According to a recent article in Investment News, under a rule proposed Wednesday by The Securities and Exchange Commission (“SEC”), large investment advisors and broker dealers would have to end compensation programs that foster excessive risk taking. The proposed rule provides requires advisory firms and broker dealers who have more than one than $1 billion in assets to disclose to the SEC their incentive based compensation plans. According to the article, under the proposed rule, regulators could then prohibit a plan if they find it “encourages inappropriate risk or that it appears it could lead to substantial financial losses by offering excessive compensation.”
Under the proposed rule, financial institutions with more than $500 Billion in assets would have to defer 50% of the incentive based pay for the executives for at least three years. The proposed rule comes under the provisions of the Dodd-Frank Financial Reform Law designed to curb reckless financial decisions that could harm investors and destabilize markets. After forty-five day public comment period, the agency will promulgate a final role. Whether there are substantial changes made to get to the final version of the rule and whether or not it the rule will reduce the excessive risk taking that caused the recent financial crisis remains to be seen.
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