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A trio of U.S. financial regulators has reignited efforts on a long-postponed project to enhance executive compensation plans at financial institutions to be more attuned to risk.
The Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and Federal Housing Finance Agency (FHFA) jointly reintroduced the rule, which would prohibit incentive-based plans lacking risk considerations or mechanisms for pay clawback or forfeiture, the agencies announced.
This revived initiative, echoing a 2016 proposal, represents the latest endeavor in a protracted campaign to implement new regulations mandated under the 2010 Dodd-Frank financial reform law. The proposed regulations aim to ensure that leaders of financial entities are not incentivized to undertake undue risks to enhance their personal compensation.
FDIC Chairman Martin Gruenberg highlighted the broader repercussions of flawed compensation practices, citing their role in the downfall of Silicon Valley Bank last year. He emphasized the importance of curbing inappropriate risk-taking within major financial institutions.
However, the industry swiftly criticized the plan, particularly its application to banks with assets exceeding $1 billion, with stricter requirements imposed on firms with assets surpassing $250 billion. The Bank Policy Institute, representing larger banks, derided the proposal as “purely political.”
Regulators have encountered persistent challenges in implementing the mandatory rules, partly due to the need for six agencies – FDIC, OCC, FHFA, National Credit Union Administration, Securities and Exchange Commission, and Federal Reserve – to concur on a joint proposal.
The agencies disclosed that the National Credit Union Administration is poised to adopt the proposal shortly, and the Securities and Exchange Commission has included it on its rule-making agenda. However, the Federal Reserve has yet to announce its intentions regarding the rule. Fed Chair Jerome Powell, in March, emphasized understanding the underlying issue and proposing solutions tailored to address it before committing to completing work on the rule this year.
A Fed spokesperson reiterated the central bank’s commitment to collaborating with regulators on a unified rule, emphasizing the importance of incorporating updated information reflecting current industry practices.
If all regulators fail to issue identical proposals, the agencies cannot officially seek public feedback on the plan, a prerequisite before finalizing any new regulations. In the interim, the agencies issuing the proposal stated they would welcome comments on their respective websites.
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