SEC Proposes Rules on Disclosure of Incentive-Based Compensation Arrangements at Financial Institutions

On March 2, 2011, the Securities and Exchange Commission proposed rules to require certain financial institutions, broker-dealers and investment advisers with $1 billion or more in assets, to disclose their incentive-based compensation practices and prohibit such institutions from having compensation arrangements that encourage inappropriate risks.

Proposed Rules

1) Disclosures about Incentive-Based Compensation Arrangements

Annual Filing with appropriate federal regulator information including:
Narrative description of the components of the firm’s incentive-based compensation
Description of the firm’s policies and procedures governing such arrangements
A statement of why the firm believes the structure will help prevent it from suffering a material financial loss and/or why it does not provide covered persons with excessive compensation

2) Prohibition on Encouraging Inappropriate Risk

General prohibition against establishing or maintaining an incentive-based compensation arrangement that encourages inappropriate risks by providing excessive compensation, or that could lead to material financial loss – deemed assumption unless arrangements meet certain standards

“Covered persons” include executive officers, employees, directors, or principal shareholders

Prohibitions for larger financial institutions – specific requirements for executive officers and certain other designated individuals at financial institutions with $50 billion or more in total consolidated assets – 3 year deferral at least 50% of incentive-based compensation and must be adjusted for losses incurred

3) Establishing Policies and Procedures

A covered financial institution would be barred from establishing such arrangement unless the arrangement has been adopted under policies and procedures developed and maintained by the institution and approved by its board of directors.

Comments: should be received within 45 days after it is published in the Federal Register.

Assuming the rules are approved, financial institutions will need to significantly alter policies and procedures regarding incentive-compensation arrangements to ensure and monitor compliance with the requirements. Please contact our firm if you need experienced legal representation and advice if you need assistance updating your written supervisory procedures, providing comments to the SEC, or any other regulatory or arbitration related legal assistance at

Link: Broker-Dealer Advisory Services and Investment Adviser Services

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