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US Securities and Exchange Commission

Business Group: Banking Agencies’ Incentive Pay Proposal Without SEC, Fed Violates Law

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

As the Securities and Exchange Commission (SEC) is in the middle of writing a third proposal on Dodd-Frank incentive-based compensation arrangements for financial institutions, banking agencies except for the Federal Reserve have jointly issued their own version of the proposal. But the U.S. Chamber of Commerce said not so fast to the four banking agencies, pointing out that separate proposals violate the financial reform law.

Section 956 of the Dodd-Frank Act, which is about incentive compensation for banks, states that “the appropriate Federal regulators jointly shall prescribe regulations or guidelines” pertaining to the rule, Tom Quaadman, an executive vice president with the Chamber, wrote on June 3, 2024, to the heads of banking agencies that issued the proposal in early May. Sec. 956 of PL111-203

The agencies are Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Federal Housing Finance Agency, and the National Credit Union Administration.

“The underlying statute by which your agencies are pursuing this exercise does not leave room for ambiguity; all six of the ‘appropriate’ Federal regulators must participate,” Quaadman wrote. “The ‘proposing release’ published by your agencies does not conform with section 956, as it does not include the Federal Reserve and the SEC. Furthermore, as of this date, the proposal was not published in the Federal Register.”

Quaadman noted that the word “shall” in Dodd-Frank means it is mandatory; thus, a failure of all the agencies spelled out in Section 956 to participate in the process would render any effort to finalize the rules invalid.

Dodd-Frank, which Congress passed in 2010 in response to the 2008 financial crisis, included Section 956, which is intended to reign in reckless behavior on Wall Street caused by imprudent incentive compensation packages for bankers. And investor advocates have urged regulators over the years to adopt the rule, but strong banking industry opposition to the rule led to the prolonged delay.

The Chamber said that Section 956 rules could adversely impact the competitiveness of the banking system if they are not informed by a careful study of current corporate practices surrounding executive pay.

“Banks must be provided the appropriate flexibility to offer compensation to attract and retain high-performing talent,” Quaadman wrote. Moreover, he said that Section 956 does not require implementing regulations but provides the agencies an option to issue guidance to satisfy the provision. And he pointed out that in 2010, the agencies issued Interagency Guidance on best practices, policies, and procedures. Thus, he said that the six agencies should consider if guidance is a more appropriate tool.

Had regulators adopted the proposed rule as issued in March 2011, financial firms would have been banned from giving out pay packages that encourage excessive risk-taking. Firms would have to file annual reports describing the financial incentives, including narrative descriptions of pay packages and the firm’s compensation policies and procedures. The proposing release cited arrangements that “rewarded employees — including non-executive personnel like traders with large position limits, underwriters, and loan officers — for increasing an institution’s revenue or short-term profit without sufficient recognition of the risks the employees’ activities posed to the institutions, and therefore potentially to the broader financial system.”

In 2016, changes that financial companies made to their compensation practices since the 2011 proposal was released persuaded the regulators to modify the proposal. The requirements would apply to banks, broker-dealers, credit unions, and investment advisers with $1 billion or more in assets.

Investor advocates have pointed out that Section 956 rules must be adopted not only because of the financial crisis in 2008 but also because of the banking turmoil last year with Silicon Valley Bank (SVB) and some other regional banks.

Where Things are With SEC, Fed

In the meantime, it is unclear when the SEC will issue the reproposal, but a person close to the matter said that the regulator is currently doing an economic analysis.

It is also unclear when the Fed will issue a proposal, especially as some critics say that the central bank may be too sympathetic to banks.

Chair Jerome Powell, for example, in March said compensation was a minor contributor to SVB’s issues, and added that the central bank would not commit to completing work on the rule this year.

“I would like to understand the problem we’re solving, and then I would like to see a proposal that addresses that problem,” he said in congressional testimony. Powell was first appointed by President Trump, and President Biden reappointed him to head up the Fed.

However, a Fed spokesperson in early May reportedly said that the central bank is committed to working with other agencies on a joint rule, but needs to take into account updated information that reflects current industry practices.


This article originally appeared in the June 6, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.

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