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Securities Regulation Daily Wrap Up, DODD-FRANK ACT—Lawmakers emphasize need for regulations on incentive-based compensation practices, (May 16, 2024)

Organizations Mentioned:Americans for Financial Reform | Federal Deposit Insurance Corp. | Federal Housing Finance Agency | Goldman Sachs | J.P. Morgan | JP Morgan Chase | Public Citizen | Silicon Valley Bank | Wells Fargo

By Patricia K. Ruiz, J.D.

A year after the 2023 bank failures, lawmakers continue to press federal agencies to pass “banker pay” regulations.

A letter from U.S. Senator Chris Van Hollen (D-Md) and Congresswoman Nydia Velázquez (D-NY) urges the finalization of act ...

By Patricia K. Ruiz, J.D.

A year after the 2023 bank failures, lawmakers continue to press federal agencies to pass “banker pay” regulations.

A letter from U.S. Senator Chris Van Hollen (D-Md) and Congresswoman Nydia Velázquez (D-NY) urges the finalization of actions to prohibit compensation arrangements for executives of large financial institutions that encourage reckless decision-making. Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) requires six agencies to jointly set guidelines on incentive-based compensation practices for large financial institutions; so far, only three agencies have acted.

Reform needed. The Dodd-Frank Act is one of several measures aimed at reforming banker pay, which Congress and other examiners identified as a core cause of the 2008 financial crash. While Congress assigned deadlines to only a handful of the 243 rules embedded in Dodd-Frank, because of the importance of compensation reform, Congress set a deadline of April 2011 for §956, the lawmakers wrote in their letter. The 2023 failures of Silicon Valley Bank (SVB) and other regional banks prompted renewed attention to the relation between compensation structures and misguided, reckless decision-making by bankers, and the White House identified the need for banker pay reform as a necessary response to the conduct that caused the failures.

“Finalizing a rule for §956 is not discretionary,” the lawmakers wrote. “Understanding the problem and how best to fashion a rule in response will require your careful consideration. In our April 26, 2023, letter, we identified key guardrails that should be included in the final rule, including a ban on stock options and hedging, as well as a lengthy deferral period for incentive compensation.”

Recent proposed rules. The Federal Deposit Insurance Corporation (FDIC), the Office of Comptroller of the Currency (OCC), and the Federal Housing Finance Agency (FHFA) proposed rules on executive compensation (see Banking and Finance Law Daily, May 7, 2024). The proposal would ban incentive-based compensation arrangements that do not include risk adjustment of awards, deferral of payments, and forfeiture and clawback provisions. A letter to the regulators from Americans for Financial Reform and Public Citizen pressed the regulators to implement §956, calling to mind the 2008 crash that precipitated the Dodd-Frank Act and the 2023 banking failures and citing examples of connections between incentive-based pay and excessive risk-taking, including JP Morgan’s London Whale loss, Wells Fargo’s fake account scandal, and Goldman Sachs’ bribery case in Malaysia.

Companies: Americans for Financial Reform; JP Morgan Chase; Public Citizen; Silicon Valley Bank; Wells Fargo

LegislativeActivity: DirectorsOfficers DoddFrankAct ExecutiveCompensation