Administration March 7, 2011

SEC Proposes Ban on Incentives that Encourage Risk

March 7, 2011 (PLANSPONSOR.com) – The Securities and Exchange Commission (SEC) has proposed a rule mandating that certain financial institutions keep away from compensation arrangements encouraging inappropriate risk taking.
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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 http://www.sec.gov/news/press/2011/2011-57.htm .

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