SEC Releases Proposed Rules on Incentive-Based Compensation for Investment Advisers and Registered Broker Dealers

The SEC has issued its proposed rules on incentive-based compensation for investment advisers and registered broker dealers: Comments are due by July 22, 2016.  The rules are part of a joint interagency rulemaking required by Dodd-Frank Act Section 956, which directs the agencies to prohibit incentive-based compensation arrangements that encourage inappropriate risk-taking: (1) by providing an executive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or (2) that could lead to material financial loss to the covered financial institution .  The SEC amendments would impact Investment Advisers Act, Rule 204-2, and Securities and Exchange Act Rule 17a-4.  SEC regulation of compensation has historically been focused on disclosures by reporting companies under the Exchange Act, and these rules expand SEC oversight into compensation practices for investment advisers and registered broker-dealers that are not reporting companies.

According to the SEC’s press release, much of the proposed rules would address requirements for senior executive officers and employees who are significant risk-takers at Level 1 and Level 2 institutions, which include those institutions with total assets greater than or equal to $50 billion. All institutions that would be covered by the proposed rules would be required to annually document the structure of incentive-based compensation arrangements and retain those records for seven years. Boards of directors of covered institutions would be required to conduct oversight of the arrangements. All covered institutions would be subject to general prohibitions on incentive-based compensation arrangements that could encourage inappropriate risk-taking by providing excessive compensation or that could lead to a material financial loss.

Many of the proposed measures may already be implemented at larger, reporting financial institutions.  The SEC is not proposing to require a covered institution under its proposed rule that is a subsidiary of another covered institution under that proposed rule to be subject to the same requirements, and defined to be the same levels, as the parent covered institution.

Cam C. Hoang

Cam helps clients with corporate matters including governance and SEC compliance, equity plans and executive compensation, securities offerings, and mergers and acquisitions. Prior to her return to Dorsey, Cam was Senior Counsel and Assistant Secretary at General Mills, Inc., where she helped the company achieve its corporate governance and SEC compliance objectives, worked on securities offerings and M&A transactions, risk management, foundation governance, and general corporate and commercial matters. Before joining General Mills in 2005, Cam was an associate for five years in the Dorsey Corporate Group in Minneapolis.

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