As discussed in our prior post, new regulations have been proposed to prohibit incentive-based pay arrangements that encourage inappropriate risk, in line with section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
To address that deceptively simple goal, the rules, compiled by a six-agency group, would codify and expand a number of current compensation practices common in the sector, informed by the experiences of the regulators examining the practices leading up to the financial crisis. Notable sections mandate:
- extended at-fault clawback periods for vested awards;
- extended deferral requirements prior to vesting; and
- formalized guidelines around negative adjustments to deferred compensation for performance or risk-related factors.
Other broad provisions include:
- prohibitions on “excessive compensation” and hedging of company stock;
- guidelines on stock versus cash compensation and the use of options;
- limitations on incentive plan metric selection and highly leveraged bonuses; and
- extensive record-keeping requirements.
The full text of the proposed rule is available on the SEC website (File no. S7-07-16).
Glass Lewis has reviewed the regulations, and submitted our comments to the SEC. We consider the proposed rule to be reasonable in most regards, although there are two principal areas where we believe the rule could be improved or expanded in order to protect shareholders’ interests:
- The agencies have intentionally limited the scope of the rule via the definition of “covered institutions.” The report, however, effectively characterizes the interconnectedness of traditional financial institutions with relatively newer (non-covered) business models which may be subject to similar risks. In our view, this speaks to the need for broader applicability of the rule; and
- The proposed rule includes no provisions for public disclosure of the results of the reviews undertaken in circumstances including where risk parameters were violated or improper conduct led to a recoupment. This information may be sensitive, but we believe that shareholders should be provided at least some information for at least some of the participants given the gravity of the circumstances considered.
The full Glass Lewis submission is available to download below, and is also hosted on the SEC’s website.
For further information please contact us at info@glasslewis.com.
Read the full submission by clicking on the link below.