Sixteen Democratic Senators are calling on federal regulators to strengthen and finalize a proposed “clawback” rule in light of the Wells Fargo (WFC) fake-accounts scandal.
Section 956 of the Dodd-Frank financial reform act aims to prohibit executive-pay arrangements that promote excessive risk-taking or misconduct in the financial-services industry, wrote the Senators — including Elizabeth Warren, Robert Menendez and Al Franken — in a letter Wednesday.
The letter was sent to Federal Reserve Board Chair Janet Yellen and Securities and Exchange Commission Chair Mary Jo White, as well as to the heads of the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the National Credit Union Administration and the Federal Housing Finance Agency.
The Senators note that Wells Fargo’s board acted “belatedly in the face intense negative publicity, to claw back only a small fraction” of former Wells Fargo CEO John Stumpf’s compensation. “However, it seems clear that without unusual public pressure, high-level Wells Fargo executives would not have been held accountable at all and would have received their entire bonuses.”
Wells Fargo’s board recently announced that Stumpf had agreed to forfeit $41 million in unvested equity awards and that he would not receive a salary during the ongoing board investigation or a bonus for 2016.
The Senators state that “key senior executives at the bank who were both aware of the behavior and were instrumental in designing policies that led to the scandal, such as former Senior Executive Vice President for Community Banking Carrie Tolstedt and former Chairman and CEO John Stumpf, have received hundreds of millions of dollars in bonus compensation, even as over 5,300 low-paid retail banking employees were fired.”
The financial regulators’ “current work in crafting new executive pay rules implementing Section 956 of Dodd-Frank offers a unique opportunity to address these accountability issues at major banks,” the letter states. Section 956, the Senators wrote, “requires your agencies to ban incentive pay practices at banks that encourage inappropriate risk taking.”
The Senators, however, specifically recommended the regulators include the following measures to further strengthen the rule:
Lengthening the bonus deferral period in the rule to ensure that executives are not improperly awarded bonuses before wrongdoing has become apparent;
Requiring, instead of suggesting, downward pay adjustments and clawbacks if misconduct or inappropriate risk-taking has clearly occurred; and
In the case of misconduct, strengthening the trigger mechanism for clawbacks to ensure senior executives are held accountable if they served in a managerial position and had oversight of the improper activities.