Alert March 08, 2011

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

At its open meeting held on March 2, 2011, the SEC voted to issue a rule proposal that would require certain financial institutions to disclose the structure of their incentive-based compensation practices, prohibit such institutions from maintaining compensation arrangements that encourage inappropriate risks, and bar such institutions from establishing an incentive-based compensation arrangement unless it was adopted under policies and procedures put in place by the institution and approved by its Board of Directors.  The proposed rule is to be issued jointly by the OCC, FRB, FDIC, OTS, NCUA, SEC and FHFA as mandated by Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  In addition to the SEC, the FDIC and NCUA have taken steps to issue the proposed rule, thus far. 

The elements of the proposed rule were discussed in the February 15, 2011 Alert’s discussion of the FDIC’s draft version of the proposed rule.  The SEC’s rule proposal is aimed at SEC-regulated financial institutions, such as broker-dealers and investment advisers.  The proposed rule would apply to such SEC-regulated financial institutions that have total consolidated assets of $1 billion or more, and would impose additional requirements for larger institutions.  For registered broker-dealers, total consolidated assets would be determined by the assets reported in the firm’s most recent year-end audited Consolidated Statement of Financial Condition filed pursuant to Rule 17a-5 under the Securities Exchange Act of 1934.  For investment advisers, consistent with Form ADV disclosure requirements, total consolidated assets would be determined by the assets shown on the balance sheet for the adviser’s most recent fiscal year end.  The SEC requests comments on the described methods of determining total consolidated assets.  In particular, the SEC asks whether the determination of total assets should be tailored for certain types of advisers, such as advisers to hedge funds or private equity funds, and if so, why and in what manner.

Once all agencies involved in the rulemaking approve the proposed rule, it will be published in the Federal Register with a 45-day comment period.