U.S. regulators revive incentive pay proposals

A collection of U.S. federal financial regulators revived a set of rule proposals, initially crafted in response to the global financial crisis, that aim to stop financial institutions from adopting compensation models that encourage excessive risk taking.

The U.S. Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Federal Housing Finance Agency issued a rule-making proposal on Monday that addresses incentive-based compensation arrangements in the financial sector.

The proposal revives rules that were initially published in 2016, as part of the post-crisis reform effort in the U.S. under legislation known as Dodd-Frank, which required federal regulators to adopt rules or guidance regarding incentive-based compensation practices at financial institutions with at least US$1 billion in assets. 

The proposals published on Monday include prohibitions designed to make incentive-based compensation arrangements more sensitive to risk, the regulators said. 

This includes prohibitions on incentive plans that do not include clawback and forfeiture provisions. 

“These prohibitions would help safeguard [financial firms] from the types and features of incentive-based compensation arrangements that encourage inappropriate risks,” the regulators said in a notice outlining the proposals. They added that the proposals are also designed to “emphasize the important role of sound governance and risk management control mechanisms.”

The proposed rules also include disclosure and record-keeping requirements that are intended to improve regulators’ oversight in this area.

The agencies noted that the U.S. Securities and Exchange Commission also has this issue on its rule-making agenda, and that the National Credit Union Administration is expected to take action on it in the near future too. 

The proposals are out for comment, although they have not been published in the Federal Register.

Acting comptroller of the currency, Michael Hsu, issued a statement accompanying the proposals, indicating they are intended to restart discussions over this post-crisis reform, alongside the other federal agencies, which never agreed on final rules.

“The 2016 [proposal] was the closest the six agencies have come to agreeing on a joint final rule; thus, it is a natural place to start,” he said. “The financial system has changed significantly since then, and interagency discussions and our supervisory experience have highlighted modifications to the 2016 [proposals] that would help us fulfil our statutory mandate more effectively.”

Hsu noted that the regulators are accepting comments on the proposal, and said they “look forward to continuing to engage our interagency peers and the public on how we can most effectively curtail problematic incentive compensation practices.”