SEC Proposes Ban on Incentives that Encourage Risk

March 7, 2011 ( – The Securities and Exchange Commission (SEC) has proposed a rule mandating that certain financial institutions keep away from compensation arrangements encouraging inappropriate risk taking.

An SEC news release said the rule also requires the disclosure of the structure of firms’ incentive-based compensation practices. 

According to the news release, the proposed rule stems from Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the SEC and several other agencies to jointly write rules and guidelines in this regard. The SEC-regulated financial institutions affected by the rulemaking include broker/dealers and investment advisers with $1 billion or more in assets. 

The proposed rules would: 

  • Require reports related to incentive-based compensation to be filed annually with SEC; 
  • 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; 
  • Provide additional requirements for financial institutions with $50 billion or more in assets, including deferral of incentive-based compensation of executive officers and approval of compensation for people whose job functions give them the ability to expose the firm to a substantial amount of risk; and 
  • Require firms to develop policies and procedures that ensure and monitor compliance with requirements related to incentive-based compensation. 


More information is at .