SEC adopts two rules, proposes a third

By Bryan Strickland

The SEC adopted two rules Wednesday, including one aimed at ensuring that publicly traded companies reclaim incentive-based compensation that was erroneously awarded to executives.

The SEC also adopted a rule requiring more transparency around mutual fund information shared with investors and proposed a rule that would require investment advisers to exercise due diligence if they outsource certain functions that serve their clients.

Adopted rule: Listing Standards for Recovery of Erroneously Awarded Compensation

The "clawback" rule adopted by the SEC on Wednesday will hold companies accountable by requiring securities exchanges to adopt listing standards that compel companies to "develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers," according to an SEC news release.

"I believe that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors," SEC Chair Gary Gensler said in the news release. "Through today's action and working with the exchanges, we have the opportunity to fulfill Dodd-Frank's mandate and Congress's intention to prevent executives from keeping compensation received based on misstated financials."

First proposed in 2015, Rule 10D-1 addresses Section 10D of the Security Exchange Act of 1934, which was added to the Exchange Act in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203. The rule becomes effective 60 days following publication of the release in the Federal Register. Exchanges will be required to file proposed listing standards no later than 90 days following publication, and the listing standards must be effective no later than one year following publication.

Adopted Rule: Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements

Wednesday's other adopted rule, aimed at protecting shareholders and potential investors, will require mutual funds and exchange-traded funds to provide "concise and visually engaging annual and semi-annual reports to shareholders that highlight key information that is particularly important for retail investors to assess and monitor their fund investments." The rules apply to printed and digital materials as well as advertisements.

"Shareholder reports are amongst the most important documents that fund investors receive," Gensler said in a news release. "These reports, however, often are more than 100 pages in length. As a result, a retail investor looking to understand the performance, fees, and other operations of a mutual fund or exchange-traded fund may need to sift through extensive financial information. Today's final rules will require fund companies to share a concise set of materials that get to the heart of the matter. Further, today's final rules are designed to promote transparent and balanced presentations of fees and expenses in investment company advertisements."

The rule will become effective 60 days after publication in the Federal Register, with an 18-month transition period for adjusting shareholder reports and advertisements. Any representations of fees and expenses considered "materially misleading" must meet the new standards on the effective date.

Proposed Rule: Outsourcing by Investment Advisers

A proposed rule released Wednesday by the SEC under the Investment Advisers Act of 1940 is aimed at protecting investors by ensuring that registered investment advisers take appropriate responsibility if they outsource certain services or functions.

"Though investment advisers have used third-party service providers for decades, their increasing use has led staff to make several recommendations to ensure advisers that use them continue to meet their obligations to the investing public," Gensler said in a news release.

The proposed rule includes:

  • New requirements for advisers to conduct due diligence before outsourcing and to periodically monitor service providers' performance and reassess whether to retain them.
  • Related requirements for advisers to make and/or keep books and records related to the due diligence and monitoring requirements.
  • Amendments to the adviser registration form, Form ADV, to collect census-type information about advisers' use of service providers.
  • A requirement for advisers to conduct due diligence and monitoring for third-party recordkeepers, along with a requirement to obtain reasonable assurances that the third party will meet certain standards.

A public comment period will remain open for 60 days, or for 30 days after the date of publication in the Federal Register, whichever period is longer.

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at

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