On March 2, 2011, the SEC proposed rules that require certain financial institutions to disclose the structure of their incentive-based compensation practices and prohibit such institutions from maintaining compensation practices that encourage inappropriate risks.

The SEC issued the proposed rules in response to Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 956 of the Dodd-Frank Act requires the SEC and several other agencies to jointly write the rules and guidelines.

The proposed rules impact broker-dealers and investment advisers with $1 billion or more in assets and would:

  • require the filing of annual reports with the SEC disclosing incentive-based compensation
  • prohibit incentive-based compensation arrangements that encourage inappropriate risk-taking by providing excessive compensation or that could lead to material financial loss to the broker-dealers or investment advisers
  • provide additional requirements for financial institutions with $50 billion or more in assets, including deferral of incentive-based compensation of executive officers and approval of compensation for people whose job functions provide them with the ability to expose the firm to a substantial amount of risk
  • require the development of policies and procedures that ensure and monitor compliance with requirements related to incentive-based compensation

The proposed rules are in draft form because the rules have not been approved by all of the other agencies required to jointly write the rules.