The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

July 2, 2024

Commissioner Lizárraga Weighs in on Delayed Section 956 Rulemaking

In a recent speech at an Americans for Financial Reform event in mid-June, Commissioner Lizárraga lamented (subject to the standard disclaimer) that federal financial regulators have yet to promulgate the joint rulemaking required by Section 956 of the Dodd-Frank Act that would prohibit any type of incentive-based compensation arrangement that encourages inappropriate risks by a covered financial institution. As I shared this spring, the FDICOCC and Federal Housing Finance Agency adopted a notice of proposed rulemaking to implement Section 956 of Dodd-Frank in early May, but the notice of proposed rulemaking will not be published in the Federal Register until all six agencies (including the SEC) propose it.

Commissioner Lizárraga used this speech to make counterarguments to those who say this rule is no longer needed today. He starts by reminding listeners that Congressional mandates are, as named, mandatory, and notes:

Of 330 rulemaking provisions in the Dodd-Frank Act, only 148 were mandatory. And of those, only 22 had a deadline of less than a year after enactment. Section 956 was one of them.

He also argues that last year’s regional banking crisis illustrated that this rule remains necessary, saying:

The Federal Reserve Board’s April 2023 report examining the factors that contributed to SVB’s failure found that its compensation packages for senior management were tied to short-term earnings and did not include any risk metrics, which may have contributed to an excessive focus on growth and short-term profitability at the expense of effective risk management.

He concludes by acknowledging that joint rulemaking with several sister agencies requires a lot of cooperation and coordination, but he’s encouraged to see this rule on the SEC’s short-term agenda.

Meredith Ervine