Rule 10D-1 under the Securities Exchange Act requires exchange-listed companies to adopt and follow a written policy to recover incentive-based compensation that executive officers received but should not have, when the company must prepare an accounting restatement. Recovery reaches back to the three completed fiscal years before the date the restatement is required. It applies to both "Big R" restatements (reissuing prior financial statements) and "little r" corrections (fixing an error in the current period). For accountants, the rule turns a restatement analysis into a compensation computation, and it raises the cost of every error conclusion.
When do the listing standards apply?
Rule 10D-1 directs exchanges to prohibit the listing of issuers that do not comply. The SEC adopted the rules on October 26, 2022. NYSE's notice to issuers states that its standards, which add Sections 303A.14 and 802.01F to the Listed Company Manual, took effect on October 2, 2023, and that issuers had to adopt a recovery policy by December 1, 2023. The Nasdaq equivalent is Listing Rule 5608, and policies filed with the SEC cite it. Under the rule, the policy applies to incentive-based compensation received on or after the date the listing standard became effective.
What triggers recovery? Big R and little r
Under Rule 10D-1(b)(1), the policy applies if the issuer is required to prepare an accounting restatement due to material noncompliance with a financial reporting requirement. The rule names two cases:
- A restatement to correct an error that is material to previously issued financial statements. Practitioners call this a Big R restatement.
- A restatement to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. Practitioners call this a little r restatement.
The rule text does not use the "Big R" and "little r" labels, but company policies filed with the SEC adopt both. One filed policy defines an accounting restatement to include restatements that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period, and labels them "little r."
Corrections that do not meet either description fall outside the rule, for example a change in accounting principle or a reclassification that is not the correction of an error. The SEC release also added check boxes to the annual report cover that show whether the financial statements reflect the correction of an error to previously issued statements, and whether any of those corrections are restatements that required a recovery analysis. For the underlying accounting, see ASC 250 changes in principle, estimate and error corrections.
Who is covered and which years?
Compensation is covered if it was received by a person who:
- began service as an executive officer, and
- served as an executive officer at any time during the performance period for that compensation, and
- received it while the issuer had a class of securities listed, and
- received it during the three completed fiscal years immediately before the restatement date (plus any transition period within or immediately after those years).
A transition period of nine to 12 months counts as a completed fiscal year. "Executive officer" includes the president, the principal financial officer, the principal accounting officer (or controller), any vice president in charge of a principal business unit, division or function, and others with significant policy-making functions.
The restatement date is the earlier of (A) the date the board, a board committee or an authorized officer concludes, or reasonably should have concluded, that a restatement is required, or (B) the date a court, regulator or other authorized body directs the issuer to prepare one. The "reasonably should have concluded" language means the clock can start before management signs off on the conclusion, which makes the timing of the error evaluation a documented event. The obligation does not depend on when restated statements are filed.
Compensation is "received" in the fiscal period when the financial reporting measure is attained, even if payment occurs later. The rule applies without regard to fault. Recovery is not conditioned on misconduct or on the executive's role in the error.
How is the recoverable amount computed?
Erroneously awarded compensation is the excess of the incentive-based compensation received over the amount that would have been received based on the restated figures, computed without regard to any taxes paid. For measures based on stock price or total shareholder return that cannot be recalculated directly from the restatement, the issuer uses a reasonable estimate of the restatement's effect and documents it.
Example: an issuer's calendar-year bonus pool is 1 percent of net income. The original net income for 2025 was $50,000,000, so the pool paid $500,000. The restatement lowers 2025 net income to $42,000,000, so the pool would have paid $420,000. The erroneously awarded amount for the pool is $500,000 minus $420,000 = $80,000, before any tax. If the issuer concludes in March 2027 that a restatement is required, the lookback covers fiscal years 2024, 2025 and 2026, and the same computation runs for each year's incentive awards in that window. If the bonus had an all-or-nothing target of $45,000,000 of net income, the restated figure fails the target, and the full $500,000 is erroneously awarded.
What are the exceptions?
Recovery is required unless the independent compensation committee (or a majority of independent directors) determines it is impracticable because:
- the direct expense of enforcing recovery would exceed the amount to be recovered, after a documented reasonable attempt to recover;
- recovery would violate home-country law adopted before November 28, 2022, supported by a legal opinion; or
- recovery would likely cause a broad-based, tax-qualified retirement plan to fail to meet its requirements.
The issuer may not indemnify current or former executive officers against the loss of erroneously awarded compensation.
What does the issuer file?
The SEC release requires issuers to file the recovery policy as an exhibit to the annual report, and to disclose the policy and any recovery actions taken. Disclosures must be tagged in a structured data format. See the SEC forms 10-K, 10-Q and 8-K audit touchpoints for where the exhibit and the cover page boxes sit in the filing.
What does this mean for accountants and auditors?
- Error evaluations become compensation events. The conclusion on whether an error is material to prior periods or to the current period now determines whether a recovery analysis is required. Document the materiality analysis contemporaneously and keep it consistent with the uncorrected misstatement schedule.
- Map incentive plans to reported measures. For each plan, list the financial reporting measure, the performance period, the payout formula and the date of attainment, so a restated figure can be run through the plan in a day.
- Test the data feeding bonuses. If a bonus metric is derived from reported figures, the controls over those figures are controls over executive pay. See ICFR documentation under SEC guidance.
- Track the restatement date. Record the date the committee or officer concluded, or should have concluded, that a restatement was required.
- Document estimates for market-based measures. The reasonable estimate for stock price and total shareholder return plans is a judgment the committee and the auditor will both read.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- eCFR, 17 CFR 240.10D-1, Listing standards relating to recovery of erroneously awarded compensation: https://www.ecfr.gov/api/versioner/v1/full/2026-11-01/title-17.xml?part=240§ion=240.10D-1
- U.S. Securities and Exchange Commission, press release on adoption of compensation recovery rules, October 26, 2022: https://www.sec.gov/newsroom/press-releases/2022-192
- New York Stock Exchange, Recovery of Erroneously Awarded Compensation listing requirement notice: https://www.nyse.com/publicdocs/nyse/regulation/nyse/Recovery_of_Erroneously_Awarded_Compensation.pdf
- U.S. Securities and Exchange Commission, filed Exhibit 97 compensation recovery policy citing Nasdaq Listing Rule 5608: https://www.sec.gov/Archives/edgar/data/875657/000143774924008872/ex_636690.htm
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