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Dodd-Frank Rule on Risky Bonuses Finally Proposed

Multiple agencies are set to act in concert to force the largest financial institutions to defer executive bonuses for four years.

(Photo: Dave Center; Edited: LW / TO)

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The Obama administration is seeking to fulfill a remaining obligation under the Dodd-Frank Act by proposing rules on risky Wall Street compensation packages.

Multiple agencies are set to act in concert to force the largest financial institutions to defer executive bonuses for four years. They will also propose mandating a seven-year window in which “clawbacks” can occur at all banks with over $1 billion in assets.

The Wall Street Journal reported the development on Thursday, noting that three year deferrals are “the common industry practice.” If approved, the rules would establish the first-ever regulatory mechanism for clawbacks.

The National Credit Union Administration (NCUA), the first of six agencies to release the framework, noted it targets “senior executives and significant risk takers” at firms with over $50 billion in assets. Additional rules would also apply to financial institutions with over $250 billion in assets.

In addition to bankers and credit union managers, the rules seek to cover investment advisers, broker dealers, and mortgage finance executives, according to WSJ.

The NCUA worked on the rules with the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Housing Finance Agency. All six will likely vote on the initiative “in the coming weeks,” WSJ noted, and each agency must approve for the proposal to take effect. The public comment period for NCUA submission will be open until mid-July.

The subprime mortgage bubble was fueled last decade, in part, by annual bonuses that encouraged volume of business over anything else. Many major institutional investors weren’t too bothered about acquiring bad assets because they were able to sell them on to other industry actors.

“Compensation systems — designed in an environment of cheap money, intense competition, and light regulation — too often rewarded the quick deal,” the congressional inquiry into the 2008 financial crisis noted. “This was the case up and down the line — from the corporate boardroom to the mortgage broker on the street.”

Section 956 of the Dodd Frank Act ordered “appropriate” federal agencies to ban “incentive-based payment arrangement….that the regulators determine encourages inappropriate risks by covered financial institutions.”

In November, a Democratic lawmaker pressed Federal Reserve Chair Janet Yellen on why the rule had not yet been implemented, five years after Dodd-Frank’s passage.

“I care that the incentives are appropriately placed so that the American taxpayer doesn’t get put on the hook again on an item that we have already identified as a problem, that everybody agrees was a problem,” Rep. Michael Capuano (D-Mass.) said.

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