Lavish Wall Street bonuses, long the scorn of lawmakers and shareholders, have met a new foe: the Securities and Exchange Commission.
The agency is now proposing a crackdown on hefty compensation at big banks, brokerage firms and hedge funds — a move intended to rein in pay packages that encouraged excessive risk-taking before the financial crisis. The proposal would require Wall Street firms to disclose bonus figures to the S.E.C., which could then ban any “excessive” awards.
The plan was among several new regulations the agency proposed on Wednesday as part of the Dodd-Frank financial overhaul law. Other proposals included rules for derivatives clearinghouses and a measure to limit the influence credit rating agencies have on the financial industry.
The agency’s commissioners, in a 3-to-2 vote on Wednesday, agreed to move forward with the Wall Street bonus rules. The proposal will now enter a 45-day public comment period, after which the commissioners must vote on a final version of the rules.
Article Tools The S.E.C.’s Republican commissioners objected to the proposed compensation curbs, which largely mirror regulations already floated by the Federal Reserve and the Federal Deposit Insurance Corporation.
Mary L. Schapiro, the S.E.C.’s chairwoman, said the agency was open to revising its proposal down the road.
“This is an area where we want to be very attuned to unintended consequences,” she said in a statement. “As with any such undertaking, there is a challenge involved in finding common means to appropriately address Congress’s mandate.”
Lawmakers have taken aim at executive compensation as a leading cause of the financial crisis. Incentive-based pay packages, critics note, invited questionable risk-taking at the American International Group and the nation’s big banks.
Now, two years after the crisis, big Wall Street paydays are back, even as bank revenues are down. Wall Street paychecks rose 6 percent in 2010, according to a recent report by the New York State comptroller’s office. Cash bonuses are down, however, as regulators have nudged banks into awarding more stock and other deferred compensation.
The S.E.C. in January enacted so-called “say on pay” rules that give shareholders a nonbinding vote on corporate salaries, bonuses and golden parachutes. The plan the S.E.C. announced on Wednesday goes even further.
For starters, it would require brokerage firms and investment advisers that manage more than $1 billion to file annual reports about incentive-based compensation paid to executive officers, directors and rank-and-file traders.
The S.E.C. would then halt any extravagant bonuses that expose the firm to a “material financial loss,” according to a summary of the proposal. The rules also would ban incentive-based pay altogether, unless the firm’s board approves the package.
Financial firms that have $50 billion or more in assets would face even tougher pay restrictions. The rules would require these firms, which include financial titans like Goldman Sachs and JPMorgan Chase, to defer half of each executive’s bonus for three years. If a firm sustains losses, the bonuses must be clawed-back.
Republicans commissioners objected to these more onerous provisions, saying they could keep a firm from recruiting star employees. Although Ms, Schapiro remained open to making some tweaks to the proposal, large-scale changes are unlikely now that other regulatory agencies have proposed similar rules.
“There could be a lot of pushback, but I don’t know how much leeway there is,” said David Lynn, a former top lawyer for the S.E.C.’s corporate finance division. “It’s like standing in front of a train — it’s coming,” said Mr. Lynn, now a partner at the law firm Morrison and Foerster.
The S.E.C. on Wednesday also agreed to propose rules that would set standards for new derivatives clearinghouses. These firms serve as a middleman between two parties in a derivatives transaction — and act as a backstop in the event one party defaults. The Dodd-Frank Act requires big banks and other financial institutions to process most derivatives through regulated clearinghouses.
The S.E.C.’s proposal would require the clearing firms to hold adequate capital in case several derivatives deals fall through. The plan also demands that clearinghouses open their membership to companies regardless of their portfolio size.
The S.E.C.’s commissioners unanimously agreed to reopen the public comment period on an earlier proposal that prevents big banks from controlling clearinghouses. The proposal, introduced in October, would forbid a bank or financial firm from owning more than 20 percent of any one clearinghouse.
The proposal generated disdain from both Wall Street, which found the rules too restrictive, and the Justice Department, which called for even tougher restrictions to prevent banks from monopolizing the clearing firms.
The comment period, which is now extended through April, could lead the S.E.C. to revise its earlier proposal.
The agency on Wednesday separately agreed to propose rules that would strip references to credit ratings from several key financial regulations. Under the proposal, money market fund managers would no longer be forced to buy only top-rated securities. The new rule would instead shift the onus to the fund’s board, which must determine whether a security poses a risk to investors.
Dodd-Frank mandated that the financial industry wean off its dependence on ratings, many of which proved inaccurate during the financial crisis.
“The focus of these efforts is to eliminate over-reliance on credit ratings by both regulators and investors — and to encourage an independent assessment of creditworthiness rather than a potentially misguided reliance on a credit rating,” Ms. Schapiro said.