In response to the financial crisis, Congress and regulators enacted a number of measures aimed at the financial industry to curb perceived compensation abuses, mitigate risk with respect to incentives and prevent excessive compensation. Section 956 of the Dodd-Frank Act requires several federal financial agencies to jointly promulgate rules covering incentive-based compensation that would discourage individuals from taking inappropriate risks that could lead to a material financial loss in addition to issuing special rules governing financial institutions with over $1 billion in total assets with augmented requirements for comapnies with over 50$ billion in total assets. A proposed rule implementing Section 956 was originally proposed in 2011. Five years later, in 2016, the six agency coalition re-proposed a rule implementing Section 956 which contained some dramatic changes compared to the original 2011 version. The Center agrees that more robust risk management and mitigation practices related to compensation should apply to the financial industry because of the unique characteristics and structures of the industry. However, the Center believes that the proposed and re-proposed rules are too broad and unnecessarily transfers board authority over company strategy, compensation and oversight to the federal government. In our comments to the six regulator coalition, the Center encouraged the re-evaluation of several aspects of the Section 956 proposed rule, including:
- Regulators need to work with the local regualtors which have been working for years with Financial Services Firms in the implementation of the 2010 FDIC Incentive Compensation Guidance to create rules reflective of the work companies have already conducted.
- Concerns that the definition of "Significant Risk-Taker" encompass an unncessarily and excessively broad category of employees and injects substantial uncertainty into compensation levels thus harming retention and recruitment prospects for financial services companies.
- The rule requires that Executive Officers and "Significant Risk-Takers" defer up to 60% of their incentive compensation, including both long and short-term pay for a period of up to four years. The Center believes the required deferrals to be excessive in length and scope.
The Center continues to advocate the board’s compensation decisions should be tailored to each company’s unique recruitment and overall business strategies while including oversight of management risk committees that include individuals familiar with the specific risks posed by different trading and investment strategies.