SEC Rule on Compensation Recovery: Updates on Restatements and Clawbacks, Quarterly Update # 4

SEC Rule 10D-1, more commonly known as the compensation clawback rule, is a requirement imposed on public companies to establish procedures for reclaiming excessive incentive compensation granted to current or former executives that was predicated on metrics later corrected through restatements. Enacted as part of the Dodd-Frank Act, the rule serves to enhance accountability by mandating the retrieval of bonus or performance-based pay linked to erroneous outcomes, irrespective of whether the discrepancies were the outcome of inadvertent errors or intentional misconduct. Notably, the rule pertains to both substantial (“Big R”) and inconsequential (“little r”) restatements.

Moreover, this regulation encompasses disclosure mandates, stipulating that companies must highlight on the cover page of their annual filings any adjustments made to prior financial statements, elucidate the measures taken to reclaim excessive compensation, and include their clawback policy as an attachment to the annual report.

In the fourth quarter of 2025, a continuation of the prevailing trends observed in the third quarter was noted, with companies grappling with similar challenges in executing the directive as seen in 2024 and early 2025.

Compared to the previous year, there was a precipitous drop in the number of companies flagging the error correction checkbox, falling from 28 in Q4 2024 to 18 in Q4 2025. Similarly, the instances of recovery analysis flags decreased in Q4 2025, with 13 flags recorded compared to 16 in Q4 2024. The count of recovery analysis disclosures also experienced a minor drop in Q4 2025 when juxtaposed with Q4 2024, with 7 disclosures versus 9. Noteworthy is the fact that only 2 clawbacks were enforced in Q4 2025, whereas no clawbacks were recorded in Q4 2024.

Looking at the year 2025 as a whole, 235 companies disclosed an error correction flag, marking a decrease from the 289 recorded in 2024 – constituting a decline of approximately 19%. There was a significant 70% surge in the number of companies activating the recovery analysis flag in 2025, totaling 90 companies compared to the 53 flagged in 2024. Furthermore, 63 companies executed the recovery analysis flag in 2025, nearly double the 32 disclosures made in 2024. Notably, 8 companies invoked mandatory clawback policies in 2025, up from merely 2 in 2024.

The data illustrated an upswing in the proportion of companies divulging a recovery analysis pursuant to Rule 10D-1. The percentage escalated from 57% in Q4 2024 to 72% in Q4 2025 and from 18% to 38% on an annual basis, highlighting a more explicit scrutiny concerning whether wrongly awarded incentive-based compensation necessitated recovery within the designated three-year review period. However, not all companies are uniform in their evaluation and disclosure strategies, with approximately 28% in Q4 2025 and 72% in Y2025 omitting a recovery analysis flag. It is anticipated that with the uptick in restatements falling within the rule’s purview, the inclusion of recovery analysis disclosure may continue to rise.

The likelihood of observing a widespread implementation of mandatory clawbacks under Rule 10D-1 remains low, mostly attributed to “little r” corrections involving minor accounting discrepancies that are improbable to substantially influence incentive compensation metrics.