COMP NEWS – Reform advocates are worried about the SEC’s rulemaking agenda this year, as the newly unveiled schedule failed to include a plan to finish the Dodd-Frank rule, an important rule that seeks to discourage reckless incentive compensation models in banking institutions

When the SEC in early January unveiled its semi-annual update to the rulemaking agenda, an unfinished Dodd-Frank executive compensation rule was once more absent from the agency’s near-term plan—to the dismay of at least one reform group. The rule in question is “incentive-based compensation arrangements” as regulators call it, and it is still on the agency’s long-term rulemaking agenda.

Dodd-Frank, which Congress passed in 2010 in response to the 2008 financial crisis, includes this crucial provision—Section 956—intended to reign in reckless behavior on Wall Street because of imprudent incentive compensation packages for bankers. And investor advocates have urged regulators over the years to write the rule with no success. Sec. 956 of PL111-203

But now, adding insult to injury, the SEC put some Dodd-Frank compensation rules on the short-term agenda and adopted them in short order last year. Moreover, the first rulemaking open meeting for this year—scheduled for Jan. 25, 2023—is another Dodd-Frank rule, though it has to do with conflicts of interest in asset-backed securities.

With a lack of resolution or a clear outline of the scope of the Dodd-Frank rule, banks who recklessly institute incentive compensation could encourage irresponsible or even illegal activities.

For Public Citizen’s Naylor, this is an important rulemaking that needs to be wrapped up quickly.

Banks have arrangements that rewarded employees for increasing their revenue or short-term profit without sufficiently taking into account the risks the employees were taking.

In part to prompt regulators to act with urgency, Public Citizen in September last year issued a report called Inappropriate: Banker Scams Continue as Washington Fails to Reform Pay as Mandated by 2010 Law. The report is authored by Naylor and Zachary Brown.

“The 2008 financial crash stemmed from numerous causes, and risk-taking by bankers in pursuit of incentive-based compensation figured as one of the most conspicuous triggers,” the report states. “Bankers committed massive frauds selling flawed mortgages, ultimately sending the economy into a Great Recession.”

In 2022, numerous criminal cases linked incentive compensation models to fraudulent activities.

“In 2022 alone, numerous cases link compensation to fraud and investor abuse by banks, including examples such as: a fake account scam at U.S. Bank; abuse in student loans by Navient; investor abuse by Allianz, Schwab, First Republic Bank, and Credit Suisse; and maintaining insufficient anti-money laundering controls by USAA Federal Savings Bank and Wells Fargo,” the report notes. “This ongoing litany of inappropriate action by executives in search of enrichment clearly demonstrates the urgency of why regulators must take swift action to finalize this pay reform rule.”

To read more about the Dodd-Frank rule and why it’s important to incentive compensation, click here.

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