Regulators look to take a bite out of Wall Street bonuses (+video)
Nearly a decade after the 2008 crisis, Wall Street regulators have drafted a plan to regulate bonuses for 'significant risk-takers' in the financial industry.
Bernie Sanders might have lost the electoral battle in New York on Tuesday, but perhaps won a moral victory yesterday, when financial regulators announced a tentative plan to better regulate Wall Street.
Wall Street reformers have long called for restrictions on reward compensation for big bankers. The Dodd-Frank Act of 2010, passed in response to short-sighted practices that exacerbated the 2008 downturn, sought to impose more accountability for financial executives, including their famous bonuses, which many believe helped instill a culture more intent on quick money than long-term consequences.
Now, regulators want to make these rules stick. Yesterday's proposal, a long-delayed elaboration of the 2010 act, would hopefully limit the incentive for bankers to make risky (but potentially lucrative) decisions with investor funds. Some leaders at major firms, for example, would have to wait four years or more to receive certain parts of their bonuses.
"Congress, and the American people, want senior executives at large financial institutions held accountable if their desire for personal enrichment leads to decision-making that results in material losses to the institution or our deposit insurance funds," Rick Metsger, the vice chairman of the National Credit Union Administration, told Reuters.
Mr. Metsger is a member of one of the six organizations that are responsible for drafting these regulations. Others include the US Securities and Exchange Commission and the Federal Deposit Insurance Corporation.
If the precedent existed for these regulations as many as six years ago, why is this legislation being drafted now?
Not only has the election season, with Bernie Sanders' famous calls for Wall Street regulation, pushed the issue to the forefront of the public's minds, but the current administration is also interested in pursuing regulation in the financial industry.
After the 2008 financial crisis, President Obama (alongside many other politicians) called for Wall Street reform. Yet though he's asked officials to put Dodd-Frank regulations into place, it has not yet happened. Mr. Obama met with regulators last month at the White House to catalyze the final work on bonus regulation.
This new proposal, which Metsger says is 500 pages long, applies to firms with $50 billion in assets.
Under the plan's new bonus and reward rules, executives are not the only targets of regulation. Although the legislation seeks to regulate bonuses for those in the top 2 to 5 percent of any firm's pay grade, senior employees designated as "significant risk-takers" would also be subject to the rules. Drafting organizations are most concerned about employees who have the ability to win or lose massive amounts of money, employees with the "authority to commit or expose 0.5 percent or more of the capital."
Regulators also added a "clawback" clause to the proposal, which would allow companies to redact bonuses if misconduct is discovered within seven years of the bonus being granted.
Critics of the proposed regulation also say that it will discourage top talent from entering Wall Street, and instead drive them to less established but lucrative fields, including Silicon Valley.
Despite these criticisms, Wall Street executive Alan Johnson called the rules "benign" compared to European regulation. The New York Times reports that many firms, including hedge funds, will not be impacted by the new rules.
The proposal is not expected to be finalized for months.