Memo #
33894

Draft ICI Comment Letter on SEC's Clawback Proposal; Comments Due by November 18
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[33894]

November 11, 2021

TO: Accounting/Treasurers Committee
Closed-End Investment Company Committee
ETF (Exchange-Traded Funds) Committee
ETF Advisory Committee
SEC Rules Committee
Small Funds Committee
Unit Investment Trust Committee RE: Draft ICI Comment Letter on SEC's Clawback Proposal; Comments Due by November 18

 

In October, the SEC re-opened the comment period[1] for its 2015 clawback proposal,[2] which it never adopted.

ICI intends to submit a comment letter. If you have comments on the attached draft, please provide them to me (matt.thornton@ici.org) by November 18, COB. Comments are due to the SEC by November 22.

Background

In 2015, the SEC proposed a new rule and form amendments to implement Section 954 of the Dodd-Frank Act, which added Section 10D to the Exchange Act. Section 10D requires the SEC to adopt rules directing the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that does not develop and implement a policy providing for:

  • disclosure of the issuer's policy on incentive-based compensation that is based on financial information reported under the securities laws; and
  • recovery of incentive-based compensation that the issuer's executive officers receive during the preceding 3-year period in excess of what they would have received under an accounting restatement.

Proposed Rule 10D-1 under the Exchange Act would exempt the securities of most—but not all—registered investment companies ("funds").[3] The proposed rule would require:

  • each national securities exchange and national securities association that lists securities to file with the SEC, for approval, proposed rules that comply with any final SEC rule; and
  • a listed issuer to adopt a written policy providing for the recovery of erroneously awarded incentive-based compensation to executive officers. 

The proposal also would subject applicable funds to new disclosure requirements. 

Summary of ICI's Draft Comment Letter

Our draft comment letter focuses on the proposal's treatment of funds and reiterates the comments we made in our 2015 comment letter.[4] Once again, we support the SEC's determination to exclude most funds from the proposal.  We recommend, however, that the SEC exclude all funds.  In support of this recommendation, we make the following points:

  • The concerns behind this Dodd-Frank Act provision do not apply to listed funds (i.e., ETFs and many closed-end funds);
  • The SEC excluded all funds from certain prior compensation-related rulemakings;
  • Listed funds' financial statements and accounting practices are less complex than those of operating companies; and
  • Costs of implementation and compliance for any potentially affected funds will outweigh any benefits.

 

Matthew Thornton
Associate General Counsel

 

endnotes

[1] Reopening of Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, SEC Release No. 33-10998 (Oct. 14, 2021), available at www.sec.gov/rules/proposed/2021/33-10998.pdf. See also Institute Memorandum No. 33831, dated October 18, 2021, for a more complete summary of this latest release.

[2] Listing Standards for Recovery of Erroneously Awarded Compensation, SEC Release No. 33-9861 (the "proposal") (July 1, 2015), available at www.sec.gov/rules/proposed/2015/33-9861.pdf. See also Institute Memorandum No. 29181, dated July 16, 2015, for a more complete summary of the proposal.

[3] The proposed rule and form amendments would apply only to those funds that: (i) list their securities on an exchange (i.e., ETFs and closed-end funds); (ii) have internal management (i.e., have paid employees of their own, as opposed to relying on an investment adviser's employees, whom the adviser pays); and (iii) pay their executive officers incentive-based compensation.

[4] Available at www.sec.gov/comments/s7-12-15/s71215-25.pdf.

    Attachments

    33894a.pdf