077. See 
also Notice, supra note 3, 88 FR at 15502, agreeing with the 
Commission's statement on the benefits of the recovery policy.
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    Rule 10D-1 and proposed Rule 5608 require that a listed issuer 
recover the amount of erroneously awarded incentive-based compensation 
``reasonably promptly.'' One commenter requested Nasdaq include 
guidance in its proposed listing standards regarding what the exchange 
will consider in evaluating whether an issuer is pursuing recovery 
``reasonably promptly'' under its policy and provided a non-exclusive 
list of factors the Exchange could consider and set forth in its 
rules.\38\ As discussed above, Nasdaq's proposed rule mirrors the 
language in Rule 10D-1 and such guidance is not included in the rule 
text of Rule 10D-1. The Adopting Release stated that whether an issuer 
is acting reasonably promptly ``will depend on the particular facts and 
circumstances applicable to that issuer'' and ``the final rules do not 
restrict exchanges from adopting more prescriptive approaches to the 
timing

[[Page 39299]]

and method of recovery under their rules in compliance with Section 
19(b) of the Exchange Act . . .'' \39\ Rule 10D-1 also does not compel 
the exchanges to adopt a more prescriptive approach to the timing and 
method of recovery. In its Notice, Nasdaq stated that ``the issuer's 
obligation to recover erroneously awarded incentive-based compensation 
reasonably promptly will be assessed on a holistic basis with respect 
to each such accounting restatement prepared by the issuer'' and that 
``[i]n evaluating whether an issuer is recovering erroneously awarded 
incentive-based compensation reasonably promptly, the Exchange will 
consider whether the issuer is pursuing an appropriate balance of cost 
and speed in determining the appropriate means to seek recovery, and 
whether the issuer is securing recovery through means that are 
appropriate based on the particular facts and circumstances of each 
executive officer that owes a recoverable amount.'' \40\ The Commission 
believes this guidance provided by the Exchange is consistent with the 
Commission's statements regarding when an issuer is acting ``reasonably 
promptly'' as expressed in the Adopting Release, with Rule 10D-1 and 
with the Act.\41\
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    \38\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Wilson Sonsini Goodrich & Rosati, dated April 4, 2024 [sic] 
(``Wilson Sonsini Letter''), at 4.
    \39\ See Adopting Release, supra note 7, 87 FR at 73104. For 
example, the Commission stated that after the exchanges have 
observed issuer performance they can use any resulting data to 
assess the need for further guidelines to ensure prompt and 
effective recovery. See id.
    \40\ See Notice, supra note 3, 88 FR at 15502.
    \41\ See Adopting Release, supra note 7, 87 FR 73104.
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    Rule 10D-1 requires issuers subject to the listing standards to 
adopt a recovery policy no later than 60 days following the date on 
which the applicable listing standards become effective and to comply 
with their recovery policy, and provide the required disclosures, on or 
after the effective date. The Commission received comment letters 
requesting the Commission not approve the proposal before November 28, 
2023, citing burdens to issuers, including with respect to assessing 
the impact of the new listing standards on their existing executive 
compensation programs, developing and implementing compliant policies, 
and obtaining board (and in some cases shareholder) approval.\42\ 
Commenters stated that listed issuers anticipated an effective date of 
November 28, 2023 based on the language in Rule 10D-1 requiring that 
the new listing standards become effective by no later than one year 
following the publication of the final rules in the Federal 
Register.\43\ One commenter stated that the Adopting Release stated 
that ``issuers will have more than a year from the date the final rules 
are published in the Federal Register to prepare and adopt compliant 
recovery policies.'' \44\ The Commission also received comment letters 
from individual investors that requested the Commission quickly 
implement the proposal.\45\ The Exchange, in Amendment No. 1, is 
proposing that the effective date of Rule 5608 be October 2, 2023.\46\ 
The Exchange believes that setting this date as the effective date will 
ensure that issuers have more than a year from the date Rule 10D-1 was 
published in the Federal Register to adopt recovery policies.\47\ This 
is consistent with language in Rule 10D-1 and the Adopting Release, 
while also ensuring prompt implementation of this proposed rule.
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    \42\ See, e.g., Wilson Sonsini Letter at 5; Letter to Vanessa 
Countryman, Secretary, Commission, from Davis Polk Wardwell LLP et 
al., submitted on behalf of 39 law firms, dated April 3, 2023 
(``Davis Polk Letter''); Letter to Vanessa Countryman, Secretary, 
Commission, from C. Edward Allen, Vice President, Policy & Advocacy, 
and Christina Maguire, President & CEO, Society for Corporate 
Governance, dated April 3, 2023 (``Society Letter''); Letter to 
Vanessa Countryman, Secretary, Commission, from American Securities 
Association, Business Roundtable, Center On Executive Compensation, 
National Association of Manufacturers, and U.S. Chamber of Commerce, 
dated April 3, 2023 (``ASA Letter'').
    \43\ See, e.g., Society Letter at 1; ASA Letter at 2.
    \44\ See Davis Polk Letter at 1 n.1 (citing to Adopting Release, 
supra note 7, 87 FR at 73111).
    \45\ See, e.g., Letters from Clarissa McLaughlin, dated May 15, 
2023; Deborah Temple, dated May 15, 2023; John Leonard, dated May 
13, 2023.
    \46\ See Amendment No. 1, supra note 5, amending proposed Nasdaq 
Rule 5608(e).
    \47\ Listed issuers will need to have their recovery policy in 
place no later than 60 days following the effective date of October 
2, 2023, which would be more than a year after publication of Rule 
10D-1 in the Federal Register. Listed issuers will also have to 
comply with their recovery policy for all incentive-based 
compensation received by executive officers on or after the 
effective date of October 2, 2023, and provide the required 
disclosures in the applicable Commission filings on or after the 
effective date of October 2, 2023. See Adopting Release, supra note 
6, and also definitions of ``incentive based compensation'' and 
``received'' in proposed Nasdaq Rule 5608(d). See also supra note 15 
and accompanying text.
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    With respect to a listed issuer that fails to comply with proposed 
Rule 5608, the Exchange has proposed to apply its current procedures 
applicable to companies with similar corporate governance deficiencies 
in addition to prohibiting the use of a Public Reprimand Letter for 
violations of a listing standard required by Rule 10D-1.\48\ The 
Commission believes that these procedures for listed issuers out of 
compliance with proposed Nasdaq Rule 5608, which are consistent with 
the procedures for similar corporate governance deficiencies, 
adequately meet the mandate of Rule 10D-1 and are consistent with 
investor protection and the public interest, since they give a listed 
issuer a reasonable time period to cure non-compliance with these 
important requirements before the listed issuer will be delisted while 
helping to ensure that listed issuers that are non-compliant will not 
remain listed for an inappropriate amount of time.\49\ Additionally, 
the proposed delisting process, including the cure period and the right 
to appeal a delisting determination to the Exchange's Hearing Panel, is 
consistent with Section 6(b)(7) of the Act in that it provides a fair 
procedure for the review of delisting determinations based on 
violations of the Exchange's rules for recovering erroneous 
compensation.
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    \48\ See supra notes 18-23 and accompanying text.
    \49\ One commenter states its agreement that issuers should be 
given an opportunity to submit a plan of compliance and to cure 
noncompliance in good faith and states that Nasdaq's proposal 
``strikes the right balance'' in deterring issuers from violating 
the proposed listing standards without unnecessarily harming 
shareholders. See Wilson Sonsini Letter, at 3. Another commenter 
that was generally supportive of Nasdaq's proposal states that 
Nasdaq's proposed delisting process involves the use of Listing 
Qualifications Panels and a Listing and Hearing Review Council with 
investor representatives. See Letter to Vanessa Countryman, 
Secretary, Commission, from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors, dated April 3, 2023, at 4 n.13.
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether the proposed rule change, as modified by 
Amendment No. 1, is consistent with the Exchange Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NASDAQ-2023-005 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-NASDAQ-2023-005. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/

[[Page 39300]]

rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for website 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street NE, Washington, DC 20549, on official business days between the 
hours of 10 a.m. and 3 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. Do 
not include personal identifiable information in submissions; you 
should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to file number SR-NASDAQ-2023-005, and 
should be submitted on or before July 6, 2023.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. In Amendment No. 1, the Exchange amended 
proposed Rule 5608(e) to (i) provide that the effective date of Rule 
5608 would be October 2, 2023; and (ii) clarify, consistent with the 
requirements of Rule 10D-1 and the rule language as originally 
proposed, that each company is required to comply with its recovery 
policy for all incentive-based compensation received (as such term is 
defined in proposed Rule 5608(d)) by executive officers on or after 
October 2, 2023.\50\ The changes in Amendment No. 1 provide greater 
clarity to the proposal. The change to the effective date of the 
listing standards is consistent with Rule 10D-1 and language in the 
Adopting Release and is responsive to comments stating that listed 
issuers anticipated an effective date of November 28, 2023. The 
additional clarification to Rule 5608(e) will ensure that the 
requirements of that Rule conform to the requirements of Rule 10D-1. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Exchange Act,\51\ to approve the proposed rule change, 
as modified by Amendment No. 1, on an accelerated basis.
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    \50\ See Amendment No. 1, supra note 5.
    \51\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\52\ that the proposed rule change (SR-NASDAQ-2023-005), as 
modified by Amendment No. 1, be, and hereby is, approved on an 
accelerated basis.
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    \52\ 15 U.S.C. 78s(b)(2).
    \53\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-12757 Filed 6-14-23; 8:45 am]
BILLING CODE 8011-01-P