Last week, a six-agency brain trust of regulators released a draft of rules to implement section 956 of the Dodd-Frank Act, covering incentive-based pay arrangements that could encourage risk or excessive pay among financial institutions. The draft includes a number of rules on pay practices and structures as well as employee activities, but perhaps most prominently among these is a fairly robust clawback requirement. Clawback, similar to “malus” arrangements more common in Europe and other markets, are an occasionally complex mechanism designed to address a deceptively simple concept: compensation such as bonuses paid based on incorrect financial results or as a result of inappropriate behaviors reduced or returned. Although the scope of the proposed rule is limited to a narrow subset of financial institutions, the stringency of these rules as proposed is a modest step forward.

Clawbacks are nothing new for the US, with federal rules promulgated under the Sarbanes-Oxley Act of 2002 mandating what ultimately came to be seen as a fairly weak legal minimum for repayment. From there, the development of the recoupment regime has moved in fits and starts through federal guidance and regulation, leaving investor pressure on companies and industry practice to fill in the gaps. The result has been a hodgepodge of different, if generally positive, approaches.

In 2010, the Dodd-Frank Act mandated more expansive clawback policies than under Sarbanes-Oxley for publicly traded firms and financial institutions in particular, although implementation of the former Act’s general guidelines has been pointedly sluggish and fraught with clamoring stakeholders at every turn. Thanks in part to a trend towards adoption, likely amid sustained shareholder pressure and the expectation of mandatory adoption in the future, as of January 2016 a majority of publicly traded US companies, including over 93% of the banks in the S&P 500 Index, have clawback policies more comprehensive than the legal minimum.

The proposed clawback ruled would not necessarily impose new and untried mechanisms into pay programs, many of which have already been pushed towards change from several directions. Instead, the new draft rules are notable for the fairly high bars set under certain components: for the largest institutions, payment may be recouped from executives for up to a lengthy seven years, and certain individuals below senior management (termed “significant risk-takers”) are also subject to longer clawback periods. If implemented as proposed, the proposed clawback periods would be significantly longer and broader (i.e. applicable to more employees) than under many bank’s current rules.

Though the longer covered period has raised hackles among the industry, the extended period seems particularly relevant given the time horizons of the events which prompted the Dodd-Frank reforms in the first place – more details and new stories about the practices leading up to the 2008 crisis continue to stream from media outlets and regulatory bodies even as the practices in question are nearly a decade old. To say the least, tangled webs take time to unravel, and the proposed rule includes triggers which may not have a particularly bright line. Specific circumstances include “misconduct,” “fraud,” and “intentional misrepresentation,” each of which could take foundation to fully establish. The limited success in the actual use of clawbacks under the Sarbanes-Oxley Act have shown this all too well in some cases.

This “at-fault” requirement for the proposed rule is especially interesting given the drafters’ disclosed rationale. Indeed, the draft explicitly cites other clawback requirements’ focus on accounting restatements or material misstatements as a trigger, which may give rise to situations where inadvertent errors, rather than duplicity, can lead to recoupment without the punitive edge (dubbed “no-fault clawbacks”). Although on its face this decision may seem a weak point in the proposed rule, the intention to cover actions that do not result in restatements, alongside the size-based striations in the rule and the discussion of the other extant clawback requirements, suggests that the proposed rule should not be considered in a vacuum but rather as part of a broader approach to mitigating risk. Regulations with different periods of applicability, triggers, and even covered entities may lend themselves to undue complexity, but here again the complexity of the industry and of some banks’ pay programs in turn may make this factor something of a boon.

While the layered impact of these piecemeal rules may have such positive impacts, there are some shortcomings: most notably, the rule as written only covers certain financial institutions including banks as defined in a fairly traditional sense. The rule specifically names entities such as depository institutions, credit unions, and investment advisers, though other entities with a significant impact on certain markets could fall outside the scope of rules.

Another potential limitation stems from the uncertainty of the rule’s applicability based on employment status, as the draft suggest that it may be left to the institution to determine whether recoupment is contingent on current employment with the entity. To be sure, the Hollywood narrative of devious types cashing out and seeking warmer climes before authorities come knocking is not the primary purpose of the rules, although this apparent ambiguity speaks to either the incompleteness or limitations of the proposal and puts the onus on firms to develop a sufficiently robust policy.

Other aspects of the proposed rule which could change the ways that banks pay high-level staff include: prohibitions on hedging transactions by covered personnel; a prohibition on exclusive use of metrics tied to performance against peers, i.e. relative performance metrics; prohibitions on use of transaction or revenue volume without quality or compliance components; longer minimum deferral periods for portions of pay of up to four years; and a limit to maximum awards under variable arrangements to 125% or 150% of the intended target. Most of these provisions reflect common practices among US companies generally and banks particularly, but the UK’s recent experiences with capping banker bonuses may be informative in this last regard – rather than trimming compensation, the regulations simply resulted in reallocated pay and flat (or even higher) pay levels.

Overall, however, the rule includes a number of favorable features that could protect shareholder interests and represent meaningful measures towards the proposal’s goal of reducing the risk to firms and markets stemming from excessive risk taking or poorly designed pay programs. Whether the final version of the rule will be as stringent or as potentially effective, of course, remains to be seen.