The Advisors' Blog

Last spring, during the banking industry turmoil, Dave reminded us about one piece of Dodd-Frank rulemaking that remained in regulatory limbo. Section 956 of the Dodd-Frank Act directed multiple regulators of financial institutions to jointly prescribe regulations addressing incentive-based compensation practices at covered financial institutions. Specifically, as Dave described:

Section 956 requires that the regulators prohibit any types of incentive-based compensation arrangements, or any feature of any such arrangements, that the regulators determine encourage inappropriate risks by a covered financial institution: (1) by providing an executive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or (2) that could lead to material financial loss to the covered financial institution.

Under the Section 956, a covered financial institution also must disclose to its appropriate regulator the structure of its incentive-based compensation arrangements sufficient to determine whether the structure provides excessive compensation, fees, or benefits or could lead to material financial loss to the institution. The Dodd-Frank Act defines “covered financial institution” to include specific types of financial institutions that have $1 billion or more in assets.

Dave’s blog also gave the regulatory history of this rulemaking — which includes two prior proposals that faced some considerable opposition (from the financial services industry). Those following the rulemaking may have noticed that the Fall 2023 Reg Flex agenda listed April 2024 as a tentative target date for a third Notice of Proposed Rulemaking. And, in case you missed it, the WSJ recently reported that the agencies involved “are pushing to propose the measure in the coming days” although the SEC was still working on a new economic analysis.

– Meredith Ervine