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08 Mar. 2011 | Comments (0)

For those of you who spend a great deal of time preparing the myriad of filings for regulators and/or board meetings there were two news events worth noting last week. The U.S. Chamber of Commerce called for new corporate governance standards that promote investment and aid economic growth and the SEC proposed a new Dodd-Frank rule that requires financial institutions to disclose the structure of incentive-based compensation practices (or bonuses) [Read the New York Times article here.] The reason I point them out is that they signify where the U.S. regulatory regime may be headed in a very crucial proxy season. With the House Republicans making it clear they want to cut the size of the federal government (including the SEC) and the U.S. Chamber of Commerce continuing to fight proxy access in the federal courts, the SEC is following through with the parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act that don’t directly cost the agency funds. So you have an agency that knows it has to hire more people to carry out a mandate to protect investors from some of the high-risk and fraudulent behavior of some large financial institutions as was evident during the financial crisis. At the same time, the SEC’s power might be tempered because of the proposed decreased in funding that the Republican House has approved. The SEC proposed rule, which will be open to public comment once the other federal agencies involved in the process approve it, would require certain financial institutions to disclose the structure of incentive-based compensation practices, and prohibit such institutions from maintaining such compensation arrangements that encourage inappropriate risks. Those affected by the rule include broker-dealers and investment advisers with more than $1 billion in assets. The specific proposal breaks down as follows:
  • Disclosures about incentive-based compensation arrangements: A covered institution would have to file annually a report describing the bonus arrangements, including a narrative of the components, a description of the firm’s policies governing those arrangements and a statement as to why the firm believes the structure of the plan will prevent it from suffering a material financial loss. (Sort of like a CD&A for bonus plans.)
  • Prohibition on encouraging inappropriate risk: A covered financial institution would be prohibited from starting or keeping an incentive-based compensation plan that encourages inappropriate risks by providing covered persons (executive officers, employees, directors or principal shareholders) with excessive compensation.
  • Establishing policies and procedures: A covered financial institution would be barred from establishing an incentive-based compensation plan unless it was approved under policies and procedures approved by the institution and its board.
What might be telling in the SEC’s 3-2 vote approving the proposed rule last week was Chairman Mary Schapiro’s comments. “Our staff has worked closely with other federal regulators and the proposal reflects a series of carefully considered compromises,” she said. [Read Schapiro’s full comments here.] The key word there is “compromise.” At the same time, it could be argued the Chamber’s recent actions might be the olive branch Corporate America might be offering to the Obama Administration. While it is no secret that organizations like the Chamber, the Business Roundtable and the Securities Industry and Financial Markets Association (SIFMA) are not crazy about the federal government dictating how banks or any companies pay their executives, the fact that the Chamber is rolling out a campaign to focus on corporate governance standards is a good first step. Instead of digging in its heels and arguing about newly proposed bonus disclosure rules, the Chamber is trying to steer the discussion back to the more important issues of investment and job creation. “With Dodd-Frank acting as an accelerator, we need to find out what is working, what isn’t, and if we are headed down the right path,” said Tom Quaadman, vice president of the U.S. Chamber’s Center for Capital Markets. “Our economy and job creators need clear rules of the road to grow and prosper.” As part of a series of events it is hosting prior to the 5th annual Capital Markets Summit on March 30, the Chamber has focused its efforts on discussions involving such issues as systemic risk (a panel discussion on the consequences of a company being designated as a systemic risk), consumer financial protection (made recommendations to the new Consumer Financial Protection Bureau to improve it without inhibiting job creation) and accounting standard convergence (will hold a discussion Thursday with the Financial Accounting Standards Board and International Accounting Standards Board). The Summit will also focus on changes in the regulation of the derivatives market and the importance of providing liquidity to U.S. capital markets. Hopefully, all the work being done by the Chamber isn’t for naught. That’s to say that whether or not members of the Obama Administration or Congress attend the Capital Markets Summit, any recommendations that come out of it should be delivered to them.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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