Proposed Rule Would Prohibit Incentive-Based Bonuses At Covered Financial Institutions

Six regulatory bodies, including the Federal Housing Finance Agency (FHFA), are seeking comment on a proposal that would prohibit incentive-based bonuses for top executives at all covered financial institutions with assets over $1 billion.

The six regulators say recent research shows that incentive-based compensation packages have encouraged inappropriate risk-taking by top executives at covered financial institutions and, as such, have put these larger institutions at greater risk.

“There is evidence that flawed incentive-based compensation packages in the financial industry were one of the contributing factors in the financial crisis that began in 2007,” the FHFA says in its release.

The six agencies say they developed the proposal under the mandate of Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the rule, covered institutions would be divided into three levels:

  • Level 1: institutions with assets of $250 billion and above;
  • Level 2: institutions with assets of $50 billion to $250 billion; and
  • Level 3: institutions with assets of $1 billion to $50 billion.

There was considerable public outcry – as well as some embarrassment for certain elected officials – when it was revealed in 2011 that more than $60 million in bailout money was used to fund pay packages for top executives at Fannie Mae and Freddie Mac in 2009 and 2010, the first two years after the government took control of the companies through conservatorship.

Last fall, Congress approved – and President Barack Obama signed into law – a rule that caps the salaries of the CEOs of Fannie and Freddie at $600,000 each and prohibits them from receiving bonuses. It is unclear whether this proposed rule would more broadly apply to other executives at the two firms.

It will be interesting to see how these “risk-takers” are defined – whether it is by title or job responsibilities or other criteria.

To view the full rule, as proposed, click here.


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