The Securities and Exchange Commission has proposed new rules that would restrict the bonuses given at broker-dealers and investment advisors with more than $1 billion in assets.
The SEC approved the measure in a 3-2 vote yesterday, with the commission's two Republicans opposing the measure. After the proposal is printed in the Federal Register, a 45-period will commence during which the SEC will take public comments on the proposal.
New restrictions on bonuses were one of the mandates of the Dodd-Frank financial reform package adopted last year. The legislation required the SEC and six other federal regulatory agencies to jointly adopt such rules. The Federal Deposit Insurance Corp. last month proposed rules similar to those proposed by the SEC that would apply to the banks that it regulates.
"It is simply common sense that a financial institution-and thus its shareholders-can be negatively affected if incentives drive behavior that is not consistent with the institution's overall interests," SEC Commissioner Elisse B. Walter said in support of the measure.
Commissioner Troy A. Parede opposed the measure, arguing, "The commission is not well-equipped to prescribe rules that dictate the specifics of how individuals must be paid"
Firms that are above the $1 billion asset threshold would be required to file annual reports to the SEC detailing their incentive-based compensation. The rules would "prohibit incentive-based compensation arrangements that encourage inappropriate risk-taking by providing excessive compensation or that could lead to material financial loss to the firm," according to the SEC.
Financial institutions with $50 billion or more in assets would face added restrictions, including deferral of at least 50% of incentive-based compensation of executive officers for three years, and board of director approval of compensation for people whose job functions give them the ability to expose the firm to a substantial amount of risk.