Federal financial regulators are taking aim at large compensation packages paid to non-executives at financial institutions, such as the huge payments made to the president and other top officials at American International Group’s Financial Products unit.
In regulations proposed on March 30, seven federal financial services regulators would bar incentive-based compensation that are excessive or that “could expose the institution to inappropriate risks that could lead to material financial loss.”
The federal agencies involved in the joint rules-making include the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, and the Federal Housing Finance Agency.
The regulations require disclosure of incentive-based compensation arrangements for top executives. The rules also establish special rules for institutions with assets of more than $50 billion.
They also require the boards, or committees of boards of large financial institutions, to monitor and oversee such compensation. And they require deferral of parts of large compensation packages.
The rules were mandated by the Dodd-Frank financial services law.
The provision aimed at AIG would require boards of institutions with assets of more than $50 billion to identify those persons (other than top executives) who can expose the institution to possible losses “that are substantial in relation to the institution’s size, capital or overall risk tolerance.”
The proposed rules would require that the board of directors, or a committee of the institution, approve the incentive-based compensation arrangement for non-top executives, and maintain documentation of such approval.
The rules aim to ensure greater control of executives, such as the head and other top officials of American International Group’s Financial Products unit. The unit, based in London and Connecticut, accumulated $2.8 trillion in liabilities through sale of un-hedged credit default swaps, according to congressional testimony.
The president of AIGFP, Joseph Cassano, earned $162 million in the eight years ending in 2007, according to congressional testimony.
The federal government took control of 79.9 percent of AIG’s stock in Sept. 2008 in return for more than $86 billion in cash needed to meet margin calls required under covenants to the CDS contracts.
The Federal Reserve’s and the Treasury’s commitments to AIG through cash outlays and guarantees of its obligation were considerably more than before AIG was stabilized.
To date, the government has converted its investments in AIG into 92% of its stock. The government plans to start selling off that stock beginning in May.
Besides banks, thrifts, credit unions and mortgage groups, such as Freddie and Fannie, the proposed regulations would cover institutions regulated by the Securities and Exchange Commission.
In a critical decision, the proposals would be established as rules, rather than guidance. That means regulators would have the authority to take enforcement action against an institution if it violates the provisions of the regulations.