Proposed rule addresses finance execs’ risks, rewards

By Ken Tysiac

Six federal agencies joined together to propose a rule Monday that would prohibit incentive-based compensation arrangements that encourage inappropriate risks at financial institutions with assets of more than $1 billion.

The proposal was made to fulfill requirements of Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203. The proposed rules are intended to address a concern that incentive-based compensation packages encouraging excessive risk taking may have contributed to the financial crisis that began in 2007.

Covered institutions are divided into three categories for purposes of the regulations:

  • Level 1 consists of institutions with assets of at least $250 billion.
  • Level 2 consists of institutions with assets of $50 billion to $250 billion.
  • Level 3 consists of institutions with assets of $1 billion to $50 billion.

All covered institutions would be required to comply with general prohibitions on incentive pay that could encourage inappropriate risks or could lead to a material financial loss. In addition, a requirement to annually document the structure of incentive-based arrangements and retain those records for seven years would apply to all covered institutions. Boards of directors would be required to conduct oversight of the arrangements.

Senior executive officers and employees who are significant risk takers at Level 1 and Level 2 institutions would be subject to additional rules.

The proposal was issued by the SEC, the Federal Reserve, the Federal Deposit Insurance Corp., the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency.

Comments on the proposal are due by July 22 and can be made at regulations.gov.

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.

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