SEC Proposes Rule Prohibits Investment Advisers from Paying Risky Incentive-Based Compensation

March 06, 2011

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Pursuant to Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the United States Securities and Exchange Commission (“SEC”) has proposed a rule that would require some financial institutions to disclose all incentive-based compensation arrangements and would prohibit those financial institutions from employing risky performance based compensation arrangements.  Included under this rule, would be broker-dealers and investment advisers with more than $1 billion in assets under management.

Specifically, the proposed rule would impose three requirements on broker-dealers or investment advisers with more than $1 billion in assets and who use incentive-based compensation arrangements. 

  •  First, these firms would be required to file an annual report which described the firm’s incentive-based compensation arrangements.
  • Second, these firms would be prohibited from using an incentive-based compensation arrangement that encouraged “inappropriate risks by providing covered persons with excessive compensation, or that could lead to material financial loss.” 
  • Third, these firms would be barred from employing incentive-based compensation arrangements unless the firm had established policies and procedures designed to monitor the firm’s compliance with the incentive-based compensation rules. 

In addition to these three requirements, financial institutions (including broker-dealers and investment advisors) with more than $50 billion in total assets would face additional requirements for incentive-based compensation arrangements.

The SEC is currently accepting public comments on the proposed rule, and SEC Chairman Mary Shaprio stated she is “very interested” in commenters’ views on how the proposed rules would affect broker-dealers and investment advisors because the SEC wants to avoid “unintended consequences.”  To view the SEC’s release, click here.

Posted by Bryan Hill
Labels: SEC