Financial Services Incentive Compensation Restrictions Potentially Back on Regulators’ Agenda

March 22, 2019

Last week, news surfaced that financial services regulators are contemplating reviving and completing regulations mandated by the Dodd-Frank Act on incentive compensation at financial services institutions.

Joint rulemaking by six regulators required:  Section 956 of the Dodd-Frank Act requires the Federal Reserve, FDIC, Office of the Comptroller of the Currency, SEC, Federal Housing Finance Agency, and National Credit Union Administration to develop rules that require longer-term deferrals especially for employees or groups of employees that are deemed “higher risk takers.”

Both times rules have been proposed (2011 and 2016), the six regulators were unable to agree on a final, unified approach.  However, thanks in part to greater restrictions by the regulators, financial institutions have already adopted pay approaches that require greater deferral of compensation that is adjusted for losses on longer term products during the deferral period as well as clawbacks.

The Association's Center On Executive Compensation urged agencies to rethink the proposed approaches.  Both proposed rules focus on company size, compensation quantity, and form instead of focusing on the risk-taking potential of employees and their activities.  The assumption that institutions with a large asset size and high pay necessarily correlate to risk potential is flawed because greater risk is typically affiliated with more complex activities, rather than mere institution size, the Center argued in its comments on both proposals.

Next steps, timing still uncertain:  Following initial news reports, American Banker reported that the heads of both the FDIC and the SEC expressed skepticism that regulators would make the rules a priority.  Last week, FDIC Chair Jelena McWilliams said, “I don't know that there is that much movement on it," and SEC Chair Jay Clayton said he was open to thinking about it, but “would put more certainty around the SEC-only items that are on our agenda.”