Center Submits Comments on Financial Services Incentive Compensation Rules Urging Regulators to Re-Focus Final Rule on Risk

July 22, 2016

The Association's Center On Executive Compensation submitted extensive comments this week to the six agencies charged with collectively implementing Dodd-Frank Section 956, which imposes significant restrictions on incentive plan designs for select financial services companies, making a strong case that a final rule should focus more narrowly on actual risk potential and warning of the dire recruitment and retention consequences which would result from the framework in the proposed rule.  Proposed rules implementing Dodd-Frank Section 956 were originally introduced in 2011 and a much more stringent re-proposal was introduced in April 2016.  The comment letter's key points include the following recommendations:

  • Refocus the Rule on Risk – Not Compensation Magnitude or Composition:  In defining the scope of which incentive plans and participants are covered, the proposed rule does not consider risk potential, treating all plans and participants equally.  This results in the coverage of an excessively broad scope of incentive plans, the vast majority of which have no potential of incentivizing risk taking leading to material financial harm to the enterprise.  The Center recommends the final rule allow companies to identify plans which actually can create the risks contemplated by Section 956, then apply the requirements to only those plans.

  • Replace the "Significant Risk-Taker" Framework with a Principles-Based Approach:  The 2016 Proposed Rule imposes significant restrictions on "Significant Risk-Takers" who are generally non-executives purportedly able to subject the firm to material financial harm.   However, the proposed rule defines a Significant Risk-Taker as the top highly compensated employees at a firm, regardless of the risk a person poses. The Center urges this framework be replaced with an effective approach already being used by regulators or a more reasonable dollar threshold test and points out the severe recruitment and retention challenges that firms would be subject to if the rules were finalized as proposed.

  • Require a Deferral of Only Short-Term Incentive Compensation:  Pointing out that long-term incentive compensation inherently reflects realized risk over time because it typically vests over three years or more, the Center urges that a final rule forgo the proposed additional deferral of both short and long-term incentive compensation and instead focus only on short-term.
Additionally, the Center and representatives from two financial services subscribers met with representatives of each of the six regulators agencies this week at the Federal Reserve headquarters in Washington, D.C. to discuss the implications of the 2016 proposed rule.  The meeting allowed the Center to hone its comments to the areas we believe will be most effective.