Wall Street pay and bonuses are getting a set of new rules today as federal regulators crack down hard on executive pay. The new rules revealed today would restrict Wall Street executive pay by allowing banking institutions to “claw back” any or all of an executive’s bonus for seven years after the bonus has been paid.
The move comes after the Obama Administration put pressure on federal regulators to fulfill the final provision of 2010’s Dodd-Frank financial reform bill — crack down on executive pay, set limits, and keep risk-taking bankers in check. After financial crisis of 2008, Wall Street executive pay has become a contentious issue for federal regulators who were given the unenviable task of developing a new set of rules that would be fair to Wall Street and Main Street in equal measure.
“It has been a long time in coming, because on this controversial issue, it is challenging to develop a rule, which both meets the mandate of the law and at the same time is focused and fair,” said Debbie Matz, chair of the National Credit Union Administration, an agency involved in designing the new regulations for Wall Street pay and bonuses.
The crackdown on Wall Street executive bonuses could potentially change the culture on Wall Street, where it’s not uncommon for high-paid executives to take financial risks without regard for the long-term consequences — particularly considering how frequently highly-paid Wall Street executives move around between banking institutions.
Today’s proposal for new Wall Street pay regulations wouldn’t cap executive bonuses, instead allowing banks to “claw back” the massive sums of money paid to executives, which would de-incentivize high-risk activity, since Wall Street executives would still be on the hook for 7 years if their decisions caused long-term financial harm to the banking industry.
According to the Washington Post, critics say the proposal doesn’t go far enough, and doesn’t place any such restrictions on Wall Street traders who often take home much larger bonuses for taking part in high-risk investment activity. Still, the rules are hitting a Wall Street that has already seen a sharp decline in the number of big bonuses paid to executives. Slowdown in the financial industry has made banking institutions more reluctant to sign off on big bonus packages — apparently dropping almost ten percent over the last year.
The new Wall Street pay regulations come as the Obama Administration is scrambling to put all of the provisions outlined in 2010’s Dodd-Frank bill into place before the end of Obama’s last term in office. So far, it’s taken about five years for the federal regulators to outline a proposal to crack down on Wall Street pay that de-incentivizes risky investing without causing damage to the financial industry.
The Wall Street Journal reports that “claw backs” are already in use by Wall Street investing firms, but only on an informal and infrequent basis. The new Wall Street pay regulations introduced today, however, would set the practice in stone — making it a legal requirement for Wall Street banks.
“[The regulations] are more restrictive than we expected,” said Michael Melbinger of Winston & Strawn, an executive compensation law firm.
The Wall Street pay regulations unveiled today won’t go into effect until it’s voted on by all six regulatory agencies involved in drafting and approving the new crackdown on Wall Street executive bonuses. The vote is expected to occur sometime after July 22, when the public comment period on the new Wall Street pay regulations ends. According to the Wall Street Journal, the regulatory agencies will have to push hard to pass the new regulations before the end of Obama’s Administration in January of next year.
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