Document ID: SEC-2023-0280-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2023-03-13T04:00Z

[Federal Register Volume 88, Number 48 (Monday, March 13, 2023)]
[Notices]
[Pages 15500-15503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05040]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97060; File No. SR-NASDAQ-2023-005]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Establish Listing Standards 
Related to Recovery of Erroneously Awarded Executive Compensation

March 7, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 22, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to establish listing standards related to 
recovery of erroneously awarded executive compensation as required by 
SEC Rule 10D-1.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Wall Street Reform and Consumer Protection Act of 2010 (the 
``Dodd-Frank Act'') added Section 10D to the Securities Exchange Act of 
1934.\3\ In October 2022, the SEC adopted final Rule 10D-1 \4\ 
instructing national securities exchanges to establish specific listing 
standards that require each issuer to adopt and comply with a written 
executive compensation recovery policy.\5\ Under Rule 10D-1, listed 
companies must recover from current and former executive officers 
incentive-based compensation received during the three fiscal years 
preceding the date on which the issuer is required to prepare an 
accounting restatement to correct a material error. As required by Rule 
10D-1 and the Listing Standards Release, Nasdaq proposes to adopt 
Listing Rule 5608 (the ``Rule''), titled, recovery of erroneously 
awarded compensation.
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    \3\ 15 U.S.C. 78j-4.
    \4\ 17 CFR 240.10D-1.
    \5\ Securities Exchange Act Release No. 96159 (October 26, 
2022), 87 FR 73076 (November 28, 2022)(``Listing Standards 
Release'').
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    Proposed Listing Rule 5608(a) would introduce the requirements of 
the Rule in accordance with the Listing Standards Release. Nasdaq also 
proposes to adopt Listing Rule 5608(b), which sets forth the 
substantive requirements of Rule 10D-1(b), and Listing Rule 5608(d), 
which sets forth the defined terms applicable to the Rule. As provided 
in Rule 10D-1, Nasdaq proposes to define the term ``executive officer'' 
to include the issuer's president, principal financial officer, 
principal accounting officer, any vice-president in charge of a 
principal business unit, division or function and any other person 
(including executive officers of a parent or subsidiary) who performs 
similar policy-making functions for the issuer. The term ``policy-
making function'' is not intended to include policy-making functions 
that are not significant.
    The recovery of erroneously awarded compensation is required on a 
``no fault'' basis, without regard to whether any misconduct occurred 
or an executive officer's responsibility for the erroneous financial 
statements. A restatement due to material non-compliance with any 
financial reporting requirement under the securities laws triggers 
application of the recovery policy. As explained in the Listing

[[Page 15501]]

Standards Release, the determination regarding materiality of an error 
should be based on facts and circumstances and existing judicial and 
administrative interpretations. The proposed Rule requires recovery for 
restatements that correct errors that are material to previously issued 
financial statements (commonly referred to as ``Big R'' restatements), 
as well as for restatements that correct errors that are not material 
to previously issued financial statements but would result in a 
material misstatement if the errors were left uncorrected in the 
current report or the error correction was recognized in the current 
period (commonly referred to as ``little r'' restatement).
    Under the proposed Rule, listed companies will be required to 
recover the amount of incentive-based compensation received by an 
executive officer that exceeds the amount the executive officer would 
have received had the incentive-based compensation been determined 
based on the accounting restatement. Incentive-based compensation is 
deemed received \6\ in the fiscal period during which the financial 
reporting measure specified in the incentive-based compensation award 
is attained, even if the grant or payment of the incentive-based 
compensation occurs after the end of that period. For incentive-based 
compensation based on stock price or total shareholder return, 
companies can use a reasonable estimate of the effect of the 
restatement on the applicable measure to determine the amount to be 
recovered.
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    \6\ Nasdaq proposes to define the term ``received'' as provided 
in Rule 10D-1.
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    As provided in Rule 10D-1, Nasdaq proposes to define the term 
``Incentive-based compensation'' to mean any compensation that is 
granted, earned or vested based wholly or in part upon the attainment 
of any financial reporting measure. The term ``financial reporting 
measures'' is defined as measures that are determined and presented in 
accordance with the accounting principles used in an issuer's financial 
statements, and any measures that are derived wholly or in part from 
such measures, as well as an issuer's stock price and total shareholder 
return. Equity awards that vest exclusively upon completion of a 
specified employment period, without any performance condition, and 
bonus awards that are discretionary or based on subjective goals or 
goals unrelated to financial reporting measures, do not constitute 
incentive-based compensation.\7\ Incentive-based compensation received 
by an executive officer before the issuer had a class of securities 
listed on a national securities exchange or a national securities 
association would not be subject to the compensation recovery policy.
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    \7\ See the Listing Standards Release, at 73094.
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    As also provided in Rule 10D-1, Nasdaq proposes to set forth the 
circumstances where listed companies would have limited discretion not 
to recover the excess incentive-based compensation. Specifically, 
Nasdaq proposes to provide that a company is required to recover 
compensation in compliance with its recovery policy, except to the 
extent that pursuit of recovery would be impracticable because: (1) the 
direct expense paid to a third party to assist in enforcing the policy 
would exceed the amount to be recovered, (2) recovery would violate 
home country law, where that law was adopted prior to November 28, 
2022, based on an opinion of counsel acceptable to Nasdaq or (3) 
recovery would cause a broad-based retirement plan to fail to meet the 
tax-qualification requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 
411(a) and regulations thereunder. Before concluding that pursuit is 
impracticable, a company must first make a reasonable attempt to 
recover the incentive-based compensation and provide that documentation 
to Nasdaq. The listed company's board is required to apply on a ``no 
fault'' basis any recovery policy consistently to executive officers 
and a listed company is prohibited from indemnifying any current or 
former executive officer for recovered compensation.
    As provided in Rule 10D-1, Nasdaq proposes to require each listed 
company to file all disclosures with respect to its erroneously awarded 
executive compensation recovery policy in accordance with the 
requirements of the Federal securities laws, including the disclosure 
required by the applicable Commission filings. As explained in the 
Listing Standards Release, each listed company is required to file its 
compensation recovery policy as an exhibit to its Exchange Act annual 
report. In addition, the Commission's rules require disclosure pursuant 
to Item 402 of Regulation S-K of the following items, among others, if, 
during the prior fiscal year, either a triggering restatement occurred 
or any balance of excess incentive-based compensation was outstanding:
     The date on which the listed issuer was required to 
prepare an accounting restatement and the aggregate dollar amount of 
erroneously awarded compensation attributable to such accounting 
restatement (including an analysis of how the recoverable amount was 
calculated) or, if the amount has not yet been determined, an 
explanation of the reasons and disclosure of the amount and related 
disclosures in the next filing that is subject to Item 402 of 
Regulation S-K;
     The aggregate dollar amount of erroneously awarded 
compensation that remains outstanding at the end of its last completed 
fiscal year;
     If the financial reporting measure related to a stock 
price or total shareholder return metric, the estimates used to 
determine the amount of erroneously awarded compensation attributable 
to such accounting restatement and an explanation of the methodology 
used for such estimates;
     If recovery would be impracticable pursuant to Rule 10D-
1(b)(1)(iv), for each current and former named executive officer and 
for all other current and former executive officers as a group, 
disclose the amount of recovery forgone and a brief description of the 
reason the listed registrant decided in each case not to pursue 
recovery; and
     For each current and former named executive officer, 
disclose the amount of erroneously awarded compensation still owed that 
had been outstanding for 180 days or longer since the date the issuer 
determined the amount owed.
    The additional disclosure requirements apply immediately following 
the effective date of the applicable listing standards.
Covered Companies
    As provided in Rule 10D-1, Nasdaq proposes to apply the proposed 
listing standards related to recovery of erroneously awarded executive 
compensation to all listed companies (including but not limited to, 
foreign private issuers, emerging growth companies, smaller reporting 
companies, controlled companies and issuers of listed debt whose stock 
is not also listed) except for certain registered investment companies 
to the extent they do not provide incentive-based compensation to their 
employees. As provided in Rule 10D-1, Nasdaq proposes to adopt Listing 
Rule 5608(c) to provide certain exemptions from the requirements 
related to recovery of erroneously awarded executive compensation. 
Specifically Rule 5608(c) will exempt any security issued by a unit 
investment trust, as defined in 15 U.S.C. 80a-4(2); and 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

[[Page 15502]]

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.
    For clarity, Nasdaq proposes to amend Listing Rule 5210 to indicate 
that any company newly listing on Nasdaq must comply with the 
requirements of proposed Listing Rule 5608 (Recovery of Erroneously 
Awarded Compensation). Nasdaq also proposes to similarly amend Listing 
Rule 5701 governing listing requirements for ``other securities,'' and 
Listing Rule 5702 governing listing requirements for ``debt 
securities.''
Compliance With Compensation Recovery Policy
    As described above, Nasdaq proposes 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 the policy's 
recovery provisions. Rule 10D-1 requires that a listed company recover 
the amount of erroneously awarded incentive-based compensation 
reasonably promptly,\8\ but does not specify the time by which the 
issuer must complete the recovery of excess incentive-based 
compensation; rather, Nasdaq would determine whether the steps an 
issuer is taking constitute compliance with its compensation recovery 
policy. 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. In 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.
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    \8\ In that regard, the Commission stated that it ``recognize[s] 
that what is reasonable may depend on the additional cost incident 
to recovery efforts. [The Commission] expect[s] that issuers and 
their directors and officers, in the exercise of their fiduciary 
duty to safeguard the assets of the issuer (including the time value 
of any potentially recoverable compensation), will pursue the most 
appropriate balance of cost and speed in determining the appropriate 
means to seek recovery.'' The Listing Standards Release, at 73104.
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    Nasdaq proposes to amend Listing Rule 5810(c)(2)(A)(iii) to provide 
that a company that failed to comply with proposed Listing Rule 5608 is 
required to submit to Nasdaq Staff a plan to regain compliance. The 
administrative process for such deficiencies will follow the 
established pattern used for similar corporate governance deficiencies, 
and would allow Nasdaq Staff to provide the issuer up to 180 days to 
cure the deficiency. Thereafter, Nasdaq Staff would be required to 
issue a delisting letter,\9\ which the issuer could appeal to the 
Hearings Panel, as provided in Listing Rule 5815. The Hearings Panel 
could allow the issuer up to an additional 180 days to cure the 
deficiency.
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    \9\ Listing Rule 5810 provides that notifications of 
deficiencies that allow for submission of a compliance plan may 
result, after review of the compliance plan, in issuance of a Staff 
Delisting Determination or a Public Reprimand Letter. However Nasdaq 
believes that issuance of a Public Reprimand Letter is inconsistent 
with the provisions of Rule 10D-1 and, therefore, proposes to amend 
Listing 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. Nasdaq also proposes to modify Listing Rules 5810-5825 
accordingly.
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Implementation and Transition
    As provided in Rule 10D-1, Nasdaq proposes to require that each 
Company is required to (i) adopt a policy governing the recovery of 
erroneously awarded compensation as required by this rule no later than 
60 days following the effective date of this rule, and (ii) provide the 
disclosures required by this rule and in the applicable Commission 
filings on or after the effective date of this rule. Notwithstanding 
the look-back requirement in Rule 5608(b)(1)(i)(D), as provided in the 
Listing Standards Release, Nasdaq proposes to provide that a company is 
only required to apply the recovery policy to incentive-based 
compensation received on or after the effective date of this rule.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\11\ in particular, in that it is designed 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.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    As required by the Dodd-Frank Act and Rule 10D-1, Nasdaq is 
proposing amendments to its listing rules relating to recovery of 
erroneously awarded executive compensation. These proposals are, 
generally, required by SEC Rule 10D-1. Nasdaq believes that these 
proposals protect investors and the public interest by requiring 
companies, with certain exemptions, that, in the event the company is 
required to prepare an accounting restatement, the company will recover 
reasonably promptly erroneously awarded incentive-based compensation 
paid to its current or former executive officers based on any misstated 
financial reporting measure. Nasdaq also believes that these new 
requirements 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. Finally, Nasdaq agrees with the Commission that the 
recovery requirement 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 
the Commission expects will further discourage such behavior.\12\
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    \12\ See the Listing Standards Release, at 73077.
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    Nasdaq believes that the proposal to amend Listing Rule 
5810(c)(2)(A)(iii) to provide that a company that failed to comply with 
proposed Listing Rule 5608 is required to submit to Nasdaq Staff a plan 
to regain compliance and be subject to the appeal process described 
above, is consistent with the investor protection objectives of Section 
6(b)(5) of the Act \13\ because the administrative process for such 
deficiencies will follow the established pattern used for similar 
corporate governance deficiencies and Nasdaq has developed expertise 
administering this process.
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    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed amendments would 
not impose any burden on competition, not necessary or appropriate in 
furtherance of the purposes of the Act, because the proposed listing 
standards will apply to all listed companies, except in limited 
circumstances described above, as required by the Dodd-Frank Act and 
the SEC Rule 10D-1.

[[Page 15503]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://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 (http://www.sec.gov/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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2023-005, and should be submitted 
on or before April 3, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05040 Filed 3-10-23; 8:45 am]
BILLING CODE 8011-01-P