The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

April 21, 2016

Excessive Incentive Pay: Proposed Financial Firm Rules Coming Today?

Broc Romanek,

With a hat tip to Mike Melbinger, it looks like new proposed rules under Dodd-Frank’s Section 956 will be released this morning – at least by the National Credit Union Administration. The FDIC has already announced its open meeting planned for next Tuesday – and this WSJ article indicates that Office of the Comptroller of the Currency will act the same day. I don’t see anything similar from the SEC planned yet – but maybe the Commission will act in seriatim or will announce an open meeting at some point soon. I’m hearing that the proposed rule will be a re-proposal of the 2011 proposal (i.e. new comment period).

This WSJ article from last month telegraphed much of this – here’s an excerpt:

As part of a hard-fought update of crisis-era compensation rules expected in April, regulators plan to require banks to hold back much of an executive’s bonus beyond the three years already adopted by many firms, people familiar with the matter said. The new holding period has yet to be determined, though it likely will be shorter than the European standard of a decade, one person familiar with the matter said. Also unclear is the portion that will be deferred. The original draft of the rules five years ago said it should be as much as 50%. Whatever the final numbers, the rules will put further restrictions on payouts that already are under pressure as some big trading businesses dry up.

The moves are aimed at giving banks more time to claw back bonuses if it turns out the executive’s actions hurt the firm. They govern pay to risk-taking executives who are in a position to do material damage to their companies. In addition to extending the deferral window, regulators want to broaden the pool of bank employees subject to the new rules by expanding the definition of risk taker to include factors like the amount of money an employee handles. Regulators also are likely to be more specific on the instances in which executives might have to forfeit their bonuses entirely in the event of a material loss at the firm. Curbing executive pay is one of the remaining key issues left unresolved that were envisioned in the Dodd-Frank regulatory-overhaul law, passed in 2010 in the wake of the financial crisis.

The effort to complete the rule got a fresh push this month as President Barack Obama met with financial regulators at the White House, urging them to prioritize wrapping up rules that govern executive compensation during his remaining time in office. New rules ought to ensure that those working for financial firms are “less incentivized to take big, reckless risks” that could wind up harming the financial system, Mr. Obama said after the meeting.

As regulators complete the new version of the rule, they are discussing not just giving it more teeth than the original 2011 proposal but also forcing Wall Street to go beyond current compensation practices. Those have evolved over the past five years to align with the concepts of the original plan, even though it was never implemented. In addition to extending the deferral window for parts of bonuses, regulators want to broaden the pool of bank employees subject to the new rules by expanding the definition of “risk taker” to include benchmarks such as the size of the assets traded by an employee.

The new version of the rule is likely to codify for the first time as government policy a requirement that companies claw back some of their top officials’ incentive pay if they have to reinstate financial results. That provision wasn’t in the 2011 proposal but has become a common practice on Wall Street in recent years.