Rep. Velazquez and Senator Van Hollen Call on Regulators to Finalize Executive Compensation Rules in Wake of SVB Collapse
Congresswoman
The letter comes after the collapse of
Observers have speculated that SVB sacrificed long-term strategy to boost profits in the short term, leading to unhedged risk at the bank. Experts have questioned whether the failure of SVB could have been avoided had the incentive-based compensation rules under Section 956 been in place.
"As we sift through the failures of another American bank and another apparent example of the bank's CEO and senior executives pursuing a strategy for their own enrichment at the apparent expense of the bank's overall health, it is clear that it is well past time to change the culture and incentives for the industry's top executives," wrote the lawmakers. "We must change these motivations to avert a similar disaster in the future. It is time for your agencies to finalize the Section 956 rulemaking."
The letter also urges regulators to include a requirement in the final rule for deferral amounts of 100 percent of incentive-based compensation, a ban on stock options in executive compensation packages, and a prohibition on the hedging of bonus pay.
"The public is outraged by the massive pay
"These financial policy leaders offer an ingenious way to turn banker pay from an incentive to engage in reckless and even fraudulent behavior to an incentive to keep banks clean and safe."-
"The American people are tired of watching
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To: The Honorable
The Honorable
The Honorable
The Honorable
The Honorable
The Honorable
The recent failures of
Section 956 of the Dodd-Frank Act4 governs executive incentive-based compensation arrangements at covered financial institutions and specifically charges each of your agencies to "jointly prescribe regulations or guidelines that prohibit any types of incentive-based payment arrangement, or any feature of any such arrangement, that the regulators determine encourages inappropriate risks by covered financial institutions."5 According to the statute, your agencies were required to issue a finalized rulemaking no later than nine months after date of enactment.6 It has been more than twelve years since the passage of Dodd-Frank, and while two iterations of the rule have been proposed, a finalized rulemaking has yet to be issued.
According to publicly available information, executive compensation at SVB soared as the bank's profitability continued to skyrocket. From 2019 to the end of 2020, the bank's assets rose from
The connection between
Therefore, we are writing to you today to encourage you to finalize the Section 956 rulemaking and include the following requirements, which will help align the compensation incentives of a financial institution's executives with those of its customers, depositors, and the overall American public:
* Require deferral amounts of 100 percent of incentive-based compensation for both senior executives and significant risk-takers at all covered institutions. For a deferral period to have sufficient incentive effects, it must be longer than a financial institution's typical credit cycle and make executives personally pay for the costs of their own recklessness.
* A ban on stock options in executive compensation packages. As has been demonstrated by the dramatic rise and fall of SVB, stock options provide executives like
* A ban on hedging of bonus pay. Executives like
As we sift through the failures of another American bank and another apparent example of the bank's CEO and senior executives pursuing a strategy for their own enrichment at the apparent expense of the bank's overall health, it is clear that it is well past time to change the culture and incentives for the industry's top executives. We must change these motivations to avert a similar disaster in the future. It is time for your agencies to finalize the Section 956 rulemaking.
We appreciate your attention to this matter.
Sincerely,
Footnotes:
1/ Jacobs, Emily. "SVB collapse: CEO cashed out millions while employees got bonuses". Washington Examiner. (
2/ Kinery, Emma. "Biden Calls on
3/
4/ Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, tit. IX, section 956, (codified at 12 U.S.C. 5641).
5/ Id.
6/ Id.
7/
8/ Gara, Antoine. https://www.ft.com/content/02ff2860-2d5b-4e21-96af-cef596bff58e.
9/ Id.
10/ Gara, Antoine. Temple-West, Patrick. and
11/
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Original text here: https://velazquez.house.gov/media-center/press-releases/rep-velazquez-and-senator-van-hollen-call-regulators-finalize-executive
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