On March 29, 2011, seven Federal agencies, including the Securities and Exchange Commission (the “SEC”), proposed rules consistent with the directive of Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would (i) prohibit certain “incentive-based compensation”1 arrangements that provide excessive compensation or material risk of financial loss and (ii) require reporting of “incentive-based compensation” arrangements.2 As part of the joint proposal, the SEC has proposed provisions to be added to 17 C.F.R. 248 (the “Proposed Rule”).
The Proposed Rule applies to “covered financial institutions”3, the definition of which includes broker dealers or investment advisers with “total consolidated assets”4 of $1 billion or more. “Total consolidated assets” is defined as, (i) for a broker dealer, the total assets reported in the firm’s most recent year-end audited Consolidated Statement of Financial Condition filed pursuant to Rule 17a-5 under the Exchange Act and (ii) for an investment adviser, the adviser’s total assets shown on the balance sheet for the adviser’s most recent fiscal year end.
The Proposed Rule would (i) place prohibitions on excessive incentive-based compensation to a “covered person”5 that is unreasonable or disproportionate to the services performed by such covered person; (ii) place prohibitions on incentive-based compensation to a covered person that would create a risk of material financial loss to the covered financial institution; (iii) create standards relating to policies and procedures for incentive-based compensation arrangements of a covered financial institution; and (iv) require annual reporting of incentive-based compensation arrangements by a covered financial institution. The Proposed Rule would place additional requirements on covered financial institutions with total consolidated assets of $50 billion or more, including, (i) mandatory deferral of certain covered persons’ incentive-based compensation and (ii) board of director oversight and approval of certain covered persons’ incentive-based compensation arrangements.
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Comments to the Proposed Rule must be submitted by May 31, 2011. If you have any questions about the Proposed Rule discussed above, please contact an attorney in the Investment Management Group at Seward & Kissel LLP.
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1 “Incentive-Based Compensation” means any variable compensation that serves as an incentive for performance.
2 See the Release and Proposed Rule.
3 “Covered Financial Institution” means a broker-dealer registered under section 15 of the Securities Exchange Act of 1934 (“Exchange Act”) or an investment adviser as defined in section 202(a)(11) of the Investment Advisers Act of 1940, in each case that has total consolidated assets of $1 billion or more (which, subject to the Proposed Rule being finalized, would appear not to cover assets under management).
4 “Total Consolidated Assets” is defined as, (i) for a broker dealer, the total assets reported in the firm’s most recent year-end audited Consolidated Statement of Financial Condition filed pursuant to Rule 17a-5 under the Exchange Act and (ii) for an investment adviser, the adviser’s total assets shown on the balance sheet for the adviser’s most recent fiscal year end.
5 “Covered Persons” means any executive officer, employee, director or principal shareholder of a covered financial institution.
