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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Statement Regarding Incentive-Based Compensation Rules Pursuant to Section 956 of Dodd-Frank


Commissioner Kathleen L. Casey

U.S. Securities and Exchange Commission

SEC Open Meeting
Washington, D.C.
March 2, 2011

Thank you, Chairman Schapiro. Section 956 requires federal financial regulators to jointly adopt incentive-based compensation regulations or guidelines that apply to covered financial institutions, which in the case of the Commission means registered broker dealers and investment advisers with total assets of more than $1 billion.

What would been a challenging task given the tricky statutory language has been made more challenging because this is a joint rulemaking, which has required the staff to coordinate, deliberate and negotiate with six other financial regulators, who all have considered or will soon consider the same rule. I appreciate the hard work of the staff, and particularly the staffs Trading and Markets, Investment Management, and RiskFin on this release.

To the extent that the release requires enhanced disclosure of incentive based compensation policies and requires the development and maintenance by covered financial institutions of robust policies and procedures to deal with incentive based compensation decisions, I believe the rule appropriately focuses management and regulators on potential risks to the firms, and gives regulators the tools to determine whether such arrangements violate the requirements of Section 956(b). Importantly, such a regime will allow for the relevant financial regulator, who understands the firms they regulate, to make those assessments, at least for firms with assets between $1 billion and $50 billion.

The release veers from this approach, however, in imposing very particularized and prescriptive requirements for executive officers of firms with assets over $50 billion.

For these firms, regardless of whether they are federally insured banks, or broker dealers, or investment advisers, the rule would require that at least 50% of incentive-based compensation be deferred for at least three years and awarded no faster than on a pro rata basis, with awards adjusted for losses incurred by the covered financial institution after the compensation was awarded. There is little discussion in the release about whether rules, which are based on Financial Stability Board guidelines for large banks, are relevant or appropriate for firms such as large investment advisers.

Moreover, it is unclear how this more specific and prescriptive approach actually addresses the concerns in 956(b). Indeed, our own analysis of potential benefits and costs recognizes that such a regulatory requirement may not be necessary or effective. But more fundamentally, the prescriptive approach we suggest enshrining in regulation, without in my view any justification for its need to fulfill the requirements of Section 956 or further the interests of financial stability, removes important decision making authority from those who oversee the firms and are in a better position to understand best how to calibrate the risks the firms can take. Given the fact the under Section 956 covered financial institutions and their regulators will be reviewing incentive-based compensation practices regularly, this additional provision is wholly unnecessary and without any demonstrable corresponding benefit.

For this reason, I cannot support the rule proposal today. I look forward to reading the comments, and particularly interested in comments that address the concerns I have already mentioned. I have no questions.



Modified: 03/02/2011