First, the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC) have announced rules that are consistent with Section 956 of the Dodd-Frank Act, on Feb. 8 and March 2, respectively.
Secondly, surveys have shown that the maligned excessive executive bonuses are tumbling down.
Wall Street bonuses took an 8 percent nose dive in 2010 and have dropped by about one third since 2007, with a total bonus payout of $20.8 billion in 2010.
Regulatory reform and different types of compensation, including deferred rewards and higher base wages, are seen as the underlying cause for the significant decline in pure bonus payouts.
Scrutiny of a number of 2010 security industry financial statements show that “although the size of the cash bonus pool has declined, overall compensation has grown,” by 6 percent, according to Thomas P. DiNapoli, New York state comptroller, in a recent press release.
The intent is to no longer award incentives for achieving short-term jumps in profitability without looking at long-term effects. Excessive risk taking is discouraged under the new reward schemes.
“Cash bonuses are down, but that’s not an indicator of a weakness on Wall Street. Wall Street is changing its compensation practices in response to regulatory reforms adopted in the aftermath of the greatest financial meltdown since the Great Depression,” DiNapoli said.
The moneyblog Personal Money Store calls the new bonus schemes a deception and a way to get out of paying taxes. It suggests that Wall Street is still at its old games, letting creative juices do the searching for loopholes that will benefit its adherents.
Wall Street intends to “give financial regulators the impression they are encouraging long-term profitability instead of short term gain. By doling out smaller bonuses, Wall Street firms have also discovered a new and effective tax avoidance tactic,” according to the moneyblog.
In its recent press release, the New York state comptroller’s office bemoaned the loss of taxes from Wall Street’s wheelers and dealers, with an about 7 percent loss, down from a 20 percent tax collection before the economic upheaval.
Article continues on next page...
New York’s tax collection outlook brightens again when noting that New York state will receive more taxes when deferred compensation is paid out in the future, unless due to the respective company’s unprofitability, the bonus is withdrawn.
In 1985, Wall Street bonuses were around $1.9 billion, the first year the New York state comptroller’s office collected such information. Bonuses peaked in 1997 at $11.2 billion and plummeted by 19 percent in 1998. Increases were reported the following years until 2002, when bonuses took a 25 percent nose dive, to $9.8 billion.
From 2003, bonuses rose to a record high of $34.3 billion in 2006, going into a roller coaster ride after that year. Bonuses declined in 2007, plummeted in 2008 to $17.6 billion, rose to $22.5 billion in 2009, and slid to $20.8 billion in 2010.
Confronting Wall Street Bonuses
The SEC takes great pains to explain to the public that it was tasked by a section in the Dodd-Frank Act to address executive bonuses.
“There is a challenge involved in finding common means to appropriately address Congress’s mandate,” said Mary L. Schapiro, SEC chairman, in a speech published on the SEC website.
Taking orders from the Dodd-Frank Act, the SEC and the FDIC are in pursuit of limiting bonuses for executives.
The FDIC board voted in favor of rules limiting bonuses for excessive risk taking, resulting in material losses for a respective bank, to comply with a rule of the Dodd-Frank Act reform beginning in February, while the SEC didn’t vote on the rules until the beginning of March.
Alas, as often happens when commissioners of different political party’s are involved, dissension is inevitable, with the Democrats voting in favor and the Republicans against. The Republican side suggests that the proposed rules are outside the domain of the SEC.
The proposed rules swerve from providing guidance to imposing specific requirements for executives, according to SEC Commissioner Kathleen L. Casey.
“I cannot support the rule proposal today,” said Commissioner Casey in a speech published on the SEC website.
“There is little discussion in the release about whether rules, which are based on Financial Stability Board guidelines for large banks, are relevant or appropriate for firms such as large investment advisers. ... It is unclear how this more specific and prescriptive approach actually addresses the concerns in 956(b),” critiques Casey regarding the proposed rules.
The rules address bonuses for a number of financial institutions, broker-related deals, and investment advisers of firms with equal to or more than $1 billion in assets.
Timeline Flawed
A 45-day public comment deadline was announced in the 77-page interagency Draft announcement, which is a nightmare to read. Unfortunately, for technical reasons, according to the Notice of Proposed Rulemaking, the public comments cannot be viewed online.
“Importantly, this inter-agency proposal will apply across all types of US financial institutions, limiting the opportunity for regulatory arbitrage,” stated the FDIC press release.
Article continues on next page...
The rules announcement is an interagency effort among the Department of the Treasury, Federal Reserve System, FDIC, National Credit Union Administration, SEC, and Federal Housing Finance Agency.
Addressing the difficulties of bringing different agencies to one table, SEC Commissioner Casey states, “What would [have] been a challenging task given the tricky statutory language has been made more challenging because this is a joint rulemaking, which has required the staff to coordinate, deliberate and negotiate with six other financial regulators.”
All federal agencies taking part in the incentive pay rulemaking activity have to approve, through their internal system, the proposed rules and then open up for a 45-day public comment timeline. The FDIC and the SEC have completed their task. It is difficult to say how long it will take before the entire process is completed and the rules adopted.
Once all agencies have approved their bonus rules and have gone through the 45-day public comment wait, “the rule will be published in the Federal Register. Once published, the public will be given 45 days to comment on the joint proposal,” according to an SEC press release.
Full Transparency Lacking on Most Far-Reaching Rules
The most far reaching of the proposed rules is that banks with assets equal to or greater than $50 billion would have 50 percent of incentive-based bonuses deferred for three years, which would affect Bank of America, Citigroup, Goldman Sachs, and other government-sponsored enterprises.
It is not certain if a clawback rule applies and how it would be implemented. This would require that bonuses already distributed be returned to the enterprise because profitability was not achieved, and the respective firm is on a downward spin due to excessive risk taking by the company’s staff.
Secondly, a very subjective new rule states that all bank employees with risk-taking activities that could take a bank into a free fall toward economic disaster must be identified and their bonuses adjusted accordingly. Alas, this rule leaves quite a bit of wiggle room, according to experts’ blogs.
Friends Read Free