U.S. financial regulators are focusing renewed attention on
Wall Street pay and are designing rules to curb compensation packages that
could encourage excessive risk taking. Regulators are considering requiring
certain employees within Wall Street firms hand back bonuses for egregious
blunders or fraud as part of incentive compensation rules the 2010 Dodd-Frank
law mandated be written, according to people familiar with the negotiations.
Including such a “clawback” provision in the rules would go beyond what
regulators first proposed in 2011 but never finalized.
The clawback requirement, which is being hashed out among
six regulatory agencies, would be part of a broader compensation program in
which firms are required to hang onto a significant portion, perhaps as much as
50%, of an executive’s bonus for a certain length of time.
Exactly which firms will be covered is still a matter of
debate among the agencies involved in the discussions, but the 2010 law
requires regulators to impose incentive-compensation rules on banks, broker
dealers, investment advisers, mortgage giants Fannie Mae and Freddie
Mac and “any other financial institution” deemed necessary.
Shareholder activists say the existing clawbacks some firms
have are too weak and that it remains unclear how often those policies are
invoked because banks don’t usually disclose when the tool is used. The New
York City comptroller has been successful in getting banks such as Citigroup Inc.
and Wells Fargo & Co. to expand their clawback policies in recent
years. But many big banks have resisted the office’s efforts to have them
routinely disclose when and how much compensation they claw back, according to
the comptroller’s office.
Work on the incentive-compensation proposal has renewed
after more than three years of dormancy, but the details are far from settled.
At the end of last year, informal discussions among staff from the various
agencies prompted the three major bank regulators—the Federal Reserve, Office
of the Comptroller of the Currency and Federal Deposit Insurance Corp.—to send
a conceptual proposal to the Securities and Exchange Commission, according to
people familiar with the discussions. The document sparked several areas of
debate, including how long the deferral period should be and how to treat asset
managers under the rule.
Big Wall Street banks have instituted their own changes to
their bonus pay practices since the financial crisis, with the encouragement of
regulators and shareholders. Many banks moved to defer more of employees’ bonus
payments over several years and give more of those bonuses in stock as opposed
to cash compared with the years preceding the 2008 crisis, consultants say. Yet
some banks have already begun reversing some of those moves in the face of
rising competition for talent from hedge funds and asset-management firms,
paying more cash and delaying a smaller portion of bonus payments.
In October, President Barack Obama gathered the
heads of the top U.S. financial regulators for a White House meeting and
urged them to finish the outstanding compensation rules required by the 2010
Dodd-Frank law, a White House spokesman said at the time. Top Fed officials
including New York Fed President William Dudley have stressed that
changing compensation practices can help address ethical lapses on Wall Street.
One flash point in the current talks is how long firms
should defer compensation for executives, according to people familiar with the
discussions. It is still early and officials haven’t landed on a specific
period yet, a person familiar with the matter said. The debate over the rule is
said to at least partly mirror the 2011 proposal, when Republican members of
the SEC objected to any mandatory-deferral requirement, saying the agency was
poorly equipped to dictate the specifics of how individuals must be paid at
Another wrinkle, according to a person familiar with the
discussions, is how to apply the rule to financial institutions that have
different methods for compensating executives than a traditional bank. For
instance, regulators are still debating how to defer the compensation—and
potentially claw some of it back—from an asset manager, who is primarily
compensated with “carried interest” as opposed to a salary and year-end bonus,
the person said. Carried interest is a share of a partnership’s profits. Still,
the rule has the potential of capturing hedge funds, private-equity firms and
investment advisers that haven't been covered by prior efforts to regulate
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