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Regulation and Compliance > Federal Regulation > SEC

SEC Proposes Compensation Rules

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Members of the U.S. Securities and Exchange Commission (SEC) today voted 3-2 to unveil draft regulations that could affect incentive compensation at large investment advisors and large broker-dealers.

The SEC has developed the rule to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires federal financial services regulators to come up with compensation rules that will discourage financial services company executives,Money employees, directors and principal shareholders from taking foolish levels of risk in an effort to increase their own income.

Dodd-Frank Act Section 956 will require financial services companies to describe and justify their incentive compensation arrangements to regulators every year.

The companies affected by the SEC draft regulations would be SEC-regulated broker-dealers and investment advisors with at least $1 billion in assets.

The proposed rule would forbid any affected company from establishing or maintaining an incentive-based compensation arrangement that encouraged inappropriate risks by providing covered persons with excessive compensation, or that could lead to material financial loss.

For executives and some other key people at financial institutions with $50 billion or more in total assets, the proposed rule would “require the firms to defer for 3 years at least 50% of any incentive-based compensation for executive officers – and award such compensation no faster than on a pro rata basis,” SEC officials say in a fact sheet. “Any incentive-based compensation payments must be adjusted for losses incurred by the covered financial institution after the compensation was initially awarded.”

After the draft rule is published in the Federal Register, members of the public will have 45 days to comment, officials say.

The SEC proposed executive compensation disclosure rules to implement another Dodd-Frank Act provision, Dodd-Frank Section 951, in October 2010.

At press time, the complete draft was not available for review.

Troy Paredes and Kathleen Casey, the Republicans on the commission, said today during an SEC meeting that they believe

the provisions for companies with more than $50 billion need work.

“I am concerned that the proposal, if adopted, would lead individuals at covered broker-dealers and investment advisors to become unduly conservative and avoid taking even prudent risks,” Paredes said.

Casey said she believes the proposed rules are more rigid than they need to be. “Given the fact the under Section 956 covered financial institutions and their regulators will be reviewing incentive-based compensation practices regularly, this additional provision is wholly unnecessary and without any demonstrable corresponding benefit,” she said.

The rules for executives and other key personnel at companies with $50 billion or more in assets are based on Financial Stability Board guidelines for large banks, and “there is little discussion in the release about whether the rules … are relevant or appropriate for firms such as large investment advisors,” Casey said.

Elisse Walter, a Democratic commission who voted for releasing the draft rule, said she wants to see constructive criticism of the proposal.

“Are the deferral arrangements required for executive officers appropriate?” Walter asked. “And, are there any other additional considerations that the commission ought to consider in designing this provision, such as tax or accounting considerations that may affect the ability of larger covered financial institutions to comply with the proposed deferral arrangements?”


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