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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement — SEC Open Meeting: Proposed Rules on Incentive-Based Compensation


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
March 2, 2011

Good morning. This is an Open Meeting of the Securities and Exchange Commission on March 2, 2011.

Today, we will consider four items stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act:

First, we will consider proposing new rules regarding incentive-based compensation arrangements at certain financial institutions.

Second, we will consider proposing new rules regarding the operation and governance of clearing agencies for security-based swaps.

Third, we will consider reopening the comment period for our previously proposed rules relating to mitigating conflicts of interest at clearing agencies, security-based swap execution facilities and exchanges.

And, fourth, we will consider amending existing rules to remove references to credit rating agencies.

* * *

We begin with a proposal that would prohibit incentive-based compensation practices that may encourage inappropriate risk.

This proposal stems from Section 956 of the Dodd-Frank Act, which requires the Commission along with six other financial regulators to jointly adopt regulations or guidelines governing the incentive-based compensation arrangements of certain financial institutions. These institutions include broker-dealers and investment advisers with $1 billion or more of assets.

In particular, the Dodd-Frank Act calls upon the regulators to do two things:

First, it calls upon the regulators to adopt rules or guidelines that require these financial institutions to disclose the structure of their incentive-based compensation practices so that the regulator can determine whether such compensation is excessive or whether it could lead to material financial loss to the firm. The disclosure would only be made to the federal regulator.

Second, the Act calls upon the regulators to adopt rules or guidelines that prohibit these financial institutions from offering any incentive-based compensation arrangement that the regulators determine encourages inappropriate risks – either because the compensation is excessive or because it could lead to material financial loss.

Among other things, the rules proposed today would:

(1) Require reports related to incentive-based compensation that the financial institutions would file annually with the Commission.

(2) They would prohibit incentive-based compensation arrangements at financial institutions that encourage inappropriate risk taking by providing excessive compensation or that could lead to material financial loss to the firm.

(3) They would provide additional requirements for financial institutions with $50 billion or more in assets, including the deferral of the incentive-based compensation of executive officers and the approval of the compensation of those persons within a firm whose job functions give them the ability to expose the firm to a substantial amount of risk.

(4) They would require the financial institutions to develop policies and procedures to ensure and monitor compliance with the requirements related to incentive-based compensation.

The proposed rule is the result of the staff working closely with other federal regulators and the proposal reflects a series of carefully considered compromises. As with any such undertaking, there is a challenge involved in finding common means to appropriately address Congress’s mandate. So, I look forward to receiving public comment on the proposed rules and specifically on how the practices contemplated by the proposed rule compare to existing conventions.

In particular, I am interested in commenters’ views on how assets would be calculated for purposes of determining whether institutions fall within either component of the proposal. I am also very interested in their views on how the proposal might affect the broad array of financial firms covered by Section 956, including broker-dealers and advisers – most particularly private fund advisers, given how they often structure their compensation; and the proposal’s potential impact on broker dealer and investment adviser business models and the variety of services they provide to investors. This is an area where we want to be very attuned to unintended consequences.

Before I turn to Robert Cook and John Ramsay to provide us with additional details about the Division’s recommendations, I would like to thank them and other Commission staff including Raymond Lombardo, Tim Fox and Leigh Bothe from the Division of Trading and Markets; Doug Scheidt, Nadya Roytbladt and Jennifer Porter from the Division of Investment Management; and Tom Kim and Anne Krauskopf from the Division of Corporation Finance for the hard work they have devoted to preparing the recommendations before us. I also appreciate the contributions from David Blass and Robert Bagnall in the Office of the General Counsel, and Jennifer Marietta-Westberg, Sandra Mortal and Vladimir Ivanov in the Division of Risk, Strategy, and Financial Innovation.

I also would like to thank staff of our fellow regulators for their collegiality throughout this process, and my fellow Commissioners for their work and comments on this proposal.



Modified: 03/02/2011