Six federal agencies are inviting public comment on a proposed rule to prohibit incentive-based compensation arrangements that encourage inappropriate risks at covered financial institutions. The deadline for comments on the proposed rule, which was submitted for publication in the Federal Register, is July 22, 2016.
Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the agencies, jointly, to prescribe such regulations or guidelines. There is evidence that flawed incentive-based compensation packages in the financial industry were one of the contributing factors in the financial crisis that began in 2007.
The proposed rules would apply to covered financial institutions with total assets of $1 billion or more. The requirements are tailored based on assets, and covered institutions would be divided into three categories:
Much of the proposed rules would address requirements for senior executive officers and employees who are significant risk-takers at Level 1 and Level 2 institutions. All institutions that would be covered by the proposed rules would be required to annually document the structure of incentive-based compensation arrangements and retain those records for seven years. Boards of directors of covered institutions would be required to conduct oversight of the arrangements.
All covered institutions would be subject to general prohibitions on incentive-based compensation arrangements that could encourage inappropriate risk-taking by providing excessive compensation or that could lead to a material financial loss.
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One Reply to “Regulators Invite Comment on Rule to Prohibit Incentive-Based Pay”
In my opinion, if the banks are held to an unreasonable standard, what this will accomplish is a heightened flight of talent from the industry to other sectors of financial services that are not overseen by the regulatory agencies. Those talented people who are best equipped to recognize and mitigate risk will be doing so outside of the banking industry, creating yet another problem instead of fixing one.