25 June 2019

U.S. Regulators Revive Work on Incentive-Pay Rules

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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 companies.

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 executive compensation.

Click here to access the full article on The Wall Street Journal. 

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