SEC Proposes Ban on Incentives that Encourage Risk

An SEC news release said the rule also requires the disclosure of the structure of firms’ incentive-based compensation practices. 

The proposed rule stems from Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the SEC and several other agencies to jointly write rules and guidelines. The SEC-regulated financial institutions affected by the rulemaking include broker/dealers and investment advisers with $1 billion or more in assets. 

The proposed rules would: 

• Require reports related to incentive-based compensation to be filed annually with SEC; 
• Prohibit incentive-based compensation arrangements that encourage inappropriate risk-taking by providing excessive compensation or that could lead to material financial loss to the firm; 
• Provide additional requirements for financial institutions with $50 billion or more in assets, including deferral of incentive-based compensation of executive officers and approval of compensation for people whose job functions give them the ability to expose the firm to a substantial amount of risk; and 
• Require firms to develop policies and procedures that ensure and monitor compliance with requirements related to incentive-based compensation.