SEC Issues Proposed Rules on Incentive-Based Compensation Practices for Larger Broker-Dealers and Investment Advisers


On March 2, 2011, the SEC released a proposed rule regarding incentive-based compensation arrangements at “covered financial institutions” with $1 billion or more in assets. The proposed rules are the product of a joint rule-making effort undertaken by the SEC and other financial regulators pursuant to section 956 of the Dodd-Frank Act. Section 956 of Dodd-Frank requires the SEC and certain other agencies with regulatory authority over financial institutions to prescribe rules or guidelines that prohibit incentive-based compensation arrangements which encourage inappropriate risk-taking. The SEC and other agencies chose to enact rules rather than promulgate guidelines. While the rules are substantially similar from agency to agency, they are specifically tailored to address differences among the entities subject to regulation by the respective agencies. There will be a 45-day period for public comment on the proposed rules after publication in the Federal Register.

The proposed rules would prohibit “covered financial institutions” with $1 billion or more in assets from establishing or maintaining incentive-based compensation arrangements that would encourage “covered persons” from exposing the financial institution to inappropriate risks by providing “excessive compensation” or that “could lead to material financial loss” to the institution. Covered broker-dealers and investment advisers would be required to file a report with the SEC on an annual basis describing the institution’s incentive-based compensation arrangements in sufficient detail to enable the SEC to identify areas of concern. In addition, such institutions would be required to establish policies and procedures to ensure that incentive-based compensation arrangements do not encourage inappropriate risk.

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